Talk Money Week - It's good to talk - Partners Wealth Management

Discussing personal wealth – even with those closest to us – doesn’t come easy for most people. But not talking about it can have a serious impact on your financial planning efforts, particularly when it comes to passing your wealth safely down the generations.

Not discussing your intentions with your loved ones now could cause upset and financial losses down the line, especially if you were to pass away with no plans in place. Early planning can help to avoid, or at least reduce, your Inheritance Tax liability and ensure as much of your hard-earned wealth as possible is passed on to the next generation. And the sooner you have those discussions, the sooner you can put your mind at rest and enjoy life knowing that your beneficiaries’ financial future is secure.

The first step is to have a clear understanding of the true value of your estate and the tax liability to which you would be subject were you to pass away now. There are two distinct parts to this undertaking: understanding the value of the assets themselves on the one hand, and how they are structured on the other. Often, it is not the asset itself that leads to tax liability, but how it is held or structured within your estate.

The next step is to understand what you hope to achieve in the future, so that your financial plans and the structuring of your assets are in line with your goals. Using a professional cash flow model is usually the most efficient way to do this. Our Lifetime Wealth Model is often referred to our clients as the closest thing we have to a crystal ball!

When thinking about your future, we would encourage you to consider the following questions:

What income will you need in retirement to meet your lifestyle expectations?
Do you have any one-off purchases planned?
Could your various assets – such as savings and investments, property portfolios, or your business – be utilised to provide you with an income, instead of drawing from your pension(s)?
Could you afford to make lifetime gifts now in order to reduce your future Inheritance Tax liability?
Are you looking to use your wealth for philanthropic purposes?
If giving up control of the asset is a worry, then have you considered a trust?
Are you looking to put aside funds to pay for long-term care?
Do you plan to downsize?

Starting those all-important discussions

Weighing up all these questions can feel nothing short of overwhelming. But remember, you don’t have to do this all alone. The first step is to have open and honest conversation with your family and your loved ones about your plans for your wealth. The second is to seek professional advice from wealth management specialists, who can not only help guide you, but can also take care of all the practicalities involved in implementing and monitoring your financial plans.

Seven key steps to securing your financial future

1. Get talking

Dispense with that stiff upper lip once and for all and have those all-important discussions with your family and loved ones. These discussions can give you a better idea of how your wealth can best be used to support your beneficiaries both now and upon your death; it is also important that they understand your plans to avoid conflict and contention down the line. These discussions should also be seen as an opportunity to educate the next generation on good wealth management and financial planning practices, so that they have the tools they need to manage, preserve and grow their inheritance in the years to come. Remember, though, that all decisions about your money must be yours and yours alone.

2. Update your will

Don’t forget to update your will regularly as your plans and circumstances change.This will ensure your wealth is distributed according to your current wishes, rather than according to your wishes of 20 years ago, or worse still, strict intestacy legislation. Furthermore, now is the perfect time to register a lasting power of attorney, so that your assets can be looked after by somebody you trust should you lose mental capacity in the future.

3. Take your pension out of the equation

Pension funds are often immune from Inheritance Tax liability. This therefore begs the question: could your income requirements be met using your savings, investments or other income-generating assets? Preserving your pension pot is a simple, yet effective way of passing down wealth without incurring Inheritance Tax. Spending other investments or savings should be considered first, to lower your taxable estate when you pass away.

4. Consider making lifetime gifts

If your finances allow, perhaps consider gifting assets to your beneficiaries during your lifetime to mitigate your Inheritance Tax liability. If seven years elapse after making a lifetime gift, then no Inheritance Tax will be due on it at all, so lifetime gifting is a key part of many of our clients’ tax optimisation strategies. It has another benefit as well: you will be able to see your beneficiaries enjoy your gift while you are still alive to appreciate it.

If you are concerned about the affordability of lifetime gifting, our Lifetime Wealth Model could provide you with the reassurance you need and ensure you can still meet your lifestyle requirements.

5. Use your tax-efficient allowances

Make sure you are aware, and take maximum advantage, of all your tax allowances. This includes annual gifting exemptions, the Inheritance Tax nil-rate band and residential rate band. Outside of your Inheritance Tax allowances, other useful allowances include your pension Annual and Lifetime allowances, your tax-free ISA allowance, as well as tax-free thresholds for Income Tax and Capital Gains Tax. These allowances can play a key part in your financial plan; regular early gifting, even in smaller amounts, can have a positive impact on the taxable value of your estate.

6. Explore the benefits of trusts

If the maturity or financial awareness of your beneficiaries is a cause for concern, you might want to consider holding your gifts in trust. Not only can trusts have serious benefits when it comes to Inheritance Tax liability, but as a trustee, you can maintain control of the assets until you see fit to release them. Furthermore, by using a discretionary trust, you can change the beneficiary of your wealth should you wish, giving you the flexibility to defer your decision until a later date.

7. Take out life insurance in trust

Putting life insurance in a trust is a great Inheritance Tax mitigation strategy, as the payout of a policy arranged in this way is normally not considered as part of your estate. It can also be a useful way of providing your beneficiaries with any funds they need to pay the Inheritance Tax owing on your estate without them getting tied up in probate.

The key point to remember is that early planning and involving your loved ones in the discussion, is a tried and proven method of ensuring your wealth becomes truly inter-generational, without unnecessary taxation along the way.