How much should be gifted?
Inseparably linked to deciding ‘when’ is deciding ‘how much’. The traditional view of inheritance as a lump sum received on the passing of an older relative may need a rethink. The ideal time and amount to inherit needs careful thought and evaluation, but there is certainly no time like the present to start these conversations with clients.
Rather than seeing inheritance primarily as an aspect of tax planning, passing on wealth can be seen as one aspect of the overall process of wealth planning. Financial advisers can support clients as they go through the process of identifying their financial objectives. Gifting can form the means to the end, not the end goal itself.
Ultimately, the amounts involved will always be a decision that is personal and specific to every family and their circumstances, and families need to take the time needed to reach decisions that they are comfortable with.
How should money be gifted?
For clients keen to make direct gifts, especially those of higher value, advisers may wish to sound a note of caution. It is worth being aware of some of the risks:
- Once given directly, there is no guarantee of future access to the assets for the donor. This can be problematic if the financial needs of the donor change in the future.
- Once passed directly to the Beneficiary, assets become part of their estate and could potentially create or add to an unintended Inheritance Tax (IHT) liability.
- The assets are unprotected from changes in the Beneficiary’s future circumstances such as divorce or bankruptcy.
- If the Beneficiary remarries at some point in the future, the inheritance line can shift meaning that assets are diverted away from grandchildren through so-called ‘sideways inheritance’.
One option to counter these risks is using a Trust to provide loans to beneficiaries instead of gifting directly. The key benefit is that the loan remains an asset of the Trust, and therefore there is an additional layer of protection for the assets.
Protecting against divorce
Consider the following scenario. Mr and Mrs A have a daughter who is due to marry. They wish to provide some financial support as the young couple are hoping to get on the property ladder, but they have reservations about the longevity of the marriage. Mr and Mrs A worry that should things not work out, family wealth that they have worked hard to accumulate could be lost and their daughter could lose out.
Were Mr and Mrs A to make a direct gift, they will have no recourse to the funds. Should a divorce take place, any remaining assets would be likely to be split between the divorcees according to their settlement agreement. Given that an estimated 42 per cent of marriages end in divorce, and that around half of these are expected to take place in the first ten years of marriage, these may not be unreasonable concerns.
Alternatively, Mr and Mrs A could set up a flexible, interest-in-possession Trust with their daughter as named beneficiary. The Trustees could then loan a sum of money to help with the property purchase.
If the loan were to be used as part of a deposit for a property, if required the Trustees would be able to confirm the conditions of the loan to the lender – typically an interest-free basis and remaining outstanding for the lifetime of the Beneficiary. Should the couple subsequently divorce, the loan would remain an asset of the Trust and a debt of the daughter. This could remove it from the divorce settlement discussions, and therefore incur a degree of protection for the assets so that they remain in the family line.