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Five ways to prepare your children for a wealth transfer

Estate planning
UK News
Estate planning

Five ways to prepare your children for a wealth transfer

Passing money 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?

Transferring wealth to the next generation is a matter many parents grapple with. With an estimated USD16tn of global wealth likely to be transferred over the next 30 years (USD830bn in the UK)1, it’s an issue facing more and more families. Typical concerns are that passing significant wealth to the next generation will lead to entitlement, complacency and stifle ambition.

Preparing children for the responsibility of a wealth transfer


Some high-profile individuals are so concerned about the impact of leaving their wealth to their family that they have spoken candidly about 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
  • find the best way to structure the transfer of the wealth over the years

Having conversations sooner rather than later is potentially one of the greatest investments of time that you will ever make. Here are five ways to start getting your children ready for 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 them 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, whether through an allowance or by asking them to earn their spending money, 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 liability, gifting money to your children allows you to assess how they respond to receiving a lump sum and witness the choices they make. Up to GBP3,000 can be gifted in the 2018/19 tax year, rising to GBP6,000 if the previous year’s allowance has not been utilised.

The current inheritance tax regime is under review with the office of tax simplification. Now is potentially a good a time to review your current plans and financial position to see if you have the financial capacity to start making gifts. Lump sum gifts in excess of the annual allowance are considered to be potentially exempt transfers. If you survive for seven years, then the assets are outside of your estate. Should you die before seven years has passed, then the value (in part or full) will be added back to your estate when calculating the inheritance tax liability.

Having conversations sooner rather than later is potentially one of the greatest investments of time that you will ever make.
Five ways to prepare your children for a wealth transfer Watch the video Five ways to prepare your children for a wealth transfer

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 as a so-called incentive trust, triggered when their earnings reach a certain level.

There can be significant inheritance tax implications when certain assets are transferred into a trust, resulting in a charge of 20 per cent (on the value of asset passed above GBP325,000) to the lifetime rate of inheritance tax. Ongoing charges of 6 per cent of the trust value (broadly speaking) also apply to the trust property, as do exit charges.

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. There is a current exemption (see above regarding the review of inheritance tax reliefs) that treats the gift of your excess income as being not potentially exempt and immediately outside your estate for inheritance tax. Making use of this exemption may better suit your financial profile and allow you to transfer assets over a period of time to your children.

With an increasing number of families passing on wealth in the coming 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.

Contact your Relationship Manager to arrange a meeting with a wealth planner who can discuss how you can prepare your children for their future wealth and the alternative structuring options that you could consider.

1Talking to your children about money, The Financial Times, 2016

This material is issued by HSBC UK Bank plc which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the UK. It has been issued for your information purposes only.

Please note that HSBC does not provide tax or legal advice and clients should seek professional advice from their tax advisor. Any reference to tax is based on our knowledge of the current and proposed tax regime and is subject to change.

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