How to support your family with making the right inheritance decisions

Inheritance Tax

When you think about leaving your loved ones an inheritance, you probably hope it will improve their financial security and provide them with more options to enjoy life. But research suggests future beneficiaries are making reckless decisions in the belief an inheritance will support them down the line.

A survey from the Daily Mail found:

  • A third of millennials expecting to inherit wealth admit they take more risks with spending and investment
  • The figure rises to 49% among those with assets over £100,000
  • 27% invest their money after carrying out their own research, without seeking expert advice

Risky investments also proved popular among millennials. Among these was investing in Bitcoin and other crypto-currencies:

  • 31% of millennials had already invested in the market
  • 37% plan to do so in the future
  • This compares to just 4% of those over 45 putting their money into digital currencies

Despite many of the younger generation hoping an inheritance will provide financial security, it’s likely to come too late. As life expectancy rises, millennials are unlikely to be able to use an inheritance to support financial milestones, such as buying their first home. But just 15% plan to use the wealth passing to them to fund retirement.

Some may also be in for a shock too; three in ten parents aren’t planning to leave an inheritance for their children.

With different attitudes to finances, it’s perhaps unsurprising them some parents are worried about how an inheritance will be used. Almost a quarter (24%) have concerns that it will be spent too thoughtlessly. But there are some steps you can take to close the generation gap.

1. Speak to them about the inheritance

The first thing to do is to speak to your loved ones about the inheritance they’ll receive.

This allows you to explain how much they can expect to inherit, allowing them to plan accordingly. It can help give future beneficiaries some perspective on what they’ll be able to achieve with the money. If you’re worried about reckless spending habits, it could be the first step in them taking a more responsible approach.

If you’re among those that don’t intend to leave an inheritance to your children, giving them forewarning can mean they’re not making plans based on inaccurate assumptions. Likewise, if you intend to leave some of your wealth to charity or to other loved ones, letting children know in advance can help aid their financial planning.

2. Say how you’d like the money to be spent

If you have an idea of how you’d like beneficiaries to use the inheritance, let them know. You can’t guarantee that they’ll follow your wishes, but it can help.

Letting children know, for example, that you’d like an inheritance to go towards your grandchildren’s education or paying off the mortgage to improve financial security, may influence their decisions. Often when people receive an inheritance, they do feel some obligation to consider the wishes of their benefactor.

However, it’s important to realise that what you want may not always be best for their situation. Financial planning should be used to help each individual achieve their aspirations. Your children’s goals may be vastly different to yours.

3. Provide financial support now

If you want a greater level of control over how the money is spent, gifting now may the answer. Not only will you be able to provide financial support when it’s needed, but you’ll be able to see the benefits of your generosity too.

One thing to consider here is the gifting allowance. Should you die within seven years of a gift being received, it may be included in your estate for Inheritance Tax (IHT) purposes. If your estate falls under the nil-rate band this isn’t an area you have to worry about. There are also gifts that are immediately exempt from IHT. If you’d like to understand what IHT your estate may be liable for, please contact us.

4. Recommend a financial adviser

A financial planner can help your beneficiaries set out their short, medium and long-term goals. It can provide the insight needed to organise their finances in a way that suits them, both now and once they receive an inheritance.

Cashflow modelling can visualise the impact the inheritance will have on their finances depending on how they use it. Seeing that through a careful investment strategy the inheritance can grow to provide a retirement nest egg may deter reckless spending, for instance.

5. Speak to your financial adviser

Speaking to your financial adviser can also help you structure an inheritance in a way that limits overspending. Putting assets into a trust, for example, can help you set restrictions, such as when the beneficiary will have access to the assets. Trusts are often used when beneficiaries are young.

If you’d like to discuss the wealth you leave behind, please contact us. Whether you want to understand whether your estate may be liable for IHT or how to structure your assets, we can provide expert support.

Please note: The Financial Conduct Authority does not regulate Inheritance Tax Planning.