The great wealth transfer is one of most discussed topics in the advice market – but unfortunately there are many clients that haven’t been prepared for it because they failed to discuss inheritance with loved ones.
Recent research revealed that high net worth individuals (HNWIs) are struggling to make plans to transfer their wealth. It found that 40% do not have a formal inheritance plan, due to the complexity of dividing their assets fairly – and that half (50%) have not shared details of where assets are held, how they intend to divide them or how much they are worth.
International Adviser spoke with Progeny, Succession Wealth, Blevins Franks, Arbuthnot Latham, Brown Shipley, Blacktower, Schroders, the Fry Group and Canada Life why the topic of inheritance is a problem for HNWIs and whether advisers and wealth managers are doing enough to address this.
‘Financial advice industry needs to do a better job’
Neil Moles, chief executive at Progeny, said: “Transferring money to the next generation is an ambition for many, yet there is a stark lack of any structured planning in evidence. This creates risk and missed opportunities for those on both sides of the inheritance divide.
“In the years ahead, we will see more families having more complex requirements when it comes to passing on their wealth to the next generation. In these circumstances, financial advice and lifetime financial planning will be more important than ever.
“It’s clear that we in the financial advice industry need to do a better job of demonstrating our strengths and showing how we can help families with their estate planning.
“Our role is to create the space for constructive, multigenerational conversation within families, allowing them to make important decisions about transferring wealth in a supportive and informed environment.
“We have an opportunity to reconsider inheritance and intergenerational-wealth-transfer planning as a responsibility for those who are giving and those who are receiving to share, bringing clarity and peace of mind to both.”
‘Ensure everyone is involved’
Alice Shaw, wealth planner at Succession Wealth, says that while it is a tricky subject, it can be beneficial to get everyone round the table.
“With the freezing of the nil-rate band, inheritance tax (IHT) planning has become even more crucial when discussing financial planning with clients,” Shaw said. “The subject of IHT planning can be a sensitive subject as it inevitably involves the death of a loved one. However, once the conversation is started, financial plans can be structured that benefit the clients and their intended beneficiaries.
“Where suitable, it is always constructive to involve family members and intended beneficiaries such as children in these discussions to ensure everyone involved is on the same page. This can be challenging as often children/beneficiaries of the clients may have very different financial situations themselves and therefore the client may wish to assist them in different ways.
“Equally, beneficiaries/children/grandchildren may feel that they would benefit more from funds at different stages, such as from gifts in the client’s lifetime in order to assist with school fees, fund a house purchase or assist a grandchild with private-education fees for example.
“It can be a balancing act between reducing the estate to mitigate a potentially large IHT bill and ensuring the clients have sufficient funds in order to maintain their lifestyle and pay for the cost of long-term care should this need arise in the future. Discussions around the client’s wishes in the event of long-term care, any desire to downsize in the future and plans for any significant capital expenditure all form part of these discussions.
‘Start the conversations early’
Andrew Tully, technical director at Canada Life, also emphasises that it’s a case of the sooner the better, when it comes to discussing IHT planning.
He said: “The nil-rate band for IHT has been frozen for more than a decade and as a result is woefully lagging behind inflation. While IHT has historically been a tax of the very wealthy this is no longer the case. With property prices soaring and most personal tax allowances including the standard and residence nil rate band frozen, this is now a concern for larger sections of society as the IHT tax net widens.
“It is important people have these discussions about IHT planning with advisers earlier in life, and potentially include wider family, such as children, within any decisions which are made.”
Where in the world?
Jason Porter, business development manager at Blevins Franks, highlighted the key factor of location of family members for effective planning.
“People are far more mobile now, and those with wealth are even more so, “Porter said. “As a result, it is quite common to see a wealthy family spread across three-four countries. This will significantly increase the complexity of an estate in terms of probate, conflicting succession law and the estate taxes payable.
“While the aim might be to try and equalise what each child receives from an estate, if one chooses to relocate to another country, then that can result in quite different estate tax liabilities on what might be the same assets.
“Trying to keep on top of these kinds of events and their impact is why the services generally only reserved for those benefiting from a family office or similar need to be made available to a wider audience.”
