Protecting Family Assets through the Generations
The Bank of Mum and Dad and its closely connected relative; the bank of Grandma and Grandpa remain reliable sources of cash loans and gifts and are often the lender of choice. But giving away and loaning money does need careful thought and without the correct planning, can have dire consequences on a person's inheritance tax bill and could also result in that money being squandered or lost. For example, what about if the money was spent unwisely or what would happen in the event of a divorce or a failing business? What if the donor's own financial circumstances changed and they find themselves in need of the money?
As well as this, the age at which a person is most likely to receive an inheritance needs considering, this will not necessarily be the point in time at which they most need it. A recent report from the Institute of Fiscal Studies showed that those born in the 1960s are expected to be an average age of 58 when their last-surviving parent dies, rising to 64 for those born in the 1980s and in actual fact, around a third of people born in the 1980s will be in their 70s by the time their last-surviving parent dies. At this stage in life, they are most likely to be retired, their children are likely to have left home and there is a reasonable chance that they may well be financially comfortable, with any mortgages having already been paid off.
It is therefore not unusual for a person to want to benefit their loved ones at a younger age, when perhaps they may be more likely to be facing financial pressures. But then inheriting too much too young can also be problematic with the risk of family wealth being squandered, and so a balance needs to be struck in providing financial support without making life so comfortable that it reduces motivation elsewhere.
Careful planning is needed as to when and how much to gift. Gifting money is more that just a tax planning tool, passing on your wealth is part of your overall wealth planning strategy. Remember, once you have given that gift, it has gone. You cannot access it again nor have any control over where it ultimately goes.
An outright cash gift may therefore not be the best option and there are more effective options available. Trusts continue to provide practical solutions to problems in ordinary people’s lives as opposed to giving the beneficiary an outright gift.
Not only can a Trust ringfence and protect assets for beneficiaries, they can also be used as a vehicle to loan money to beneficiaries, rather than making outright gifts. The loan remains an asset of the Trust and provides a layer of asset protection in the event of divorce, or bankruptcy. The loan is a formal agreement and may remain outstanding for the duration of the beneficiary's lifetime and will be a debt against their estate, payable upon their death.
A further benefit of placing assets in Trust is to help prevent sideways disinheritance. Sideways disinheritance is a term that relates to children losing out on their share of their parent’s estate as a result of remarriage. This is becoming a greater problem as people live longer and longer and are therefore more likely to remarry after the death of a spouse.
Trusts are more common than people would think and continue to play a key role in many aspects of everyday life. Many people, often without realising it; will come into contact with a trust in one form or another at some point during their lives. Yet trusts are widely misunderstood and often seen as something just the wealthy need to be concerned with.
But as can be seen, trusts are particularly useful when planning how money and assets should pass from one generation to another, especially when family structures are complicated by divorces and second marriages. This; coupled with the growing frequency of marriage breakdowns, an ageing population and rising prosperity; makes trusts an excellent tool for long-term planning to ensure a family’s financial stability and security.