You have more control over the Inheritance Tax your family pays than you might think, but each option to mitigate the levy has to be carefully weighed in the balance.
Britons are notoriously reticent when it comes to talking about finances, even with family. Yet you really should try to put any qualms aside and tackle “the money conversation” with your aging parents – lest serious consequences ensue.
Many people feel very awkward about discussing money matters, even with close family members like their parents, children or spouse. But while this reticence may be deeply ingrained culturally, its consequences are often many times worse than taking the trouble to have a free and frank conversation before it’s too late. Never is this truer than with aging parents.
People are living longer lives than ever today, which is very much a “double-edged sword”. If your parents can reasonably expect to live well into their eighties, you may feel it’s inappropriate to air issues like long-term care and inheritance until well after they have passed their “threescore and ten” – and you yourself are at retirement. However, greater longevity is bringing its own challenges for both society and individual families that simply cannot be ignored. There were a record half a million 90 year-olds in England last year. Such extended lifespans are making it easier and easier to put off essential conversations about family wealth planning while also making having them as early as possible more and more vital.
Obviously, the first issue at stake is proper retirement planning, particularly in the “decumulation phase” when your parents are relying solely on pensions, annuities and the returns from any other assets for their income. With retirement now often stretching into several decades, being able to sustain a desirable lifestyle for the whole duration has become a real challenge – and a problem very much exacerbated by the current financial environment.
While nobody would wish to see their parents stinting themselves in their golden years, meticulous planning is called for to make sure their resources don’t run out when they can no longer earn money themselves. Obviously, what is required in retirement is that their assets are working as hard as possible to grow their wealth. However, this is no longer as easy as it once was.
As we explain in our eBook, “Alternative Safe Havens for Your Capital”, cash is no longer king. Interest rates, at least on the High Street, remain low (and even desultory) while inflation is ratcheting up. This means that holding capital in simple cash deposits will see the spending power of wealth rapidly erode. For your parents to maintain their wealth – and their standard of living – they will need to make sure that their assets are generating returns that at least keep pace with inflation (and better yet far outstrip it). While cash might feel safe, it might actually be a pretty poor proposition long term.
Nor are some traditional sources of income as appealing as before. House prices remain unpredictable and the taxman is increasingly eager to tap buy-to-let investors, meaning that having second property as a source of income may have lost its shine. Meanwhile, the UK’s new pension freedoms have hit the annuities market hard, making it potentially difficult to find a good deal.
At the same time, DIY investors are having a tough time as geopolitical and other shocks continue to buffet both the equity and bond markets. Many are finding a traditional “60-40” investment portfolio simply no longer delivers the returns they need at a level of risk they are comfortable with. Most will find they now need a more sophisticated mixture of asset classes and instruments, along with the ability to respond more quickly to market gyrations, making professional help with their investments essential.
Further complicating lengthy retirements is the issue of long-term care. Good health is far from assured and for anyone with aging parents the spectre of cognitive decline must surely loom large. There are currently 850,000 people suffering from dementia in the UK, and not only is the disease now our leading cause of death, cases are expected to double over the next thirty years.
Providing long-term care for those that might be afflicted is something that the government and families themselves are now really grappling with. Policy seems to be constantly changing and a workable solution remains elusive, but what is clear is that our public coffers will not be able to bear the burden of a dramatically aging population alone. This means those with the means are likely to have to increasingly self-fund their care.
Against this back-drop, many families are opting to put in place a Lasting Power of Attorney (LPA) allowing for family members (or other caregivers) to make financial and healthcare decisions on behalf of the elderly. Importantly, LPAs can be arranged long before they need to be activated. Having one ready will make accessing the funds of an incapacitated parent relatively straightforward; not having one can make untangling their financial affairs and being able to help incredibly difficult (and costly in terms of legal fees).
Remember that care home fees can run into the thousands each week and these potentially huge expenses must be taken into account when planning your parents’ finances. Both generations might also like to think about how their wealth might be better structured to benefit the family.
Wealth structuring and mitigating inheritance tax are complex issues that certainly call for taking professional advice. But we would always advise that you follow the maxim, “When in doubt, do as the very wealthy do”. Ultra-high net worth individuals have long looked at their wealth on an intergenerational view, structuring it as efficiently as possible to minimise the inheritance tax levied on their estates and ensuring that as much money stays within the family as possible. It behoves families of any means to do exactly the same and there are myriad options they might deploy.
Most people are familiar with the seven-year gifting rule, which means that assets given to the next generation are not liable for IHT as long as the donor lives on for seven years; what you might not know is that even if the donor does not survive for seven years after the gift IHT can be still be reduced proportionately to the period of time that they did. There are complexities in this area, but gifting might be a good option as long as you take proper legal and tax advice.
Of course, “giving while living” will not appeal to everyone and each family is different. You could also look at options like trusts and other structures such as family investment companies to hold and invest wealth more efficiently, and gain various tax advantages for each generation. Your parents can be reassured here that they can retain a great deal of control over their assets and that a reputable adviser will only ever recommend tax mitigation techniques that are widely used and well-accepted – even by the tax authorities themselves.
Combining investment management, financial planning and legal structuring expertise – as only a full-service wealth manager can do – will open up a whole range of options.
This article gives only a flavour of all the questions you should be asking as you tackle the thorny issue of how to best help your aging parents arrange their finances. A professional wealth adviser will bring huge experience in these issues to bear and will be able to devise a plan that precisely suits the needs of each generation concerned.
As ever, the key to optimising wealth is starting to plan as early as possible and being proactive about seeking professional advice. There are many serious pitfalls that can hurt those who avoid money conversations they perceive as being difficult; there are many, many benefits for those who take action well ahead of time.
Many advisers have a real specialism for helping the elderly with their financial planning and we can help you find exactly the right ones. To start the process of finding the right wealth manager for your needs, simply complete our 15-point questionnaire and put our smart online tool to work.
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