What are we going to do about the children?

The subject of inheritance tax and estate planning came up in a meeting with clients today, as it so often does. The couple in question admitted to being very uncertain about estate planning and the distribution of their estates in their wills. Not only that, but they each had different views on what they should do and admitted that they kept changing their minds about the issue.

Having spent some time discussing this they asked me, “What do other clients do?” It was a good question and on reflection I told them that some clients felt that time, money and energy spent on bringing up their children, educating them, supporting them both financially and emotionally and giving them a kick-start into the world was more than enough; they had no intention of providing them with anything further, apart from a nominal legacy in their wills. These parents generally worked towards the principle that the last cheque you ever write should be the one that bounces because there is no money left when you are on your death bed: a philosophy commonly known as “skiing", or spending the kids’ inheritance.

At the other end of the spectrum, however, were those parents who felt it particularly important that their wealth be handed down the generations, either to the next generation directly or generation skipping for inheritance tax efficiency and passing money onto their grandchildren. These parents tended to see their parental roles as on-going and for life; their underlying philosophy was that the children are the most important elements in their lives and that they would do everything they could to support them financially and emotionally and in any other way throughout their lives. For these people, personal life goals came second to their children. They would pass money onto their children both during their life times and on death.

A smaller group of parents see things very differently and take a “what goes around comes around” approach. These parents have experienced the joys and dramas - and the expenses - of bringing up the children but recognise that their children may well be called upon to support them in their later years. For these parents it’s much more about family and community than money. If there is any left over then it goes to the children; if there isn’t it doesn’t.

Lastly, there is a small group of parents who see death as a means of wealth creation, a strategy enacted by taking out large insurance policies on their lives, usually placed in trust for their children or grandchildren.

So, there are many ways of looking at how to deal with the children’s inheritance. The question is how do parents make the decision and as life planners we would suggest revisiting those exploratory and vision meetings designed to clarify the client's most profound life goals. The Kinder Institute Three Question methodology is ideal for this as it will help clients to “light their torch” and work out what is really important. For some it may well be the children, whilst for others it may be the much wider community. For yet others it may well be doing all those wonderful things they wanted to do when they were young but never got round to doing. Whatever the answer, the process should produce the correct answer, one that everyone is happy with and one that will allow parents to plan their finances for the rest of their lives without worry or concern.

A final issue emerged during this conversation and that was the question of whether clients should reveal their intentions to their children - a difficult question. Some parents may take the total secrecy approach whilst others may take the totally open approach. Our view is that keeping lines of communication between the generations open is a good thing and one that allows generations to plan smoothly and avoid shocks. Financial planners could well be called upon to facilitate meetings between the generations which can, if handled well, be of huge benefit to all concerned.