Passing assets from one generation to the next may be a tried and trusted method of transferring wealth, but how do you make sure your children are prepared for the responsibility?
Some high-profile individuals are so concerned about the impact of leaving their wealth to their family that they are refusing to pass little more than a fraction of it to the next generation. That may seem a little extreme, but for those wishing to pass on wealth, early planning is essential in order to:
- start educating the next generation
- structure the transfer of assets
Here are five ways to prepare your children for the responsibility of future wealth:
1. Be transparent
Being open about money with your family and the responsibilities it conveys can be a valuable education piece for your children. Helping your children understand the nature of your wealth, along with how you and previous generations created and manage it, is important.
2. Expose your children to money
Giving your children some financial independence early on can help them learn its value and how to take responsibility. Whether they save or spend, talking about their choices is a good starting point.
3. Start with a gift
As well as reducing your inheritance tax (IHT) liability, gifting money to your children allows you to assess how they respond to receiving a lump sum and witness the choices they make.
“Having conversations sooner rather than later is potentially one of the greatest investments of time that you will ever make”
4. Create a structure such as a trust
If you’re concerned about the impact of a wealth transfer on your children or about how they will manage future wealth, creating a trust can bring peace of mind. The terms can be set to include access once your children reach a certain age (and expected maturity). Also, the terms can coincide with key life events, such as graduation or marriage, or when their earnings reach a certain level.
5. Turn to assets
If you would rather not transfer cash to your children, there are a number of alternatives. Purchasing assets for them could be an option, as could making regular payments towards a mortgage or university fees. This would allow you to transfer wealth in instalments and reduce your inheritance tax liability.
With an estimated £637bn of wealth1 in the UK likely to be transferred over the next 30 years, considering all the options makes sense. Preparing your children to manage their future wealth is becoming more and more important.
Before considering any transfers of assets, it’s important to seek professional advice from a wealth planner on the options available to you and tax advice from your lawyer or accountant. This will ensure that the issues have been assessed and any potential tax consequences have been considered. Please note that HSBC does not provide tax advice and as such you should seek professional advice in that regard.
(Financial Times, 2016)
If you’re interested in learning more about preparing your child for their inheritance, please go to www.hsbcprivatebank.com to find out more.