Wealth is increasingly becoming an intergenerational issue. Parents today are often digging into saving to help children get on the property ladder and grandparents may find themselves offering financial support for young families. As a result, it’s important to think about when and how you’ll pass on wealth to the next generation when the time comes.

There are essentially two ways to pass on wealth to loved ones:

Inheritance: Perhaps the most common way to pass on wealth is to leave an inheritance when you die. Your wishes should ideally be set out in a will and you should have a clear idea of how you want your wealth to be distributed. If your estate is likely to exceed the threshold for Inheritance Tax (IHT), you should consider how to reduce tax liability.

Gifting: An alternative is to gift money during your lifetime. This has the added benefit of you being able to see the joy and financial security your wealth has for those you love. One thing to keep in mind is that whilst some gifts are considered immediately outside of your estate for IHT purposes, others may not be for up to seven years.

Thinking about leaving wealth to loved ones is often bittersweet and you may be unsure which is the right option for you. These seven questions can help give your decisions some direction and see what the pros and cons are.

1. Who do you want to benefit?

The first question to think about is who you’d like to benefit from your wealth. Often, it’s children and grandchildren that are the focus, but you may also want to provide support to extended family or friends. Considering beneficiaries means you’re in a position to assess their financial situation alongside your own. It may also have an impact on a potential IHT bill. For example, the portion of your estate that can be inherited tax-free can be increased if you’re leaving your main home or the proceeds of its prior sale to children or grandchildren thanks to the Residence Nil-Rate Band.

2. How do you want your estate dividing?

With an idea of who you’d like to inherit or receive gifts from your estate, it’s time to think about how you’ll divide it. There are many different ways to do this. For example, there may be specific items you’d like to go to someone in particular (known as a specific bequest), leave a fixed sum to someone (a pecuniary bequest) or leave a portion of your estate (a residuary bequest). Coupled with a look at whether IHT may be due, it may become clear that it’s a better option to gift some of your assets rather than leave them as an inheritance at this point.

3. Would beneficiaries benefit from receiving financial help now?

Your own financial security and wishes should be a priority. However, often you’ll also want to consider the impact your decision will have on loved ones too. Some will find their generosity can have a far bigger impact through a gift now rather than an inheritance that may be larger. Young families struggling to get on the property ladder, for instance, may improve their long-term financial security through a gift far more than receiving an inheritance 20 years down the line. As a result, gifting may be more appealing in terms of helping your family and various exemptions currently in place, which may mean gifting money during your lifetime could reduce or eliminate Inheritance Tax.

4. How would taking a lump sum out of your wealth affect your plans?

Linking with the above question, you should carefully consider how a gift may affect your own plans and financial security. Would taking a lump sum out of your estate now potentially leave you struggling in the future? Would you still be able to pay unexpected costs, such as care? Assessing your wealth is crucial if you hope to give a gift to loved ones. Financial planning can give you confidence in your decisions here.

5. How will your assets be depleted during retirement?

If you hope to leave an inheritance, looking at how the value of your estate will change over time is important too. You’ll need to think about life expectancy as well as a range of other factors, such as the cost of living, inflation, interest rates and investment returns. It’s these factors that will help inform your decisions about which people and how you leave your wealth as well as understanding whether IHT may be due.

6. Is your estate likely to be liable for Inheritance Tax?

Valuing your entire estate and calculating how this is likely to change means you can see how likely an IHT bill is. For the tax year 2019/20, a single person can pass on £450,000 IHT free if they combine both the Nil Rate Band and Residence Nil Rate Band, or £900,000 for couples that are married or in a civil partnership. This will rise to £500,000 and £1 million respectively in 2020/21. If your estate may be liable for IHT, there are usually steps you can take to reduce the amount due, including gifting. Taking a proactive approach to estate planning ensures your beneficiaries receive as much of your estate as possible, rather than the tax man.

7. Are your wishes known?

Finally, you should ensure your wishes are known and clear. This should begin with writing a will, outlining exactly how you’d like your estate to be distributed when you die. Without a will, your estate will be distributed according to the Intestacy Rules, which may be very different from what you want. Next, ensure you have a Power of Attorney in place. This gives someone the ability to make decisions on your behalf if you become unable to do so. Your Power of Attorney should be someone you trust and who understands what you want.

If you’re starting to think about how your wealth could help those you care about, we’re here to offer you support. Whether you believe gifting or inheritance is the right option for your circumstances, our goal is to give you confidence in your finances and how you can improve the financial security of your family and friends. Of course, for many, it’s not a question of gifting or inheritance; it’s common to blend both options to pass on wealth to loved ones. We can show you how different options would have an impact on your lifestyle, IHT bill and more.

Please note: Estate planning is not regulated by the Financial Conduct Authority.