How to best handover wealth to the next generation
Of course, embedding knowledge and skills to take them into adulthood is just another element of good parenting, while ensuring the children are financially secure for the future is often top of many parents’ priorities.
But are we really doing enough to prepare them for what’s ahead?
And having built up wealth to pass to the next generation, are we making the most of it and – importantly – how well-equipped are our children to handle it?
Peter Shand, partner at leading Scottish private client law firm Murray Beith Murray in Edinburgh, has some concerns that our time-poor, high-pressure working lives may mean there is less focus on our children’s financial and business education than they may need.
“There is a need to invest in the coming generation,” he says. “It’s easy when you’re busy running a business to focus on investing in it, but that may be to the detriment of investing properly in family and the next generation.
“You can make the investment in the business, that investment may come to fruition, but have you done enough in terms of investing in children’s financial wellbeing and in preparing to pass on that wealth?”
That question is particularly pertinent at a time when Millennials – often with very different attitudes to financial prudence than previous generations – prepare to inherit what can be substantial sums from older relatives.
As the Baby Boom generation departs, significant wealth from their investments, property, businesses and savings will be unlocked – potentially falling into the hands of young people with little solid experience or knowledge of just how to cope.
The result could be a perfect storm of rash spending, poor investment and lost opportunities.
“The attitudes to risk and investment values of the Millennials are quite different from Baby Boomers who were prudent, saved and didn’t spend. Millennials have a more short-term approach to life and less interest in saving,” says Shand.
“There’s a concern that a lot of wealth will be unlocked and land in the laps of a millennial generation who are potentially completely unprepared.”
It’s a similar story when it comes to taking over family businesses, he warns. For unless work is done well in advance to drive up the younger generation’s understanding of risk, tax, investment opportunities and across a broad range of monetary issues, decades of shrewd financial work to grow a business could unravel.
It is where Murray Beith Murray, which has more than 170 years’ experience of meeting the legal, financial and administrative needs of its clients, can step in.
That can be in helping to establish trusts to pass on wealth in a more controlled manner, guiding young people so they understand the value of their inheritance and how best to invest it, or advising parents or grandparents how their wealth can be used now for their children’s future benefit – such as school fees.
“We are keen to start looking sooner rather than later at giving children a sense of financial awareness, so they can build confidence and self-esteem, develop their business skills and understanding of wealth management,” adds Shand.
There does appear to be a gap in young people’s financial awareness. According to a 2016 financial capability survey of children by the Money Advice Service, 39 per cent of
16 to 17-year-olds don’t have a current account and 60 per cent don’t have a savings account.
The survey also found that children who never save money are least likely to be confident when it comes to managing their personal finances.
One way to protect wealth and cushion its impact on young lives is to have a managed process for passing it on, advises Shand. “Don’t just hand over everything in one go,” he warns, “Because unless children are up to handling it well, it could go wrong.”
Trusts, which have their roots in regulatory legislation in Scotland dating from 1861, have helped many families ensure control is kept over assets to ensure they are sensibly distributed.
With trustees appointed to be in control of the funds, young people are protected from making reckless or poor decisions, there is security should they go on to enter a marriage which ends in divorce, and insulation against insolvency and creditors.
“A lot of business owners set up a trust before or after exiting their business, using them as a ‘halfway house’ and a way to educate children,” adds Shand.
“We have also seen a pension or life assurance held within a trust, so if money is paid out, it doesn’t go straight to the children. Instead, it’s held in a trust and protected.”
Trusts enable someone to hand ownership of cash, shares, property, life insurance policies and pensions to trustees who manage the assets in the best way to meet the beneficiaries’ interests.
Solicitors can advise on the terms of the trust, such as the beneficiaries’ rights to capital, when they will inherit, and what rights they will have to draw income.
Certain trusts can have benefits for both parties. “A grandparent can put quite large sums of money into a trust, the purpose of which is to meet their grandchildren’s school fees,” adds
Shand. “This is a very tax-efficient way for grandparents who want to invest in their families.”
He also stresses that business owners should not take their eye off the ball when it comes to investments and pensions either. Strategic planning now – particularly regarding new, flexible pension rules – could boost the benefits for the next generation in the future.
“Previously, most pension funds were restricted to a surviving spouse, and if you planned to leave anything to other individuals such as children, it would be met with exceptionally high tax charges,” says Shand. “Now you can leave your pension fund to your family – including grandchildren. That means grandchildren could make withdrawals from grandad’s pension to pay school fees.
“We’d advise business owners to check to ensure they are maximising their pension and taking up that flexibility.”
With a young generation set to benefit in so many ways, the need for solid financial understanding of essentials such as risk management, tax systems, the need for financial prudence, and other business and monetary skills, becomes even clearer.
“There can be a lot of worry for children, particularly when a family business is involved,” Shand observes.
“They worry about losing the wealth, failing to understand tax, the expectation that’s on them – they inherited this, do not mess up, or that their grandfather set up the business, now what are they going to do with it?”
“There is a need to engage with this generation,” he stresses. “Investing in a business should not be to the detriment of investing in the next generation.”
For more information visit https://www.murraybeith.co.uk/
This article appears in the Winter 2019 edition of The Scotsman's Vision magazine which is available here