When you are writing your will, it is natural to think about passing your wealth to your children. But this is not the only option.
Instead, you may want to skip a generation and leave some of your wealth directly to your grandchildren or other younger family members.
This can form part of a wider strategy for managing family wealth and, in some circumstances, may offer Inheritance Tax (IHT) benefits.
However, this approach needs careful consideration. Your estate plan should reflect your family circumstances and wider objectives, rather than simply following a standard inheritance pattern.
Your grandchildren could benefit from your wealth
One main reason to consider skipping a generation is that your children may already be financially secure.
They may have accumulated significant wealth of their own, whereas your grandchildren could be at a relatively early stage of their financial lives.
As a result, they might face significant costs in the years ahead, such as paying for university, buying their first home, starting a family, or building their own financial security.
In these circumstances, leaving some assets directly to grandchildren could support those who benefit most. It can also reduce the number of times wealth passes through successive estates.
Consider the age and circumstances of your grandchildren
Before leaving significant wealth directly to your grandchildren, you should consider what they would do with it.
If they are young, they may not yet have the experience or financial maturity to manage a substantial inheritance themselves.
One option could be to use a trust with reliable individuals, potentially including your children, acting as trustees.
This can give you greater control over when and how the money is used, providing protection and flexibility while allowing you to benefit the next generation directly.
However, trusts can be complex and may have their own tax and administrative implications. The most appropriate structure will depend on your circumstances and what you are trying to achieve, and you may want to seek professional advice before making decisions.
There are potential Inheritance Tax benefits of skipping a generation
When assets pass from you to your children, they may pay IHT on them, depending on the overall value of your estate. Those assets then become part of their estates and, in certain cases, could be subject to IHT again when they eventually die and your grandchildren inherit them.
This can create additional estate planning considerations for the next generation and deplete the amount that your grandchildren eventually receive.
But by leaving some assets directly to grandchildren, you may be able to avoid that transfer through your children’s estates. This could reduce the IHT burden, meaning your grandchildren inherit a larger portion of your wealth.
However, simply changing the beneficiaries in your will is not a substitute for proper estate planning, and you should consider any potential tax advantages alongside your wider objectives.
Do not overlook the needs of your children
Your children may be financially comfortable today, but their circumstances could change significantly in the future. Unexpected financial pressures, changes in employment, divorce, or other events could affect their financial position.
Equally, one child may be considerably wealthier than another.
This is why skipping a generation altogether may not be appropriate.
Instead, you could consider dividing your estate differently, providing some assets for your children while directing a proportion to future generations.
This approach may allow you to reflect the needs of different family members and provide support where it is likely to have the greatest impact.
It is important to communicate your intentions effectively
If you intend to leave a significant proportion of your wealth to grandchildren rather than your children, it is worth considering how this could affect family relationships.
Your children may have their own plans for providing for their beneficiaries and different expectations about their eventual inheritance.
Being clear about your intentions can reduce the risk of misunderstandings later.
You do not necessarily need to disclose every detail of your estate or the value of your assets. However, discussing your broader intentions with family members can sometimes make the eventual outcome easier to understand.
Build your estate plan around your family
For families where the children are financially secure and you want to support the next generation directly, skipping a generation can be worth considering.
It may allow you to direct wealth to grandchildren earlier, when they are at a potentially more financially demanding stage of life.
In some circumstances, it could also reduce the amount of wealth that would otherwise become part of your children’s separate estates and potentially be subject to IHT in the future.
Professional advice can help you structure your estate plan around these objectives and ensure your will, pensions, investments, and other arrangements work together.
It is also important to review your arrangements regularly, particularly after significant changes in your family or financial circumstances.
Get in touch
If you would like to discuss your estate planning arrangements and the issues raised in this article, email enquiries@dbl-am.com or call 01625 529499 to speak to us today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All content is based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning, estate planning, will writing, or trusts.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.