An article by the Guardian in December 2022 reminds us of a staggering statistic. It reports that by 2025, an estimated £100 billion a year will be passed down from the baby-boomer generation to their children.

It’s been dubbed the “great wealth transfer”, and it’s easy to see why. If you intend to pass your wealth on to younger members of your family, another report by Morningstar may make for thought-provoking reading.

It reveals that a Bank of America survey found that around half of parents with more than £2.4 million believe that their children are not well enough prepared to inherit their wealth. One reason for this may be that wealthy parents sometimes worry that letting their children know how much they will inherit could result in them becoming lazy and unproductive.

A young adult who knows they will inherit millions may decide to busy themselves from 9 to 5 (pm to am, that is) partying hard instead of working. While this may be an understandable concern, one of the best ways to ensure your children can deal with the wealth you eventually pass on to them is to talk to them and prepare them.

This means explaining how much you intend to leave them, how you would like them to use it and how they could get the most from it. So, with this in mind, let’s look at five things you could encourage your children to do when they receive your wealth so that they can get the most from it and enjoy greater financial security.

1. Incorporate the inheritance into their financial strategy

When your children receive your wealth, they may see it as separate from their own. As a result, they may treat it differently and make decisions with it that they wouldn’t normally make.

For example, they may take more risks with it or spend it in a different way than they would with their own money. Helping your child to understand that their inheritance should be incorporated into their own wealth and financial strategy is an important step.

This will help them encompass the inheritance as part of their own wealth, which could encourage better decisions.

2. Encourage them to become “emotionally detached” with the inheritance

A common mistake beneficiaries can make with inherited money or investments is to create an emotional attachment to it. This means they may see their inheritance as “mum’s money” or “dad’s investments”, which may result in decisions that may cost them dearly.

For example, your children may hold on to shares when the smart move might be to sell them and invest in different asset classes. Furthermore, they may keep the money in cash instead of investing it due to the increased risk involved, and potentially miss the opportunity for greater growth in the long term.

Helping your children to understand that they should see the inheritance as their own money and not become emotionally attached to it could help them make shrewder decisions with it.

3. Always consider the tax implications

Preparing your children for their inheritance could help them better understand the tax implications that might arise. For example, the money you leave them may result in their estate becoming liable to Inheritance Tax (IHT), or increase their estate’s exposure to it.

Understanding this, so that your children can act to reduce – or even negate – an IHT liability, could help them leave more to their own children further down the line.

That said, IHT isn’t the only tax your children could be exposed to if you leave investments. They could also be liable to Capital Gains Tax or Dividend Tax, and if your children are not aware of this, they could face an unexpected and substantial tax charge.

4. Remember that investing may provide greater growth potential

According to an article by the Independent, research suggests that only 52% of people would be confident about what to do with investments should they inherit them. As a result, they’re more likely to sell them and place the money into savings accounts.As a result, they’re more likely to sell them and place the money into savings accounts.

As you may guess, doing this means that your children’s inheritance would no longer be exposed to growth potential, which could significantly reduce its long-term value. Furthermore, the effects of inflation may mean that putting the money into cash accounts could reduce the value of the inheritance that you leave to your children in real terms.

By teaching your beneficiaries the potential benefits of remaining invested, they could see a boost to the value of your inheritance in the long term. This could help provide them with the financial security you hope to provide for them, and significantly boost their standard of living.

5. Work with a financial planner

Helping your children to understand the value of working with a financial planner could help them negotiate the potential gains and pitfalls from the inheritance you leave them. A planner could ensure your beneficiaries understand how to get the most from your inheritance as tax-efficiently as possible, which could provide them with the financial peace of mind you hope it will.

One way you could do this is to involve your children in meetings you have with your financial planner so that they can see the value it provides.

Get in touch

One of the most effective ways of preparing your children to receive an inheritance is with an intergenerational wealth plan. This is a roadmap that allows you to discuss all of the above points with your children, and how you would encourage them to spend your money when they receive it.

It could also enable you to start passing your wealth to them while you’re alive, which could provide you with greater control over how it is used and allow you and your children to enjoy the experience together. If you would like to discuss any of the above points, your estate’s exposure to IHT or how we could help you create an intergenerational wealth plan, please email theteam@citywidefinancial.co.uk as we’d be happy to help.

Please note

This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation will be different. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The information is aimed at retail clients only.

Investments carry risk. 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. Past performance is not a reliable indicator of future performance.