This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
A lot of attention is given to people who want to build a financial plan for their estate. Yet what about those who potentially stand to inherit it (the “beneficiaries”)? Receiving a large sum of money and/or valuable assets could be transformative to your finances if used prudently. However, without planning, an inheritance can also lead to complex, costly pitfalls.
Below, our Burnley financial planners offer 4 tips for beneficiaries to consider when preparing to receive a future inheritance. We hope these insights are helpful to you. Please get in touch for more information or to discuss your own financial plan with us.
#1 Temper your expectations
Put bluntly, many people expect to receive too much inheritance, too early. Around 20% of UK adults are relying on getting an inheritance to “rescue” their finances. Yet expectations are often very unrealistic. On average, people expect to get £130,000 from their parents. People in the 18-34 age bracket, however, anticipate £150,000.
The sad reality is that, on average, the average UK inheritance is just £11,000 despite the average estate value standing at around £334,000. The “peak” age bracket for receiving an inheritance, moreover, is not earlier in adulthood (as many hope) but between 55 and 64.
Of course, some people may get far more than £11,000 and far sooner than in their 50s or 60s. Yet, to protect your finances, it is typically better to plan as if you will receive nothing at all – or, not for a long time. This way, any inheritance that does arrive will be a nice “bonus”, rather than a desperately-sought lifeline.
#2 Consider your tax plan
The UK is different from certain other countries when it comes to inheritance tax (IHT). Here, the estate “owner” (the deceased) pays any IHT out of the value of their estate – a process typically managed by the executors of the will. In Spain, by contrast, the beneficiaries pay a “succession tax” on assets they receive.
However, be careful not to assume that receiving an inheritance will have no tax implications for you as a British beneficiary living in the UK. For instance, take the scenario of your parent dying and leaving their pension to you.
If they die before age 75, then your tax bill will not typically be affected as a beneficiary. However, if this happens after the age of 75, then you would pay income tax on the death benefits at your marginal rate. For some people, this could push them into a higher tax band.
This is why “inter-generational” financial planning can be very important. Here, an estate owner works with a financial planner to ensure that his/her plans line up efficiently with the plans of their chosen beneficiaries.
#3 Understand the trust(s)
Many estate owners do not wish to simply hand down their wealth to loved ones, leaving them to their own devices. Often, they attach conditions using legal structures such as “trusts”. These can dictate important terms such as who receives what, how much and when.
For instance, a parent may wish for certain funds to only be spent on a child’s first mortgage deposit, a wedding or to pay for university. In some cases, the estate owner may empower trustees to use their discretion about when funds can be released and for which purposes. This might happen, for instance, if a parent feels strongly that a child is not responsible enough to be entrusted with large sums of money by themselves.
Here, it is important to not make assumptions about the conditions of any potential inheritance you may receive in the future. You may wish to discuss with your parent (or loved one) about any trusts or legal structures they will use, so you better understand what may happen.
#4 Help your loved one
As a beneficiary, you likely have your loved one’s best interests at heart and want to ensure that their wishes are respected when they die. Also, you might want to ensure that family relationships are protected when the estate is administered – e.g. avoiding sibling conflict over inheritance money. Helping everyone in this way can also protect your own financial plan.
For instance, suppose a single mother wants to leave her house to her four children when she dies. She communicates this wish to each of them and puts it into her will.
Two of the adult children want to keep the house and continue living in it. The other two, however, have no interest in living there and would want to sell it. Unless the first two children can afford to buy out the other two, this could create a family conflict (or worse).
If the mother is unaware of this, then initiating the discussion now – helping everyone to realise any issues and agree on a way forward – may be better than leaving things unsaid.
Another scenario involves “power of attorney”. This is a legal document which hands decision-making authority about someone’s lifestyle and/or estate to another trusted person, should the individual lose the ability (or desire) to make those decisions by themselves.
If this has not been contemplated by your parent or loved one, then you (as a beneficiary) could help by raising the discussion with them. This not only stands to protect them in the future, but also provides peace of mind to you.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
