Intergenerational planning is a hot topic for many advisory firms, which is hardly surprising given people are, in general, living for longer and require financial advice much later into their lives.
This brings with it a whole host of new challenges and opportunities as age and health-related conditions increasingly need to be planned for and, more and more people's estates are set to breach the IHT threshold.
As well as making sure their client's family wealth is cascaded in accordance with their wishes and in as tax-efficient a way as possible, for advisers being involved in the financial planning of more than one generation of a family is an opportunity to broaden their client base and retain funds under management.
Pru's Family Wealth Unlocked report from 2022 shows one in three people of those surveyed are sharing the same financial adviser as another member of the family so it seems the door is often open to advisers but where are the potential stumbling blocks?
Let's consider five simple ways an adviser can start a conversation with their clients as to why they should jointly engage with the next generation on key topics.
Pretty much every adviser, or solicitor, I speak to says making a will should be the very first starting point when considering the next generation. Of course, going alongside this is appointing executors for the will. Naturally, children of a client will be often be both an executor and a beneficiary. At such a stressful time for those having lost a loved one it is important they know where they can turn for help, such as how the estate is handled and how it can be wound up effectively. This could require both legal as well as financial advice. If the estate is likely to be complicated it could be that appointing a professional executor might be preferable.
If a client and/or their partner has a pension scheme chances are that the adviser has ensured that an expression of wish has been completed and sent to the pension scheme in order that the client's wishes in terms of who receives the fund can be taken into account by the scheme's administrator. These are not normally binding but will generally be followed by the administrator unless there is good reason not to.
Even now it is still the case that, despite the options upon death brought in by pension freedoms being available in many schemes, the fund is still paid out as a lump sum. This might easily be a sub-optimal route to take though as the beneficiary remaining a member of the scheme either as a nominee or dependent allows them to keep the funds in the pension tax shelter and draw on the fund - or not as they see fit. This can prove highly effective from both an income and inheritance tax perspective.
While no one likes to think about needing to pass control of one's affairs to somebody else, the sad reality is that for many this becomes a necessity. In England and Wales, a LPA for property and financial affairs and a LPA for health and welfare can be set up for £82 each. Similar arrangements exist in the rest of the UK. This is usually far easier and cheaper than applying to the court of protection to take over someone's affairs.
With continuing longevity and the drawdown rules now meaning advisers are often continuing to advise clients till later in life than was previously the case, a LPA looks like a very sensible piece of future planning to have in place. For example, it might well be that financial decisions need to be made on behalf of a parent who has some form of dementia. Though it's often a really difficult subject to broach with someone, the NHS estimates the condition affects one in six people over 80. As a friend and former army captain of mine used to say "hope for the best, prepare for the worst".
Gifting to loved ones is a very legitimate way of passing wealth down the generations in a tax-efficient manner. Use of the annual exempt amount of £3,000 and also the gift allowance under the ‘normal expenditure' rules can both be used to good effect by advisers, who will have a multitude of highly attractive options in terms of how these gifts could be made and where they may be invested. Third-party pension contributions for example can help reduce an IHT bill, while also boosting a child's pension and simultaneously increasing their net income if the child is a higher or additional rate taxpayer - a pretty unbeatable combination.
HMRC requires form IHT403 to be completed upon someone's death to document what gifts the deceased made which may fall in full or part outside of their estate. A tip that a veteran adviser gave me many years ago was that completing the relevant sections on this form as the gifts are made can save an awful lot of time and heartache later on.
This may seem obvious but it never hurts to remind people that a loved one is going to have to deal with all their financial matters and correspond with different parties after they die. Not only is it sensible to put affairs in order as much as possible, it is also important to let that loved one know where all the documentation physically is, who to write to and correspond with etc. That will of course also include the adviser.
Ideally, all important documents such as those mentioned above (as well as insurance policies, house deeds etc) will be stored in a fireproof box with the relevant person(s) knowing where this is kept.
Given all of these reasons for advisers to engage the next generation it is highly desirable to bring them into the loop of family financial planning as soon as possible. It might be that either or both generations are reluctant to engage on this subject, but it is worth persevering - the consequences for all parties of failing to plan could be severe.
Given the widespread use of adviser/client video calls that are now transacted it might be that this is a suitable mechanism to introduce this subject to the relevant individuals at the same time - this approach might come across as less personal than a face-to-face meeting but could prove much easier to arrange if the relevant people live far apart, as can often be the case.
I believe it is Roy Jenkins who is credited with saying "inheritance tax, is broadly speaking a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue".
In fairness, this is somewhat overused but in AKG research last year 40% of those surveyed said they were concerned about IHT, whereas 74% said they hadn't taken any steps to address it. So while intergenerational planning is much more than just inheritance tax planning, there does seem a desire for engagement on this particular issue. This should be at the forefront of advisers' plans.