Bring on the Bank of Grandma and Grandad
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As a grandfather of recent vintage, it’s my privilege to enjoy the company of two adorable one-year-old boys.
It’s almost impossible to imagine these toddlers as adults, but adults they will one day be, with all the attendant pleasures and problems. Not to mention the financial headaches.
I belong to a generation that seems to have had it all — free university, lots of jobs (for graduates), stable careers, affordable housing and generous defined benefit pensions.
So naturally, I worry that my children have started their families in more difficult circumstances, with student loans, expensive accommodation, volatile employment prospects, insecure pensions and yawning inequalities exacerbated by the pandemic.
As the economy recovers, we face further headwinds, ranging from paying for the pandemic to the ageing of the population.
Like many other parents, my wife and I have helped our children financially. But, if we give serious amounts of money to the children, why not the grandchildren? If the Bank of Mum and Dad, why not the Bank of Grandma and Grandad?
We are not alone. Lawyers say that in the past decade a growing sense that life is harder for younger generations has led more grandparents to give money to grandchildren.
The pandemic has accelerated things. A survey by Killik & Co, the financial adviser, shows that 48 per cent of grandparents have increased financial support to grandchildren under Covid.
And what about going further and handing down the bulk of your fortune to your grandchildren instead of the children? Skipping a generation, whether through lifetime gifts, or through your will?
Passing most of your estate to your children has long been the norm, even though English law gives people wide freedom in distributing assets, once any taxes are paid. (The Scots, as so often, do things a bit differently).
However, growing life expectancy has made it more likely that grandparents will see their children retire and their grandchildren move well into adulthood. So the children may no longer need money just at the time when the grandchildren might require substantial funds, for example to buy a home.
Also, there is a potential tax advantage: assets passed to grandchildren will not face inheritance tax (IHT) when the children die. This can have a particular appeal when, for example, there’s a cherished home to be kept in the family.
A generation’s worth of IHT can be saved. Inheritance tax is payable at 40 per cent on most estates valued at more than £325,000 (or £650,000 for a couple), though the potential bill can be cut through tax breaks. Philip Munro, a partner at Withers law firm, says passing assets directly to grandchildren has “an economic logic and a tax logic”.
But that’s by no means the whole story. Families are above all families — bundles of personalities, experiences and emotions. They are not organisations to be ruled by economic priorities or tax considerations.
What perhaps matters most is a sense of fairness. Julia Cox, a partner at law firm Charles Russell Speechlys, says that missing out the children and switching to the grandchildren can be seen “as a punishment for the children”.
So grandparents wanting to ignore the norm should discuss any plans with their children to avoid the risk of disputes. You might wonder whether reducing your children’s IHT should even be a priority when the potential tax saving may not crystallise for decades? The law, by then, might have changed out of recognition.
Fortunately, there’s a middle road: when giving money to grandchildren, keep the children involved. This starts with lifetime gifts, often necessarily so as the grandchildren may still be under 18 and unable to manage their finances.
The co-operative approach is easily incorporated into the will: the law allows beneficiaries two years after a death to change the will. This freedom is often used to minimise tax, but can be employed to alter the distribution among beneficiaries or add new ones.
So grandparents can leave it to their children to decide whether to give up some or all of their share to the grandchildren. They can even write a non-binding letter encouraging them to do so. Of course, it all hangs on trust, but then so does almost everything in a family. You have to make the call.
With young grandchildren, grandparents may worry about passing large amounts of money into inexperienced hands. One possible solution is a so-called bare trust — a vehicle where the money sits untouched, until the recipient turns 18. The problem here is obvious — who wants to give an 18-year-old a life-changing sum?
An alternative is a discretionary trust, where money is passed into a vehicle controlled by trustees (often the parents in the case of gifts to grandchildren).
Here, the donors can delay access to funds until a sensible age — 30, say. But there are disadvantages: it costs a bit to set up, it’s taxable and the trustees have some discretion over distribution, as long as the money benefits the youngster. So they could use it, for example, to finance holidays — costs the grandparents might have thought should be met by the parents. Or not. It all depends. Every family is different.
Clearly, lifetime gifts give grandparents greater control. Also, all gifts given seven years or more before death are IHT-free. So are gifts made at any time from surplus income, and not from savings.
All this is more complex than it should be. The allowances disproportionately benefit the wealthy: the effective IHT rate on fortunes over £10m is just 10 per cent. We should cut the 40 per cent headline rate and scrap the allowances. But, for now, the law is what it is.
Finally, when spreading your largesse, don’t forget that the flip side of longevity is an increasing need for old age care.
Covid has highlighted how volatile investment portfolios can be. In the Killik survey, while 38 per cent of the grandparents polled said they were increasing the amounts passed to grandchildren, 16 per cent said they were making cuts because of the pandemic.
So let’s be generous with our heirs, children and grandchildren alike. But keep a bit in reserve for a walk-in bath or a stair lift.
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