Reviews and Ratings for Financial adviser Chris Wheatman, Lancaster

Living legacies are on the rise. Here’s what you need to know about them

More people are choosing to gift wealth during their lifetime rather than leaving assets as an inheritance. There are benefits to choosing a living legacy, but there are things you need to consider too, including your long-term financial security and the potential tax implications.

According to an Aviva survey, more than half of those over 55 want to give a living legacy. It’s a trend that suggests a move away from leaving money to your family when you pass away.

There are many reasons why you may want to create a living legacy, including:

  1. You can see the benefit of your gift

One of the key benefits of a living legacy is that you can see the joy and security that your gift brings to loved ones. For some people, this may be a motivation for creating a living legacy.

  1. Help family members when they need it most

Longer life expectancy means that many people won’t receive an inheritance until they’re retired. As younger generations face financial security challenges, like struggling to buy their first home, a living legacy can have a much larger effect. A gift earlier in life can help your family reach their goals.

While there are benefits to a living legacy, there are some key areas you need to consider first.

Will a gift now affect your long-term security?

Taking a lump sum or assets out of your estate now could affect your financial security. To have confidence in the steps you’re taking, you need to think about how they could affect your long-term plans.

According to the Aviva survey, 33% of people said they would be uncomfortable helping a family member get onto the property ladder without knowing how much money they’d need for retirement. For many, this worry is likely to apply if you’re helping loved ones achieve other goals or simply want to provide a gift.

Gifting some assets can have a larger effect on your plans than you think. For instance, if you took money out of an investment portfolio, you would also lose the potential returns you could earn from those investments. So, it’s important you review your entire financial plan when gifting.

Longer life expectancy is one of the reasons people are turning to living legacies, as it can help family when they need it most. However, it also means you need to consider the long term and what could happen if you face financial shocks.

Making gifts part of your financial plan means you can hand over assets to loved ones with confidence.

A robust plan will help you understand how your wealth and income needs may change over the years. You can also take steps to protect yourself from income shocks – for example, by taking out appropriate financial protection or having emergency assets you can fall back on.

How will a gift affect your Inheritance Tax liability?

If your estate could be liable for Inheritance Tax (IHT), it may be a reason you’re considering gifting assets now. However, not all gifts are outside of your estate for IHT purposes.

If the value of all your assets is more than £325,000, your estate could be liable for IHT. With a standard rate of 40%, IHT can significantly reduce what you leave behind for loved ones.

Gifting to bring the value of your assets under the threshold can seem like a straightforward way to reduce IHT but it’s not that simple.

Some gifts are considered immediately outside of your estate for IHT purposes. This includes up to £3,000 each tax year known as the “annual exemption”, the small gift allowance of up to £250 for each person, and gifts that support someone’s living costs.

However, other gifts may be considered “potentially exempt transfers” (PET). PETs can be included as part of your estate for IHT purposes for up to seven years.

So, if you gifted assets and died within seven years, the IHT bill could be more than you or your family expect.

If IHT is a key reason why you’re considering a living legacy, it’s important you understand the effect this could have.

There are things you can do to increase how much you can leave behind before IHT is due, including making use of the residence nil-rate band. We can answer any questions you may have about IHT and the steps you could take to reduce liability.

Contact us to discuss living legacies

If you’d like to gift your loved ones cash or assets during your lifetime, please contact us. We can help you understand if it’ll affect your long-term security and what other implications you may need to consider, such as a tax liability.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate or tax planning.

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