Recent surveys show that around £5.5 trillion pounds of wealth will be transferred from the baby boomer generation over the next 20-30 years.
But no matter how much money we have, the idea of gifting money to our children can be daunting and unsettling.
Parents naturally want to help their children financially where they can and give them a good start in life – perhaps a better one than they had. But we are also concerned about making sure that our children have meaningful lives, lives of significance built from their own efforts and we don’t want our financial gifts to spoil this by encouraging idleness and purposelessness. There is a balance to be struck between helping our children and indulging them!
The current Generation Y (born between 1981 and 1995) are regularly dubbed “snowflakes” as they are seen as less resilient than previous generations, or as being too emotionally vulnerable to cope with views that challenge their own. Even younger people are often characterised as being over indulged and “entitled”. Have we taken away the ambition and hunger of these young people by being too generous?
Whether you think this generalisation is true or not, it poses a key question which many parents (and Grandparents) struggle with – if we help out financially, in the long term will that have hindered their growth and development in the longer term?
How do the very wealthy strike the balance between help and over-indulgence?
Self-made billionaires Warren Buffett and Bill Gates have expressed similar philosophies when it comes to passing on their money.
Bill Gates wants his 3 kids to find their own way and will only give them “a minuscule amount” while Warren Buffett has said that the perfect amount to leave your kids is “enough money so that they would feel they could do anything, but not so much that they could do nothing.”
Other people have a more severe approach and say that once the children are finished with their education, they are on their own. Some make it very clear after this point that the bank of Mum and Dad (currently the UK’s 9th largest money lender) is permanently closed!
At Magenta we are primarily concerned with the happiness and security of our clients but there is a balance to be considered here too. It may make parents and grandparents happy to set up their young people, but too often we have seen clients compromise their own future security by giving away too much – and sometimes to ungrateful, expectant recipients.
As we are all going to be living longer and not necessarily in the best of health, it is important to ensure that we don’t give away too much and that we maintain a cushion of wealth to pay for our health and nursing care in the future as well as the things that bring us joy.
Our lifetime Cashflow forecasts allow us to model future scenarios and to make provision for any anticipated costs and emergency funds. Once we have taken these into account, clients can happily make gifts if they want to, safe in the knowledge that they won’t be compromising their own security. For many people this is also a certain way of reducing inheritance tax liabilities and passing more wealth to their family.
It is clear that we need to think carefully about how we transfer our wealth to future generations – do we make gifts in our lifetime at a time when our young people need our help and we can see them enjoy the benefits of our generosity, or do we leave everything in our will, or do we do a bit of both?
Whatever we do, it is best not left to chance, or the whims and demands of our offspring – we must have a plan (or at least some broad thinking!)
“My personal plan – to die with a £5 overdraft!” – Julie Lord
If you would like some guidance with a gifting or estate planning strategy, please feel free to call for a friendly chat.