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Inheritance Planning Trends and Concerns

The publication of findings from several recent research projects has given an interesting insight into current trends and opinions with regards to inheritance planning.

Parents Concerned about Risk of Divorce

One such piece of research comes from Investec Wealth and Investment, which revealed that some parents are reluctant to leave an inheritance to their married children because of the risk that they might divorce.

Around 30% of parents surveyed are apparently concerned that if their children’s’ marriage fails, inherited assets will end up leaving the immediate family. These fears are being exacerbated by a lack of confidence in the stability of their children’s marriages -  12% of parents said their children’s marriages had already broken down, and a further 14% had little or no confidence they would last a lifetime.

Parents have also expressed doubts about the financial management capabilities of their sons and daughters-in-law. In addition, they worry that an inheritance will be squandered by their children or reduce their incentive to work hard and make their own money.

Investigating other Options

To help minimise these risks, parents are apparently investigating other methods of passing on their wealth, including:

- favouring small financial gifts rather than a lump sum to help with day-to-day living,
- skipping a generation and leaving assets to their grandchildren, and
- setting up a discretionary trust, which can be a useful means to protect family wealth from future divorce within a family.

Impact on Social Equality

In a second piece of research, the Institute for Fiscal Studies (IFS) has examined the impact of inheritances on inequality across and within different generations.

It revealed that younger people today are likely to inherit more wealth than their predecessors did, but that within each generation the people who inherit the most tend to already be wealthy. The IFS warns that this retention of wealth will have implications for inequality and social mobility.

The study looked at the current pensioners, and ranked them in terms of their total lifetime income, excluding any inheritance they might have received. The researchers then looked at inheritances, and found that the pensioners in the top 20% of the income ranking also received the greatest amount of inherited income – on average four times more than people in the bottom 20% of the ranking.

They also found that amongst the younger generations, those with higher incomes are significantly more likely to expect an inheritance than those with lower incomes.

Future inheritances are likely to be highly unequal, says the IFS. Even excluding the super-rich (for whom no reliable data is available), the richest half of elderly households hold 90% of the wealth and the richest 10% hold 40% of the wealth. This leads the IFS to conclude that a ‘lucky half’ of younger generations look likely to get the vast majority of inherited wealth.

“The wealth of younger generations looks set to depend more on who their parents are than was the case for older generations,” explained Andrew Hood, a Senior Research Economist at IFS. “Today’s elderly have much more wealth to leave to their children than their predecessors did, primarily as the result of higher homeownership rates and rising house prices.”

“At the same time, today’s young adults will find it harder to accumulate wealth of their own than previous generations did, due to the sharp fall in homeownership for that group, the dramatic decline of defined benefit pensions in the private sector and the stagnation in their incomes,” he added.

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