Broaching the topic of inheritance with parents might be daunting because even the most diplomatic approach could appear to be self-interested.
Nevertheless, planning for the future is essential to maximise prosperity for younger generations and minimise inheritance tax bills.
In Britain, adult children have no automatic right to their parents’ money. However, most parents do want to preserve their capital for their children and grandchildren while still having enough to enjoy their retirement.
This is particularly important when second marriages and second families can complicate matters or when adult children may need to take on power of attorney on older parents’ behalf.
Telegraph Money explores the best ways to manage multi-generational finances while still allowing for retirement cruise trips and well deserved luxuries for parents.
How to speak to family members about money
Involving the whole family in planning can help to reduce the potential for future disputes and manage expectations, says Sean McCann, a chartered financial planner at NFU Mutual, the insurer.
“Plan as early as possible, as the earlier you plan the more options you have, particularly when it comes to mitigating any inheritance tax bill,” he says.
“Involving a solicitor or financial adviser experienced in helping families to plan can open up options that may not have been considered. It can also help to remove some of the emotion from discussions if someone from outside the family is involved.”
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Being fair to all children does not necessarily mean promising equal shares of wealth, as Helena Morrissey, the City “superwoman”, has described for her own family of nine children.
“There is no simple formula, just some pointers to help make the best of things – and, importantly, prevent arguments or resentment between family members,” she wrote for Telegraph Money.
“Avoiding misunderstandings will be easier if everyone communicates openly – but giving and receiving money can feel awkward.”
McCann says parents may want to reflect any financial help they’ve given to certain children during their lifetime or the fact that, for example, one child may have invested more time and energy in a family business.
Setting up power of attorney
A lasting power of attorney is a legal document that enables one or more people, known as “attorneys”, to make decisions for or act on behalf of an individual who cannot make decisions for him or herself (the “donor”).
There are two types of LPA: one relates to health and welfare, the other to property and financial affairs. At the time an attorney is appointed, the donor must be 18 or over and have mental capacity.
A property and financial affairs LPA allows the attorney to make decisions about managing money and property, including selling a home or managing a bank account. Louise Lewis of the law firm Freeths says families should start to consider power of attorney at any time after the age of 18.
“We recommend that people do them as part of their general estate planning, for example at the same time as doing their will,” she says.
How to protect family money if the parent refuses to attend a medical appointment?
According to Lewis, this is a “tricky” situation. “While people have capacity, they can make unwise decisions. This is enshrined in the Mental Capacity Act 2005,” she says.
“If adult children have concerns about their parent they should seek advice from social services, which have legal responsibility under the Care Act 2014 for anyone with eligible needs.”
If necessary, social services can refer the individual for medical treatment with the NHS and involve doctors. In certain circumstances they can force someone to be “sectioned” to undergo treatment.
As social services tend to be very busy, it is best to make a referral sooner rather than later, Lewis says.
When can power of attorney be abused and how do lawyers guard against it?
For professionals who make “best interests” decisions, particularly with potentially vulnerable clients, the Mental Capacity Act 2005 offers legal guidance.
Lawyers may use a vulnerable client policy to support individuals. As an example Lewis says a client with a cognitive impairment may need conversations to be recorded, longer meetings and the use of notes to review any suggestions made.
Can an attorney be blocked by their donor from making a decision under a power of attorney?
This happens “often”, says Lewis. “Capacity is specific to the decision concerned, so someone may have capacity to do some things but not others,” she says.
“Often someone may have the capacity to make their own welfare decisions but not to manage their affairs.” In this situation, you may wish to seek legal advice.
Managing money with second families and remarriage
Lawyers and financial planners cannot ensure that adult children inherit their parents’ money, because adult children have no automatic right to an inheritance in Britain – unlike in France, for example.
If a parent has remarried and had further children to whom they bequeath their estate, legally it would be difficult for the adult child to challenge it.
However, situations do arise in which adult children may have been informally promised money. They may raise this as a claim against a parent’s estate.
“It is really common to have mediation after death to settle such claims,” Lewis says. In Britain, individuals are free to dispose of their estate as they see fit.
However, the courts do have a limited power to intervene under the Inheritance Act 1975 if there is judged to be a failure to make “reasonable financial provision” for a certain number of people linked to the deceased.
These include their spouse or civil partner or child. Claims must be made within six months of the date of a grant of probate or letters of administration and give full disclosure of financial needs and resources.
A trust may be the solution
If parents put money in a trust, adult children can rest assured that their inheritance is protected and parents can enjoy spending in retirement without touching the money set aside for future generations.
McCann says it is a “common misconception” that trusts are just for the wealthy.
“In their most simple form trusts can be used with life insurance policies to ensure that they don’t form part of your estate for inheritance tax purposes and to speed up payment to your beneficiaries by avoiding having to wait for probate,” he says.
They can also offer inheritance tax advantages. If you give assets to a trust and survive seven years, the value will normally fall outside your estate.
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Many life insurers offer free trust documents and trusts can be set up during an individual’s lifetime or via a will to make gifts or bequests without giving the recipients immediate control.
In families with multiple children and grandchildren from different marriages, a “life interest trust” may help to avoid disputes over sharing an individual’s wealth.
Money or property can be held in a life interest trust for a second spouse for life, with the stipulation that the assets pass to the children of the first marriage on the spouse’s death.
“Discretionary trusts” allow an individual to name a wide range of potential beneficiaries, including children and grandchildren and those who may be born in the future.
“By appointing yourself as trustee you can exercise control over who benefits during your lifetime,” says McCann. “You can also write a letter of wishes to the other trustees that they can take into consideration when managing the trust after your death.”
Never pay inheritance tax – your questions answered
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