Inheriting plan for secure future

Informed and timely planning can ensure the best outcome when family wealth is passed on to the next generation, as Will Sidery discovers


Since the market downturn five years ago, families have become acutely aware of the need to protect their wealth. Only with the right advice can they be sure the family’s assets are being handed down in a tax-efficient and responsible manner.

However, as in many walks of life, there is no one-size-fits-all solution to intergenerational wealth planning. But getting it right is vital to prevent any nasty surprises further down the line.

Families looking to establish structures are often beset by a host of providers and options, so it is, therefore, important for them to set out their goals and restrictions clearly. Thinking in terms of establishing a flexible and bespoke wealth management structure, based around family needs and objectives, is key to long-term success.

Chris Aitken, head of financial planning at Investec Wealth & Investment, says his firm offers a bespoke advice-based approach to succession planning rather than specific products.

“We ask clients if they have excess capital, how much they want to have access to and whether they are happy to give it to their beneficiaries straight away,” he says. “Some clients don’t want to wait until they die and want to see their beneficiaries enjoy the benefits of the capital now.”

This bespoke approach is mirrored at Coutts where Julliette Johnson, head of UK family business, notes that only 13 per cent of wealth makes it to the third generation.

Not conducting a risk assessment is the leading cause of wealth destruction

While she concedes that there is no right or wrong answer to succession planning, Ms Johnson says her role is to work with clients on an individual basis to find a solution that fits that particular family.

“Our role is to help them based on their dynamics, their situation and their demographics to work out their risks for the future, and what they want to do about it,” she says. “Essentially, communication between all parties is key for succession plans to be implemented with the best long-term outcome.”

Hugo Smith, partner at UK law firm Bircham Dyson Bell, explains: “Discussions [should] involve the client’s other advisers, such as their solicitor or accountant, to ensure that any financial planning ties in with the client’s other arrangements.”

There are different investment methods that could be used by clients planning for the future depending on their needs. These include discounted gift arrangements that are income-tax efficient and, provided the settlor lives seven years, are outside of the estate for Inheritance Tax (IHT) purposes.

Similarly, the use of an IHT-efficient loan trust, where the settlor loans a sum of money to trustees who then invest that money via an offshore bond, is favoured by Investec. The settlor can then take repayments of that loan via tax-deferred withdrawals from the bond or when the settlor dies the original sum invested can be repaid to the estate.

Investec’s financial planning expert Mr Aitken says this vehicle is more suited to younger clients as it is a “slow burner”, but is popular as the original capital can be accessed for whatever reason at any time.

Trusts remain an important structure for succession planning, according to Tim Gregory, a partner at UK accountancy firm Saffery Champness.

“They have been used for centuries to pass wealth down the generations and they have had substantial tax benefits too. Many of those tax benefits have been removed, but trusts remain in the toolkit as a useful structure in certain circumstances.”

Naturally, tax plays a big part in succession planning, but Bircham Dyson Bell’s Mr Smith warns investors to be wary of aggressive or artificial tax-saving products.

“There is still a lot that can be achieved from simple planning, such as making lifetime gifts, or using arrangements, such as venture capital trusts and the Enterprise Investment Scheme which have, in effect, government-approved tax benefits,” he says.

Richard Boyd, a chartered financial planner at Duncan Lawrie Private Bank, says: “In the right scenario, the use of trusts, and onshore and offshore investment bonds can be effective planning structures in which to hold investments. There are substantial savings to be made for anyone who structures their investment portfolio tax efficiently.”

Also important is conducting a risk assessment. In fact, not conducting one is the leading cause of wealth destruction.

High-net-worth individuals have an average of three different adviser relationships with an average of eight accounts with each adviser. This can make consolidation and risk management tricky and people have been known not to consolidate, which would have led to disastrous consequences during the 2008 crisis.

Mr Boyd says: “Gauging the level of investment risk you are prepared to take before structuring your portfolio is imperative. If the worst case scenario is a manageable one, then this should avoid any nasty surprises that could affect your objectives.”

One way that banks and advisory firms are helping to ensure that wealth is being passed down in a responsible and well-managed manner is through education. Both Coutts and Investec, along with a number of advisory firms, such as accountants Dixon Wilson, hold frequent seminars designed to help future generations understand the financial position in which they will find themselves.

Coutts runs educational forums where it brings families together to talk about these key issues. The global wealth group believes that hearing other people’s experiences can help clients work out the best plan of action.

Mr Gregory, of Saffery Champness, agrees, saying preparing future generations for inheriting wealth is vital, but nothing is more important than the settlor having a hands-on approach in succession planning. “Nothing beats the family touch and it provides a great opportunity to pass on personal values as well as wealth,” he says.

With this in mind, the need for constant review remains important once succession planning is put in place. “The best-laid plans are useless unless they are kept under review, especially as life can often throw you a curve ball,” warns Mr Boyd. “Don’t forget that you should regularly review your objectives and risk level, and check they still align to your wealth management structure.”