A question of trust. Allaying clients’ fears about children ‘squandering’ an early inheritance

While the third edition of our report on family wealth planning (Family Wealth Unlocked report), highlights a number of new behaviours from advised clients, it also reveals how concerns about children ‘squandering’ any of their inheritance gifted early remain entrenched. This is undoubtedly contributing to the postponing or arresting of mutually-beneficial gifting. Yet solutions that can allay these fears are, as we know, common tools of our trade.

Our research shows that, in fact, one in five clients (19%) are concerned that children would squander any inheritance gifted to them early. And 13% worry about a ‘lack of control ‘over how it might be spent, this number is consistent with last year’s figure of 15%.

However, gifting is a valuable and effective tool. This is signalled by a significant rise in gifting this year; the number of people who said they’d received a financial gift rising from 77% to 84%. For the recipient it can provide a leg-up for a deposit on a home (gifting for this purpose rose from 18% last year to 22% this) or the ability to better cope with the cost-of-living crisis (gifting to ‘help with bills’ rose 4% year-on-year). In the process, the donor helps the next generation and reduces any potential IHT liability. You can find the full changes of how gifting usage has changed in the report.

Concerns about a lack of control and squandering can, of course, be reduced by alerting clients to solutions such as discretionary trusts; control being exerted via the trustees. Trustees can include family members and impartial parties such as a solicitor. And a letter of wishes can be drawn up by the client to inform trustees’ decisions on how much, when and for what purpose sums are destined. In the case of a discretionary gift trust excluding the settlor as a potential beneficiary, the transfer into trust creates a chargeable lifetime transfer (CLT), subject to the seven-year rule.

What if I need the money myself in later life?

A separate client concern (cited by one in five (22%) in our research) was that, having released some of their children’s inheritance early, they might need the money themselves; either to meet care or wider needs earlier.

Again, there are ways advisers can reassure. Cashflow modelling can fulfil its role in illustrating predictions of client income throughout life, providing confidence and helping show the affordability (or not) of gifts. For some people, a loan trust could be the answer. The client makes an interest-free loan to the trustees who then invest in an insurance bond. The client can then, if they choose, take part repayments of the loan via 5% tax-deferred bond withdrawals. And any growth accrues outside the client’s estate.

For more information on trusts as part of estate planning, you’ll find greater detail here.

Gift Trust

Loan Trust

No client ‘access’ following gift

Not a gifting tool, as such. The client has full access to any outstanding loan (but not the growth)

Absolute trust or Discretionary trust versions are available

Absolute trust or Discretionary trust versions are available

Client can carry out IHT planning whilst retaining a degree of control

Client can carry out IHT planning whilst retaining a degree of control

Typically used in conjunction with new or existing insurance bonds

It’s not possible to set up a loan trust with an existing insurance bond. Instead, the client sets up the trust, lends money to the trustees who then invest in a new insurance bond

Client automatically appointed a trustee

Client automatically appointed a trustee

Gift Trust | PruAdviser (mandg.com)

Loan Trusts & Inheritance Tax Planning | PruAdviser (mandg.com)

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