The pros and cons of skipping a generation when leaving an inheritance

As you get older, you may begin to reflect more on not just your own goals, but the aspirations of the generations that came after you.

If you have adult children with their own young families, it likely fills you with pride to imagine them living prosperous lives and supporting each other in the future.

Of course, this could be bittersweet, as you may imagine that some of their most treasured life experiences may occur after you’re gone. But the good news is, you may be able to facilitate their success by leaving wealth to them in your will (or gifting it during your lifetime).

In the world of financial advice, we call this forming an “estate plan” – which includes:

• Deciding who should inherit your wealth
• Writing a fair, comprehensive, and legally valid will
• Taking steps to mitigate Inheritance Tax (IHT) where you can
• Making your intentions clear to your beneficiaries.

One decision most overlook, but could be instrumental to your estate plan, is whether to “skip a generation” when leaving an inheritance.

In short, this would involve leaving some or all of your estate to your grandchildren rather than your children.

Let’s assess the pros and cons of doing so.

 

2 key pros of skipping a generation in your will

1. Your beneficiaries could avoid “double” Inheritance Tax

If you leave an estate worth more than £325,000 – or £500,000 if your main home is inherited by direct descendants – it’s likely that this will incur an Inheritance Tax (IHT) bill. These thresholds are called the nil-rate bands and they’re frozen until 2030.

IHT is charged at 40% as standard, although some lifetime gifting and charitable giving could lower the rate in some cases.

Leaving everything to your grandchildren could mean your beneficiaries avoid “double taxation” regarding IHT.

Imagine you left £800,000, including your home, to your 50-year-old child. The estate pays £120,000 in IHT, leaving your child with £680,000. Your child sells your home and invests their whole inheritance as a nest egg for their own children, and dips into it towards the end of their life in order to pay for care.

When they die, they leave their home, their savings, plus your nest egg to their children in an estate valued at £1.2 million. Their estate pays £280,000 in IHT, assuming the nil-rate bands and rate of IHT have not changed.

While your child was able to grow the wealth you left behind and use some of it for their own needs, this process has essentially subjected your money to a double IHT bill.

Whereas, leaving your initial £800,000 to your adult grandchildren means this money is likely to be protected from another IHT hit in a few decades’ time.

2. Your grandchildren may need the money more

Your grandchildren are building their lives in a world that costs a lot to live in.

According to housing research published by The Negotiator, first-time buyers are paying 191% more for a home than their parents did on average, with the average earnings to house price ratio more than doubling since the 1990s.

Plus, getting an education and starting a family are both expensive exercises. Save the Student reports that on the whole, a university education costs nearly £70,000 in total. Plus, Money Helper says that childcare for young children is often more than £200 a week, although some government reliefs are available to help cover the cost.

When deciding how to leave an inheritance, and to who, it’s important to consider who would benefit more significantly from a financial boost.

 

2 cons of skipping a generation in your will

1. Young adults may not have the life experience to handle a windfall

If you had received a large inheritance in your 20s or 30s, how different would your life have been?

While your grandchildren may benefit from inheriting your wealth when you die for the reasons outlined above, they may not be accustomed to handling large sums of money.

With that in mind, you could be unsure whether it’s a good idea to leave everything to them. Your grandchildren may not even be 18 yet, meaning that their parents or guardians would take care of the wealth until they become adults. Even so, being legally entitled to a large inheritance at 18 may mean they make financial decisions they later regret.

Of course, you can make specifications for how the funds should be spent, saved, or invested in your will. Or, you could go one step further by setting up a trust arrangement that gives the trustee some discretion over when your grandchildren receive the money and how it should be spent.

2. Your adult children may need support to retire comfortably

Your children may be in their 50s or 60s when you pass away, meaning that it’s likely they have a home, savings, pensions, and investments to support them as they age.

Nevertheless, much like your grandchildren, your children still face a world where costs are rising. For older people, the challenges include:

• Affording a comfortable retirement
• Rising tax burdens, even for retirees
• Paying for care, if they need it
• Supporting their own children in their ambitions.

One way you could decipher whether your adult children need an inheritance to fund their future would simply be to discuss it with them. Inheritance conversations may be awkward to bring up, but afterwards, you may have a much clearer understanding of your beneficiaries’ needs.

 

Work with an adviser to make inheritance arrangements that suit your family

Here at Chancellor, we always take a bespoke approach – meaning your estate plan will be formulated with care and personalised attention as well as technical expertise and sound advice.

Whether you want to discuss your estate planning options, reduce Inheritance Tax, or make sure your own life plans are on track and affordable, we’re here for you.

Email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.

 

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.