Intergenerational transfers of wealth: what and when to gift?
4 September 2023 | Applicable law: England and Wales | 3 minute read
Much of the wealth currently held by older generations will be transferred to today's young people at some point, most commonly on the death of the older generation. For this reason, appropriate planning using wills is always encouraged. However, as the population ages and families continue to evolve, inheritances on death are now being received much later in life when there may be less need for them or indeed, they may have different or unforeseen tax consequences, and as a result, wealth transfers made during lifetime are growing in importance.
For many evolving families, with greater longevity expected for family members, it is increasingly likely that a family could have at least four living generations at any one time. The question therefore arises as to whether it is preferable, if possible, to look to make lifetime gifts to the next generation (or even the one after) at a more appropriate and effective time than waiting for death, as traditionally may have been more the case.
What is an intergenerational transfer of wealth?
The most usual type of wealth transfer is a gift from one family member to another, initially from, say, generation one to generation two, but as time goes by, a gift skipping the generation below and going to generation three may be more effective. In some circumstances, it may be appropriate for an older member of the family to establish a trust or other asset-holding structure during their lifetime as a means of providing a source of wealth for their family in future generations, but this is not considered further here.
Why might such transfers be made?
A gift from one individual to another usually comprises cash or other assets. For example, an individual business owner might wish to transfer part or all of their business interest to younger family members as part of their succession planning. Wealth transfers are typically made from parents to their adult children, often on the occurrence of a one-off event in the adult child's life, such as attending university, purchasing a property, or establishing a business
It is equally common for a significant 'life event' for the older generation, such as the birth of a grandchild, retirement, or the death of a spouse to concentrate the mind on the transfer of the family's wealth. For the older generation, concerns about exposure to estate or inheritance tax may also prompt a decision to give away wealth. Increasingly, with the longevity that many people are now benefitting from, there may also be compelling reasons for an older family member to make a gift directly to a grandchild, particularly if that child's parents have no need for such a gift.
The following considerations may be relevant in the context of any intergenerational wealth transfers for evolving families:
- The circumstances of the gift recipient, including their age and stage in life, and their level of financial maturity, should be taken into account. Tax and reporting implications for the parties involved will need to be determined. Tax and legal advice should be taken in the relevant jurisdictions before any gift is made to ensure that no unforeseen tax or reporting consequences arise as a result.
- The individual making the gift will need to appreciate that the recipient will have control of the cash or assets going forwards, and may have different, and potentially conflicting, views about how the funds are invested or the assets used.
- Finally, the individual making the gift will need to ensure that, following the transfer, they are left with sufficient funds to cover their own present and future needs. This will be particularly important if the individual is concerned about funding the costs of medical treatment or long-term care in later life.
Wealth transfers during lifetime can be an effective way for older family members to help younger ones. They should not be looked at simply in the context of parents making provision for children but in a wider context alongside the other considerations for all evolving families, in particular looking at the most effective and beneficial times to make a gift. Questions about the best way to structure transfers should be discussed with your legal and other advisers.