Swept under the rug for another day
John Westwood, group chairman at Blacktower, points to the risks of unfortunate consequences from avoiding the topic.
“It is an unfortunate truth that many families still feel uncomfortable discussing inheritance planning due to its inextricable association with death and grief,” Westwood said. “Regrettably, it is a topic that people find all too easy to sweep under the rug for another day, only for the conversation to never take place.
“While this might be the easier option in the short term, when it comes to the practical implications of this, after a loved one’s death, things become astronomically more stressful if the proper preparations have not been put in place.”
Huw Wedlock, director of The Fry Group Singapore office, also warned that lack of planning can become a thorny legal issue.
He added: “Inheritance remains a complex and sensitive subject for many HNWIs and their families. We often see cases where plans to address important issues have been ignored, being deemed too complex or difficult to discuss, and are then set aside for another day.
“We also see out of date or unsuitable wills and estate plans which fail to deliver on the individual’s final wishes. Not properly planning, documenting and communicating wishes can be a source of contention and dispute within a family, sometimes involving the courts.
“Emotions can run high when considering inheritance, and this is often why people shy away from the topic. HNWIs can have complex financial affairs − perhaps involving overseas assets and complicated trusts − which might not be particularly liquid and potentially difficult to distribute fairly to chosen beneficiaries.”
‘Sometimes you must challenge them’
Chris Allen, director of wealth planning at Arbuthnot Latham, also said advisers must help their clients to overcome reluctance to discuss inheritance.
“For me, talking about inheritance is not taboo. Clients come to us for advice and there needs to be a wide-ranging conversation to ensure we truly understand our clients and what their goals are. Sometimes you must challenge them to consider what happens when they pass away and if they are comfortable with the current structure of the legacy they would leave.
“No one likes to consider their own mortality, but if you do not have these conversations, then you are not providing a full wealth-planning service. People are not as squeamish as you might think, even if they have not thought about it before.
“No one considers looking after their loved ones to be a taboo subject. It does not mean you need to be insensitive in the conversation; in fact, it can bring comfort to people knowing that the decisions they make now can continue to benefit their loved ones after they are gone.”
‘Contentious issue’
Rebecca Williams, head of wealth planning at Brown Shipley, added: “Many HNWIs have not made formal inheritance plans for many reasons, including the complexity of dividing their assets fairly. Dividing assets between immediate and sometimes extended families can be a contentious issue and can be particularly challenging for individuals who have large estates.
“Business owners may face additional complications when considering wealth transfer, particularly since businesses will often be an individual’s most valuable assets. Recent Brown Shipley research uncovered that one in five six-figure earners’ wealth comes from running a business. If the family business is passed to one child, the owner may want to consider leaving personal assets to other children. If the business is sold the value of the individual’s estate, and likely IHT liability, will materially increase. Conversations around the future financial security of the business owner and passing on wealth are key.
“Wealth advisers understand and advocate for ongoing conversations with families that facilitate the most effective means of wealth management and inheritance planning. Knowledge and information sharing from advisers to clients aims to simplify a system that can be complicated and ensure that inheritance planning can be as informed and efficient a process as possible.”
Gillian Hepburn, head of UK intermediary solutions at Schroders, emphasised the importance of advisers having good communication skills.
“Family conversations about passing on wealth are often difficult and can be made more so in the case of blended families, or when there is an unequal distribution of wealth among siblings or the intention is to skip a generation,” she added. “To navigate these issues, advisers need excellent soft skills, empathy and a good understanding of some of the potential challenges.”
‘Honest and open’
Fry Group’s Wedlock also said that clients need to communicate clearly and advisers can help with this.
He said: “It’s safe to say that many people aren’t comfortable talking about inheritance and succession planning. With blended families, the conversations can be even more difficult, especially if there are added factors including divorce and remarriage.
“It’s important to be honest and open, and not to leave any surprises in terms of how wealth is going to be shared out. A professional adviser can play an important and impartial role in helping to facilitate difficult conversations among family members.
“Having a will that is up to date, reviewed regularly, and appointing a professional executor that can act alongside family members, are constituent parts of a good estate planning strategy.”
