With one in five parents now giving away money to their children to avoid high inheritance tax bills, it is more important than ever to include your children in your financial decisions, to avoid them having a nasty shock or trying to deal with something they know nothing about should the worst happen.
Research undertaken by Direct Line* found that a total of £227 billion has been transferred, with £32,920 being the average amount that parents are gifting their children. Another 19% of parents had not given any money away as of yet, but planned to do so in the future. However, 34% of parents said they did not have the assets to give away, with one in 10 saying their children are too young and 13% were worried that they will be short of money themselves when they are older.
Times are changing. In our grandparent’s day the financial decisions were normally carried out by the breadwinner of the family (typically the male) and sometimes only the sons were made executors of the will, which was kept a secret until the parent(s) died. Nowadays, thankfully executor responsibility is split equally between all the children to ensure everything is kept fair.
More parents are realising they need to look at their finances before it’s too late to ensure their children know their wishes and who to contact from a financial point of view, whether it is another family member or a Financial Advisor. The latter is especially important to help children know who to turn to for help with investing their parents’/grandparents’ money when the time comes. Even if gifting money to your children before you die is the route you decide on, there are still implications to be considered, such as if you give the money away you need to do so 7 years before you die, otherwise your children will still be liable for inheritance tax.
Talking about finances is uncomfortable for both children and their parents, but doing so can alleviate stress and worry in the future – especially if you are suddenly taken ill or suffer from dementia and can’t make your own decisions. You may feel too proud to talk to your children, feel it is a private matter, don’t want to lose control of your money or don’t want your children to take advantage. Whilst these concerns are valid there are considerable benefits to having this discussion with your (grown up) children whilst you still can.
It may help to open discussions around children potentially needing a small ‘early inheritance’ to help them out, whether this facilitates higher education, assists them to buy their first property or simply to alleviate any money concerns. It can also save time when they know details of your will/s, powers of attorney, where vital documents are held and even meeting your financial advisor so a relationship is formed.
It is also helpful to talk about options should you no longer be able to care for yourself; waiting lists for retirement/care homes can sometimes be long, so it means your children can move faster should the need arise. No one wants their parents to become ill and lose their judgement but there are several studies that show the ability to make financial decisions declines by about 2% a year after age 60.
It is important that discussing family money matters does not become a taboo subject and you try to get everyone involved in financial planning and budgeting from an early age as it instils good financial awareness. This can start from saving money in a piggy bank, having a bank account as children get older and even bringing them into family businesses or taking up part-time jobs encouraging them to budget for what they need, whilst showing them the real costs of living and what expenses you have as a family each month.
By being open and honest regarding the financial history of the family it means your children will also learn from your experiences, good or bad, and it will help shape their financial future.
To talk to NLP Financial Management about your financial planning please contact [email protected]