How to keep your family from wasting the wealth you built

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Over the next decade, baby boomers are expected to pass on more than £300bn to 300,000 beneficiaries as part of what has been dubbed the “great wealth transfer”. Over three decades, Standard Life estimates that sum could rise to £5.5tn.

But even those huge sums are far from guaranteed to remain in the family. Research suggests that as much as 70pc of family wealth is gone by the second generation, and 90pc by the third. That is why many affluent retirees are uneasy about what will happen to the money they have worked so hard to accumulate.

We spoke to estate planning specialists about the measures that can help protect a legacy, and when parents have to let go of control.

Family concerns

“For many clients who have built up considerable wealth over their lifetime, concern about what happens to that money after they’re gone is one of their biggest priorities,” said Mark Chandler, a chartered financial planner at Shackleton Advisers. “In some families, it is a topic that comes up at virtually every review meeting.”

He said the worries were often less about tax or investing than about family dynamics.

“What begins as a discussion about inheritance can quickly become a conversation about strained family relationships, worries about sons-in-law and daughters-in-law, concerns about grandchildren, addictions, financial behaviour and whether particular beneficiaries are capable of handling wealth responsibly.

“In reality, inheritance planning is often as much about understanding family dynamics as it is about understanding the money itself.”

Many parents fear their assets could end up with an ex-spouse if a child divorces, or that handing over large sums could make an existing problem worse — whether gambling, alcoholism, drug use or simple overspending.

Others want their children to make their own way. “There is also the question of motivation,” he added. “Some parents worry that receiving a significant inheritance too early can remove the incentive to work, build a career or create something independently.”

Rachel Winter, a partner in the private client advisory team at law firm Birketts, said: “In our experience, clients tend to be particularly concerned about how inheritance will be used where their estate includes a family business, agricultural assets or wealth which has been accumulated over several generations.”

Ways to reduce the risk of a wealth drain

Trusts

Death does not necessarily mean the end of control over money and assets.

That control is usually exercised through carefully written wills and trust arrangements, which let parents decide when and how wealth is passed on.

Ms Winter said: “Suitable steps may involve moving assets into a trust on death, or in lifetime, rather than making outright gifts. Trust structures can provide an additional layer of protection and allow an element of control as to when and how much beneficiaries receive.

“One of the best ways to ensure that your wishes are carried out is to appoint trustees who are trusted implicitly and understand your priorities and wishes. It can sometimes be helpful to appoint a professional and/or independent trustee who can act completely impartially.”

With a discretionary trust in a will, for example, money can be left to named beneficiaries, including children not yet born, but the trustees decide when distributions are made, in line with your instructions.

These trusts can also shape the form of benefit. Beneficiaries might receive income or capital, a trust might buy a property to provide a home, or it may allow loans to be made to beneficiaries.

Mr Chandler said an income in possession trust could suit parents who want children to benefit from family wealth without giving them access to a large lump sum. “Such arrangements can provide the beneficiary with a regular income while preserving the underlying capital, with trustees retaining the ability to advance capital in certain circumstances, if appropriate.”

He added: “Whatever structure is chosen, the role of trustees is absolutely critical. Even the most carefully drafted trust is only ever as effective as the people responsible for administering it.”

Wills

Adam Vanstone, a chartered financial planner at Chester Rose Financial Planning, said a carefully drafted will is equally important.

“It should show your current wishes, consider changes in your family, and fit with any trusts or gifts you have set up. Before you start, an open, honest chat with a good solicitor can help you share your wishes and concerns and find the best options.”

If the concern is that a beneficiary is too young to inherit, the will can set a higher age, Ms Winter said. “For example, the entitlement age is often increased from 18 to 25.”

She also noted that delaying access can create tax and administrative issues because the assets remain in trust until the beneficiary reaches the specified age.

Mr Chandler said a letter of wishes can also be useful. “Although they are not legally binding, they allow parents to explain their intentions and concerns to trustees. In many respects, they enable individuals to continue that conversation after they have gone, offering guidance on how they would like decisions to be made and highlighting issues they felt were important.”

The line between control and overreach

But there is only so much influence parents can exercise after death.

James Scott-Hopkins, founder of EXE Capital Management, noted that trusted family solicitors will eventually retire or die.

“Depending on the trust arrangements, responsibility may eventually pass to younger partners or professional trustees whom the family has never met. These individuals may know nothing of the family’s history, relationships or the sacrifices made to create its wealth.”

As a result, beneficiaries who may be capable and responsible can end up having to ask a stranger for access to their inheritance.

“What began as an act of generosity and protection can become a source of resentment, dependency and family conflict,” he added.

He said a better approach is to involve younger generations early. “Adult children can become trustees alongside an independent, mutually trusted individual who understands the family and can help resolve disagreements.”

Creating a family investment company to hold, manage and grow family wealth can also work in some cases, with children gradually brought in as shareholders or even directors.

Mr Chandler also cautioned against attaching restrictive conditions to inheritances, such as rules about marriage or religion.

He referred to the Tuck settlement case in the late 1970s, which said beneficiaries could only receive income from the trust if they followed the Jewish faith and married an “approved” Jewish wife, but which the court ruled invalid.

“There are also numerous stories, some of which have become part of professional folklore, involving increasingly elaborate requirements being attached to inheritances. While people naturally want to encourage certain behaviours, there is a limit to how far such conditions can realistically go before questions of reasonableness arise,” he said.

Leave financial literacy as part of the legacy

“There are many ways to marshal and guide wealth, and there is a great deal that can be achieved through thoughtful planning, but there still needs to be a degree of trust,” said Mr Chandler.

In the end, parents need to accept that perfect control is impossible, though communication and education can help.

Mr Vanstone said: “We cannot control every decision our children make, nor should we try. But we can give them the knowledge, support and safeguards that make it more likely our life’s work will benefit the generations that follow. Financial literacy is one of the best legacies you can leave.”

He said a useful first step is to give inheritance a purpose. “Help your beneficiaries see how an inheritance could help them buy a home, pay for education, start a business, or build long-term financial security.”

Next, consider each beneficiary’s situation. “If a beneficiary is at risk of debt, addiction, divorce, or financial exploitation, they may need a different plan than someone who is financially confident and responsible,” he added.

But communication is not always simple, Mr Chandler warned.

“In families where relationships are strong and everybody is functioning well together, open conversations about wealth, inheritance and family intentions can be incredibly valuable. I’ve been involved in family meetings where parents want children to understand the family’s assets, the thinking behind their arrangements and, in some cases, the future direction of a family business. However, not every family is in that position.”

In some families, those discussions can intensify tensions that have been simmering for years.

“What begins as a discussion about inheritance may quickly become a conversation about a child with a gambling problem, a family member whose business is struggling, or long-standing tensions between different branches of the family. Very often, those underlying issues are far more significant than the money itself.”

Mr Chandler described one case involving a family worried about a son in his 30s with a gambling problem who was still living in the family home. “The family wanted him to understand the structure of their estate planning and the fact that trustees would be expected to take his circumstances into account when exercising their discretion. The hope was that this would provide an incentive for him to address the problem. Unfortunately, in that particular case, the incentive did not work.”

He said the example showed the limits of planning. “Communication matters enormously, but there are situations where no amount of planning or discussion can entirely change behaviour.”