Deciding when and how a child receives an inheritance is often a tricky issue. There are a number of factors to consider and in this article we take a look at some of them.
During Your Lifetime or Through Your Will?
It’s becoming more common nowadays for parents and grandparents to make large lifetime gifts to their children, rather than waiting for the inheritance to be distributed after their deaths. There are a number of reasons for this:
- They get to see their children enjoy the money whilst they’re alive
- The children need the money to get on the housing ladder or go to university
- Parents want to reduce the value of their Estate for Inheritance Tax purposes
These are all legitimate reasons. However they do raise some legal issues that often get overlooked in the midst of trying to be helpful and supportive to your children.
Risks of Lifetime Gifts
Giving your money or property to your children whilst you're alive always carries inherent risks which, at the very least, you need to be aware of.
Firstly, the most obvious risk is that you might need the money back at some point. It’s very easy to ignore the fact that your circumstances may dramatically change in the future – for example, you could lose your job, your pension could devalue, or your health could deteriorate meaning you need additional resources to pay for the best treatment.
It may sound obvious but once you've given your assets away then they no longer belong to you. If financial issues do arise, you'll have to rely on the original recipient of the gift to give it back to you. Now this is where the next problem arises.
"I trust my children 100%" – Solicitors hear this a lot from clients. And whilst it may be true that the children would be more than willing to return the gift (or part of it) back to their parents if they needed it, the reality is that life can produce unexpected results which weren't foreseen at the time the original gift was made.
Let’s take Mr and Mrs Smith for example. They are in their 60s and have 3 children, Agatha, Beverley and Charles, who are all adults with spouses and children of their own.
Mr and Mrs Smith decide to downsize their matrimonial home and release a lump sum of cash for their retirement. They were pleasantly surprised how much their house sold for and it left them having £150,000 more than they expected. They decided to give this surplus of cash to their 3 children equally (£50,000 each). They did this safe in the knowledge that if they ever fell on hard times then their children would, without question, make sure that they gave it back.
Ten years later Mr Smith passes away leaving Mrs Smith surviving. Not long after, Mrs Smith's health deteriorated and she moved into a residential care home. She chose the care home herself as she had friends who also resided there.
Her property was eventually sold to meet the ongoing care costs and over a few years her assets were depleted to the extent that she could no longer afford to stay there. Mrs Smith desperately didn't want the upheaval of relocating to a different care home, having to make new friends, getting to know new staff and learning a new routine.
However Mrs Smith wasn't concerned as she knew that she could call upon her children to give her back some of the money she gave to them all those years ago. Unfortunately, each of children had suffered bad luck since they each received £50,000 from their parents.
Agatha passed away 3 years after receiving the money from her parents. She left her Estate under her Will to her husband, who had since gone on to remarry another lady. Agatha's husband hadn't really been in contact with Mrs Smith since Agatha's death and now isn't returning her phone calls.
Beverley used the £50,000 gift she received to invest in her hairdressing business. Unfortunately after a few years the business failed and she lost everything.
Mrs Smith's last hope was her son Charles, who was always the most sensible and financially responsible out of the children. Unfortunately, upon contacting Charles, he informed her that he and his wife were going to divorce and the £50,000 gift now forms part of the matrimonial pot that is going to be divided up as part of the divorce proceedings.
As you can see, even if the parents and children trust each other and they all act with the best of intentions, there are circumstances which can have a detrimental impact.
It’s for this reason that many couples, after taking legal advice, decide to leave their children's inheritance wholly through their Wills rather than lifetime gifts.
Although there may be Inheritance Tax advantages to be gained from lifetime giving, every parent needs to balance the benefit of their Estate potentially paying less tax against the benefit of being able use the money if they need it.