Keeping wealth a family affair

How do you make sure the lion's share of the assets you work so hard for over a lifetime end up in the hands of your loved ones?

There is an old proverb which says: ‘the art is not in making money, but in keeping it’. When it comes to passing money from one generation to the next there is plenty of evidence of the truth of this statement.

In their book Beating The Midas Curse, Perry L. Cochell and Rod Zeeb report statistics indicating that in the US at least 60% of families lose their fortune before the second generation is over, with that figure rising to a frightening 90% by the end of the third generation. And the evidence suggests this is not a new phenomenon; from the China of two thousand years ago to 20th century Brazil, language is littered with evidence of a three generation cycle of boom to bust – ‘from the stables to the stars to the stables’ as the Brazilians would have it.

Mistakes to avoid

So what are the causes of this failure to conserve and pass on wealth and how can the potential pitfalls be avoided?

The first and most common mistake is a reluctance to accept your own mortality, which frequently results in a lack of any proper inheritance planning. The solution is simple: whether or not you have a family, accept now that nobody lives forever and start making arrangements for when you are no longer around.

The second error many people make is leaving their assets open to the full 40% Inheritance Tax rate, rather than making use of the various concessions which exist to mitigate its impact. Getting professional advice about how to pass on your assets in a tax efficient manner will ensure you pay only what is reasonable and necessary.

However, while these matters can be quite easily addressed, increasingly the complexities of modern life are creating a whole new set of issues. Traditionally of course, family wealth was passed down through the eldest male heir, making allocating your assets a straightforward matter. Today, with people often marrying more than once and any children feeling equally entitled to the family wealth, the decision can be much more complicated.

Allocating assets fairly

It might seem that the only fair way to do things is to divide the assets up equally between your offspring. But what if your youngest child from a second marriage has learning difficulties and is struggling at school, while your eldest is a wealthy and successful adult in their own right? Or you might have two daughters, one of whom has married into money and has no children, while the other is a single mother working in a low paid job. You may even feel that passing on all your wealth unconditionally to your children risks robbing them of ambition.

These sorts of scenarios are increasingly common, but because the issues are emotive they often go unaddressed. It is vital to manage the passing on of your assets in an open and considered way if you want to pre-empt conflict and ensure not just the economic security but also the future happiness of your loved ones.

Bloodline planning

As well as a will, making arrangements to ensure your assets are passed on to your relatives effectively and efficiently – a process known as ‘bloodline planning’ – will help to ensure that your family are left in the best possible circumstances after you are gone. Speaking to a professional adviser who can carry out a holistic and dispassionate assessment of your family’s financial situation is the best way to do this, as it helps create the necessary emotional disconnect.

In some cases setting up a trust will be the best way to protect your assets and make sure your offspring are taken care of. If the trust is well written there should be fewer grounds for disputes. It can also be designed to allow the trustees discretion in how assets are released depending on the beneficiaries’ circumstances.

Whether you’re still growing your wealth and your family, or you’re in comfortable retirement with a basket of assets and a dozen grandchildren, planning effectively now will give your family the best chance of beating ‘the Midas curse’ and continuing to prosper for generations to come.

Tax treatment depends on individual circumstances and may be subject to change.

This article has been provided to Bank of Scotland Private Banking by external/third party contributors and contains their views as at July 2015 and should not be relied upon as fact and could be proved wrong. The information and opinions may not be accurate after this date. The views expressed may not reflect the views of Bank of Scotland plc.

Bank of Scotland Private Banking assumes no responsibility for the content or any reliance upon the content of the third party websites detailed in this article.

The forecast of future figures or events is not a reliable guide to actual future figures or events and cannot be guaranteed.

Bank of Scotland plc. Registered office: The Mound, Edinburgh, EH1 1YZ. Registered in Scotland, no. SC327000. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under number 169628.

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