How family contracts could help inheritance, aged care and even first time buyers

Anna Sofat of Addidi Wealth explains why family financial planning is replacing personal planning and how it could help you.

By 2020, women and men will each control 50% of all investible assets.

This is good news for women, and for society as a whole. And, while money brings power and freedom, you only have to read the news these days to realise that not a single generation is immune from financial pressure.

Whether it is the plight of the young, unable to save to buy their first home or of older people not having enough money to pay for their care, financial stress is present at all age levels.

With wealth comes independence and choice – for men and for women, there is perhaps, a changing sense of responsibility.  Rising women’s wealth is increasingly leading to more conversation about how women want to use their wealth because women think about and want to use wealth differently from men.

Good intergenerational planning has to take both sexes’ needs into account, but an imaginative approach that recognises what women want from financial services will pay dividends.

Read our complete guide to passing on wealth, from Junior ISAs to Inheritance Tax

Family contracts

Because of today’s financial pressures, for example, more people, both men and women, start amassing life experiences earlier on in their lives – by going travelling, or spending time volunteering, for instance.

The problem with this trend, however, is that it doesn’t tally with traditional stages of wealth creation – the ‘create it, invest it, enjoy it’ phases – which (generally speaking) require 20 years’ worth of commitment to the create and invest stages.

So where does this leave us? To me, it can only mean one thing – families need to completely rethink what intergenerational financial planning means: what they really need to be doing is creating a ‘family contract’ – so that conversations about how money moves between generations are more black and white.

Adult children living at home: should they pay rent?

Family charters

Just as companies are specific legal entities with concrete rules governing how their profits and dividends get divided, I would encourage families to do the same – by creating specific family charters.

Through such arrangements, distribution of family monies is bound by intergeneration agreements – where each generation agrees to certain commitments that apply to them.

It could be, for example, that a son or daughter agrees to take time off their own careers to care for their parents. Time away from a career could be compensated for by monetary gifts passed down to them either as cash: parents can gift up to £3,000 per year, every year without attracting inheritance tax as long as they survive seven years after the date of the gift.

Or it the compensation could be contributions to an ISA, which could be part of their own pension plan. Currently, parents can pay up to £2,880 a year into a child’s pension and the government will top it up to £3,600.

Writing a will: how to leave money ‘with strings attached’

No such thing as personal financial planning

In addition, part of a ‘family-business’ style contract could see the patriarch or matriarch deciding to buy a much bigger home – so that their dependents can live there too and save for their own homes.

Setting up a multi-generational nuclear home is also an extremely efficient way of moving money between generations. For example, we’ve already helped one female client buy a larger home where her children are the joint owners. Rules can also be included about who has power to sell, and to whom the proceeds go to.

The point of arrangements like this is that they set agreements. Contracts typically provide solutions for when things start to go wrong – establishing clear rules mean that families can then have a grown-up conversation about issues they face.

It might seem odd, but why should it? Too often we fail to talk about money early enough. A family contract is a way of setting things up, about defining the exact contribution each generation is expected to make – financially or non-financially. It makes perfect sense.

The beauty of this approach is that the detail people want to attach to their contracts is then completely up to them. Do they want to set up trusts for dependents? These can be done, with pre-set ages to access them. Do they want to gift money? It’s all for them to decide, but at least the framework is there.

Believe me – there is no such thing as personal financial planning anymore. Family financial planning is taking its place, and recognising both the critical role women play in families and the goals they prioritise is key.

How you can help your children get on the property ladder

What to consider for your family contract

Joint property ownership: When there is property jointly owned (rather than as tenants in common), the whole property passes to the surviving joint owner automatically after a death of one of the owners.

Agreements for passing to descendants: Inheritance Tax (IHT) is paid at 40% on assets above £325,000 but the recent ‘family home allowance’ (worth £125,000 for 2018-19) means that by 2020, the first £0.5 million of an estate can be passed on IHT-free.

Formalising gifts: As well as being able to give £3,000 per year away without attracting Inheritance Tax, it’s possible to make unlimited ‘gifts of surplus income’ – that is any surplus money from pensions income, dividends and interest on savings (but not including capital) that is left after expenses, without creating any additional tax liability.

Cascading you pension pots: Direct contribution pension pots can now be inherited tax-free and can be cascaded down a family sometimes free of income and Inheritance Tax charges – for instance, if death occurs before the age of 75.

After that, any lump sum or income is taxed at the beneficiary’s marginal rate of tax when it is withdrawn from the pension Either way though it’s vital you set up ‘expressions of wish’ forms, to ensure pension providers can process things expeditiously. Family contracts will see to this in advance.

Anna Sofat is the managing director of Addidi Wealth, a financial planning firm that focuses on helping women grow their wealth.