Inheriting wealth can be a significant life event, especially when it comes to helping younger generations achieve financial freedom. But what’s the best age to inherit, or choose to pass on your wealth to your children or grandchildren? Steve Wright, our Estates Director, takes a look.
Receiving a windfall of cash or assets can derail even the most level-headed individual. The risk is that gifting an early inheritance out of wealth which you have carefully nurtured, could leave it being inappropriately used by your heirs, eroding its potential. On the flip side, you may be cautious about hanging onto wealth, particularly when passing on a large Estate in one go can create an unnecessary Inheritance Tax bill.
The question of maturity
When it comes to establishing what’s the right age to inherit, character is a factor. In purely simplistic terms some of us are happier saving, and others spending. One of the best places to start is to consider how those inheriting deal with their own finances – can they handle a sizeable sum? If they are young, it may be that peers have a significant impact on their decision-making ability, and even encourage irresponsible spending. This can be particularly true if someone inherits a sum in their late teens or early 20s, when activities such as university, socialising or travelling might be the main priorities.
Even if your children or grandchildren assure you they can handle an inheritance, the reality might be a different story. Ultimately you know them best! It can be useful to consider how you dealt with money at the same age and how you’ve raised your children where the subject of money is concerned – financial attitudes can have a likelihood of passing on intergenerationally. Determining when your child or grandchildren are mature enough to inherit is very subjective; one of the reasons why many trust funds are set up to pass on inheritances at a particular age, perhaps at 21 or 25, or in stages at particular life events.
There can also be some other forces at play which you might like to take account of. For example, if your children are married, but divorce may be on the cards, you may want to protect your family wealth from being drawn into a financial settlement. As always, there are ways to share inheritance to protect against these situations.
The effect of inheritance
Inheriting too early can also affect working patterns and decisions. If your children or grandchildren are early in their career, they might still be exploring their options, and are likely to be lower down that salary ladder. Injecting wealth into the equation may mean it’s easier for them to opt-out. Here it can be the amount of the inheritance that matters – a certain level of money can facilitate a lifestyle, perhaps enabling them to buy a property, set up their first investment portfolio or take in some travel each year. But a larger inheritance can create its own issues, maybe offering that option not to work. Even if wealth is used more wisely – perhaps to buy one or more properties – there will be a need for a degree of responsibility to come into play to manage the situation professionally, handle bills and maintain the property. Don’t forget too that receiving wealth early on can impact their tax position, and it might be that there needs to be some careful planning needed for both you and your chosen beneficiary.
Sharing your plans
It’s always important to let your family know your plans, and to factor in your own financial requirements. If you’re not comfortable trusting your hard-earned wealth to younger generations then sit tight and think again in a few years. Whenever you are gifting or bestowing a large sum it’s vital that you’ve made sure your financial position will remain comfortable. Set the right expectations too – for example do your children or grandchildren expect to receive the funds to help them with house deposits, or have you made it clear they have to save their own funds, or that you’ll match what they contribute?
The right age
The best age to inherit really does vary between families and individuals. Typically – if you are looking for an ideal time – it’s more likely that someone in their mid-20s will be able to act responsibly, although of course this differs by person. One of the best steps you can take to help your children be financially mature is to be a good role model, and teach them the importance of properly managing money.
When planning any aspect of Estate planning don’t forget to consider tax. Inheritance Tax can create an unnecessary and unwelcome bill but can be avoided with careful planning. It can also be useful to stagger inheritances to help your children or grandchildren develop important financial literacy skills; trusts can help properly manage your plans and other tools – such as paying into pensions – and can also be used to disperse inheritance, in a sensible way.
To discuss any aspect of Estate planning please get in touch with your nearest office.