Inheritance planning: why conversation is critical

It might not be the easiest topic to think about, but inheritance planning is one of the best financial decisions you can make. It saves time and money – and makes it easier for those left behind. In the first instalment of a three-part series, we look at the need for transparency and the importance of preparing the beneficiaries of inheritance for the receipt of wealth.  

For many families, a discussion about what happens in the event of death never really happens until after the fact.

But when it comes to inheritance, talking openly and being prepared can have significant benefits: with some financial planning and structuring, families with significant wealth can reduce their tax bills, more easily transfer an asset, or speed up and simplify the inheritance process.

In Ireland, one third of households have been the beneficiary of an inheritance or substantial gift in the past¹ – and the wealthier a household is, the more likely it is that at least one member will receive an inheritance or gift. Indeed, almost 70% of households in the top income decile report that they have received a substantial gift or inheritance in the past – this compares to less than 10% in the bottom income decile². A Goodbody survey of households revealed that more than 50% of people in the top wealth decile report either getting or expecting a gift or inheritance from their parents³.

Not only is household wealth heavily correlated with receiving gifts or inheritances, but receiving a gift or inheritance increases a household’s relative wealth position.

Research by the Economic Social Research Institute (ESRI) indicates that having received an inheritance moves a household up the wealth distribution curve by more than 15 percentiles versus households with the same income, but which did not benefit from inheritance⁴.

That means wealth accumulation and economic mobility from one generation to the next hinges significantly on inheritance. And given how fundamentally inheritance influences wealth outcomes for the beneficiaries, it’s important that parents are transparent with children about their inheritance plans.

After all, children have the most to gain or lose from managing the process as effectively as possible.

It's time to talk

Despite how important this conversation can be, it may be difficult to initiate – and at Goodbody, we have seen time and again that communicating clearly and preparing the beneficiaries of inheritance to receive wealth remains largely an untouched area.

While most parents do share some aspects of the plans they have made, often they do not share the full details with the next generation.

But it is important that the beneficiaries understand their parents’ intentions and inheritance plans because a lack of clear communication can reduce the amount beneficiaries receive and increase the likelihood of conflict.

What comes through most strongly in our conversations with clients is a desire for financial security – both in terms of providing for old age and providing for the next generation. Those concerns are interrelated, which is why we see parents looking after the future with a mix of gifts for today (that’s a topic we’ll discuss later in this series) and inheritance for tomorrow.

We also come across clients who believe that their children are fortunate to be receiving an inheritance in the first place and, therefore, can sort out the tax bill themselves – i.e., that the financial responsibilities of inheritance are the sole responsibility of the recipient.

Equally, children don’t want to appear greedy or ungrateful by proposing to develop inheritance planning strategies.

It’s important to focus on the long term

Another story we hear frequently from clients is that they are not, in fact, passing wealth on to the next generation, but rather leaving it to their spouse, who they believe is in a good position to manage the estate themselves.

That may be true in the short term, but it is not a long-term strategy. Parents usually do not outlive their children – and the inheritance will end up with their children eventually.

How we can help

Alongside transparency, seeking advice and an independent facilitator is essential to the inheritance planning process.

Increasingly, our in-house tax experts are asked by parents to chair meetings with children or intended recipients of wealth. The aim is to objectively inform children of the financial position, the proposed course of action, and the distribution of wealth so they can absorb the information and ask questions of an independent expert source.

In doing so, we can help preserve wealth and income for both generations – and it will make things easier for those left behind.

What would you like to do next? 

Sources: