How To Protect Your Wealth For Future Generations

“Let us sacrifice our today so that our children can have a better tomorrow”. A. P. J. Abdul Kalam (former President of India)

Climate change. Student debt. House prices rising year on year. The future for today’s young people presents challenges that previous generations were fortunate not to face. It is understandable, therefore, that parents want to smooth the way for their descendants. And unlike past generations, many people now are in a position to pass on a considerable legacy to their children and grandchildren.

In 1850 only around 15% of adults who died had enough wealth to leave an inheritance; most people died with nothing or they were in debt. By the mid-1930s, that proportion increased to approximately 23% of dying adults. Research[CM1] by HSBC shows that by 2013, two-thirds of people expected to leave an inheritance, mainly thanks to the dramatic rise in property prices.

The question now is – what is the best way to protect wealth to ensure it benefits family members and is not diluted through divorce or Inheritance Tax (IHT)? And for those receiving an inheritance from their parents (the average age of a beneficiary is now between 55-64[CM2] ), what is the best way to protect this windfall?

Speaking to the founding partner of Solomons Solicitors, Paul Solomons, it is clear there are several actions people can take if they want to ring-fence their property and assets so future generations can benefit from them. One little known solution is to form a company in which to place the inheritance

“If you inherit a substantial amount, say a few hundred thousand pounds, and are a high rate taxpayer, forming a company makes good sense. For example, if you wish to purchase a second home with the inheritance so you can earn income from the rent upon retirement, doing so through a company means interest payments on the mortgage can be deducted prior to corporation tax being calculated. If you purchase the property as an individual, tax is charged on the entire rental income amount”.

Trusts offer another option for Estate Planning, although they can incur high costs. Again, in the case of a received inheritance, money to purchase a buy to let can be borrowed from the Trust rather than a lending institution. Trusts also provide greater flexibility on how you arrange your affairs. For example, you can choose to set up an Interest in Possession Trust which provides Beneficiaries with income from the capital held in the Trust, but it does not allow the capital itself to be sold.

Paul states “Trusts ensure that any money you inherit remains outside of your own estate for Inheritance Tax purposes”.

A common question asked by people who have excess money in later life is how to prevent their property and assets being used to pay for care should they need it. Paul cautions that great care has to be taken to ensure there is no question of “deliberate deprivation”; in other words, setting up a Trust or gifting money for the obvious purpose of depriving the relevant local authority of money to pay for your care. One increasingly popular solution to this challenge is to review your Estate Planning arrangements well before you reach an age where care may be required, i.e. in your 40s or 50s.

Trusts are also often used to protect the family home. Paul states that couples who are listed as joint tenants on the title can change to being tenants in common in equal shares. Each spouses’ Will can then place their individual half in Trust after death. This means that only half the property can be sold for care requirements.

Leveraging the benefits of seeking wealth p rotection and legal advice early on in life can be highly advantageous. On the contrary, leaving Estate Planning until later in life can result in Trusts being set aside by local authorities and your legacy being decimated by tax bills and claims by those outside of your direct descendants.

If you would like help with any aspect of Wills, Estate Planning, Power of Attorney, or any other matter, please contact us on 01202 802 807 to make an initial appointment with one of our expert Solicitors, Alexandra Livesey or Paul Solomons.