The Great Wealth Transfer – managing the transition

The shift in assets will be enormous. Figures from estate administrators the Kings Court Trust and thinktank CEBR, suggest that wealth transfers are set to grow to £100 billion by 2025, and to £355 billion by 20471.  Transfers will peak in 2035, with large numbers of younger people receiving substantial lump sums at the same time.

For families, transferring wealth between generations is a vital but tricky task. There are many hurdles to negotiate, including tax and estate planning, while younger people receiving large amounts of money will need to make decisions about investing and saving that they have never had to make before.

If your family is contemplating the transfer of wealth, there are several ways to make tackling the task easier. Consider these points first.

You can transfer wealth in bitesize chunks

While the bulk of wealth tends to be transferred between the generations on death, this can create tax liabilities and prevent inheritances from being used effectively.

Making use of annual gifting rules, trust funds and other structures on an annual basis can help families to start the wealth transfer earlier, meaning that money can be used when it is needed – for example for school fees or house deposits, as well as helping families to minimise the inheritance tax burden.

Cashflow forecasting can help members of the older generation to decide what is needed in retirement but may require expert help.

Wealth transfers can skip a generation

By the time older people are ready to think about transferring wealth, their children may already be well established in their careers and have homes and families of their own. A legacy may not be needed at this point.

That is one reason why family members need to speak to one another in advance of wealth transfers. In some cases, it may be more efficient for wealth to cascade directly down to grandchildren who are more likely to need the money to deal with housing costs, university debt, or even to set up a pension of their own.

A pension is a very efficient wealth transfer vehicle

A pension sits outside a person’s estate for inheritance tax purposes, so although it may be counter intuitive, can be one of the best ways to manage intergenerational wealth transfer. 

Keeping a private pension intact and spending other savings, for example ISAs, instead, in retirement, gives the older generation a valuable nest egg that can be passed down tax efficiently. 

Where there’s a will, there’s a way

Making a will, and keeping it up to date, goes hand in hand with effective wealth transfer. Once family members have discussed the most effective way to pass down money, enshrining it in a legal document will ensure wishes are carried out correctly.

Family circumstances change often, so remembering to adjust a will when a new family member is born, or there is a divorce or marriage, will also ensure that transition goes smoothly.

Education is key

If one generation of a family has always handled the wealth, preparing younger generations for wealth transfer is key. This may involve meetings with a family financial adviser, discussions about expectations and hopes, and the completion of financial powers of attorney so that not only the wealth, but the responsibility for financial decisions begins to pass from one generation to another.

The great wealth switch is inevitable, but it need not be sudden. Preparation now will ensure everyone is ready to make the best of changes later.