Should you give away your inheritance before you die?
Early inheritance is taking off. Parents are keen to give their kids money sooner rather than later, while they're young enough to enjoy it. The question is whether this will turn out to be a good idea - or whether you will fall prey to the four potential pitfalls.
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A study by Key Retirement found that 53% of parents want to give away early inheritance gifts to their offspring - and would like to give them an average of £15,000. More than one in ten would like to give them more than £25,000 each.
There are plenty of benefits of early inheritance. From the parents' perspective, if they can afford to give cash away, then it can be a handy way to get around any inheritance tax that might be payable on their estate. If they give away a lump sum, and then live for seven years after making the gift, it counts as being out of their estate for inheritance tax purposes. If they can afford to give regular amounts from their income, then it counts as being out of their estate immediately.
From their children's perspective, it means getting the money when it is most needed. As people live longer, there's a real possibility that their offspring will be in their 60's or 70's when they pass away. Arguably this is a time when they need the cash less - as the expensive years of saving for a house deposit and bringing up a young family are behind them. By giving the cash away during their lifetimes, their offspring can receive a lump sum to move up the property ladder - into a family home - or help them through their childcare years.
The research found that 58% of people specifically want to use their money to help their children or grandchildren get on or move up the property ladder. Other support includes helping their family buy a car (17%) and paying for a wedding (13%).
However, anyone taking this approach needs to consider the move carefully, because there are four situations in which it can backfire if you fail to take sensible steps.
1) If you release cash from your home to do this - without fully appreciating the cost.
It's a popular move, and the study shows that 22% of people would consider it. However, when you release equity from a property, you need to understand that you are actually borrowing money against the value of your home. Interest on the borrowing will roll up, and will need to be paid off when you eventually sell the property. Most products nowadays don't allow the interest to leave the homeowner in negative equity, but the interest can easily end up matching the sum borrowed in the first place.
Sensible steps: If you and your children are comfortable with this, it may still prove the best move for you. But everyone needs to be clear about the potential cost.
2) If you give the money away, without getting an idea of the financial approach they plan to take
In the worst case scenario, you might give the cash to our offspring in order to help them pay their debts, only to watch them continue to overspend, and run up more debts. Alternatively you might want to give them the money to help them up the property ladder, but they choose to go on a series of holidays instead.
Sensible steps: you have to appreciate that once you have given the money away, you have lost control over it, so it's well worth talking to your family about their intentions, before you hand over any money.
3)If they were actually relying on the cash for their retirement
This is surprisingly common, as people don't have the pension arrangements in place to secure a comfortable retirement. If you give them the cash in their 30's, 40's and 50's, and they spend it all, they will need to make alternative arrangements for their retirement.
Sensible steps: again it's essential to talk to your offspring. If they want to use their inheritance in retirement, they can still benefit enormously from having the cash at a younger age, so they can invest it for the future, but it's worth ensuring they understand how an early inheritance will affect any potential payout when they are older.
4) If you give away the cash, but come to need it later
The difficulty is that none of us know what will happen further down the line. You could live for 20 years longer than you were expecting, and need more cash to maintain your lifestyle. Alternatively, you may need to go into residential care, and need cash to fund that care. If you have already given the money away, then it's too late.
Sensible steps: there's no right answer to this one - so it's a question of finding an answer that suits you and your family. If you are all very sensible, and reasonably well off, then you may want to give away your inheritance early, on the understanding that your family will step in if you need help when you get older. If you are concerned they may not be able to help by that point, it may be more important to keep a nest egg just in case.