Engaging younger generations in an estate planning strategy is not just good for your client – it’s also good for your client bank argues Sheriar Bradbury. By forging strong links with the beneficiaries of intergenerational financial planning, advisers can connect with the affluent clients of tomorrow, while ensuring the estate planning they put in place today is as effective as possible.
Hooking in the potential beneficiaries of a family wealth strategy can be a cost-effective way of future-proofing your business as this will help build a client bank of high net worth, potential millennial clients. Acquiring clients is an expensive process for an adviser and making the financial case for targeting millennials is particularly challenging given the multiple drains on their finances.
The pressures of getting on the housing ladder, clearing student debt and lower salaries mean many millennials will remain unattractive to advisers for quite some time. But the healthy fiscal start in life that beneficiaries of intergenerational financial planning receive means they are likely to become wealthy more quickly.
What’s more, they will be eager listeners. Self-interest is a powerful motivator and children with parents reaching late retirement will be very interested in understanding what the estate planning strategy being put in place means for them. Whether as recipients of gifts or beneficiaries of trusts, bonds or pensions, advisers will need to hold their contact details and have a legitimate reason to contact them to set up a face-to-face meeting. Explaining what the financial plan means for them, and ensuring they make the most of what they have been given are arguably as important as advising the client, who, after all, doesn’t want to go to great lengths to achieve a tax-efficient estate strategy only for his or her offspring to end up paying more tax on their bequest than they need to.
Young people are very alive to estate planning issues because they know that it will have a big influence on their own future. They are therefore concerned as to what will happen, and will often be fearful that if the parents go into care, the estate could get gobbled up by nursing fees. Allaying these fears and demonstrating the value of financial advice will enable the adviser to forge a strong relationship with their potential new clients.
Let’s get technical
Inheritance tax is a big factor that is likely to prey on the minds of the younger generation. One of the interesting new developments is the additional new IHT Residence Nil Rate Band (RNRB) due to be introduced in April 2017. RNRB is added to an individual’s own nil rate band of £325,000, and conditional on the main residence being passed to direct descendants (including step-children, adopted children or foster children).
By 2020/21 families could escape IHT on up to £1 million of their wealth. Each parent will have a nil-rate band of £325,000 plus an RNRB of up to £175,000. From April 2017, the RNRB will be phased in over four years and the full £175,000 allowance will only be available in April 2020. The RNRB will start at £100,000 and will increase by £25,000 each tax year until 2020 as shown in table 1.
The available allowance will be reduced if the value of the property is less than this allowance. For example, a father dies in 2020/21 and his will gifts his 50% share in the family home to his children. If this share is valued at £140,000, the extra £35,000 of nil rate band will go unused (but may be transferred to his widow).
Much like the standard nil rate band, the RNRB will be transferable between spouses and civil partners on death. It is the unused percentage of the RNRB from the estate of the first to die which can be claimed on the second death.
This is irrespective of when the first death occurred or whether they owned the residential property at the time of their death. There will always be an additional 100% RNRB unless the first spouse’s estate was greater than £2 million.
If the net value of the deceased’s estate is more than £2 million (after deducting any liabilities but before reliefs and exemptions), the RNRB will be tapered away by £1 for every £2 that the net value exceeds that amount.
Alive and kicking
Younger people will also be interested to understand all the other ways their forebears can effectively pass them cash – particularly those ways that involve them receiving the assets without having to wait for the parents to die.
Gifts made more than seven years from death are exempt from inheritance tax. Obviously the donor needs to have sufficient assets elsewhere to make these sorts of gifts. Then there are the general exceptions, such as the straightforward £3,000 annual gift allowance, as well as the £5,000 per parent and £2,500 per grandparent gifts on marriage. Making gifts out of normal expenditure should not be overlooked – these can be very efficient for donors with big final salary benefits in payment.
Money purchase pensions are also now very attractive, since the death benefits rules changed. Money in a DC pension can pass across to nominated beneficiaries without inheritance tax, and even be received without income tax, if you die before age 75. Even in the case of death over age 75, where income tax is payable by the recipient at their marginal rate, this is often more tax efficient than paying IHT.
An alternative to giving money away is a whole of life guaranteed premium policy that pays the equivalent of the inheritance tax payable on death where the policy is placed in a trust. By making the trustees the children, it is possible to get them in to talk about their responsibilities, which can lead onto them becoming clients in their own right. This is nice simple business for advisers as long as the underwriting is straight forward.
Pass the pension
Pension assets can be passed from person to person, without attracting any tax at all provided they remain within the pension wrapper. What’s more, money within the pension grows free of tax, apart from a small amount of dividend tax credit. So it can be a good incentive for beneficiaries not to take money out of the pension fund if they have other money elsewhere.
Time for trusts
Trusts are also an effective way to pass money down and to engage the next generation, whether into a bare trust, which is a potentially exempt transfer (PET), or into a discretionary trust, which is a chargeable lifetime transfer.
The advantage of the discretionary trust is that the client can change the beneficiaries. Passing on money sooner rather than later via outright gifts, not just to beat the seven-year rule, can also be a good idea. If an elderly person knows that they are going to be giving money away at some point, they do not have to wait until they die to do so. Otherwise children can be waiting until they are 70 or even 80 years old before they receive their family inheritance, by which time it may be of little use to them. Bring the children into the conversation and you are ideally positioned to advise them on how to invest what they receive.
At the riskier end of the spectrum are the AIM shares, unquoted companies and Enterprise Investment Schemes, each with their own estate-planning benefits – but the client will need a high appetite for risk to be able to do that. If they are sophisticated investors, then given the complexity of the plan, this is an ideal opportunity to bring the beneficiaries in to fully explain the reasoning behind what mum or dad have done.
As an adviser, there is nothing wrong with selling the idea of financial advice as a valuable gift to your clients’ children. Your client is going to great lengths to ensure his or her hard earned wealth is passed to their loved ones in as efficient a way as possible. By advising the children as well, you are ensuring they keep what they have been given – what parent would not want their children to be educated in making their money work for them through their life. By giving them a robust financial plan you are giving them benefits that will help them through their entire life, and at the same time forging bonds with some of tomorrow’s affluent investors.
Sheriar Bradbury is Managing Director at Bradbury Hamilton.
Sheriar Bradbury founded Bradbury Hamilton in 1993 to provide clients with accessible, pragmatic financial advice suited to their personal and business goals. After studying Economics at university, Sheriar worked in accountancy before becoming an adviser within the Porchester Group and Berkeley Morgan.
Bradbury Hamilton was an RDR-ready firm almost 10 years before RDR became compulsory. In 2007 the firm was awarded Chartered status by the CII. The firm’s growth is driven by a continuing acquisition of IFA firms and to date more than 48 businesses have been acquired.
Twitter – @SheriarBradbury