Over the past two years the COVID-19 pandemic has seen so many of us re-evaluate what is important to us and in my line of work this has been evidence through a lot of conversations with families about their desire to transfer some, or sometimes a large portion, of their wealth either to the next generation or to a philanthropic pursuit.
In this short piece I wanted to draw attention to a number of the recurring issues that we often see arising when we engage with families, and I assure you that very often we are not talking about tax.
Starting with control, it is a well-established scenario that the generation that created their family’s wealth want to pass it on but want to have a say, or in some cases completely dictate, how the recipients or beneficiaries utilise what they get. The desire to retain control is a common human trait and giving away something you have worked so hard to generate is natural.
My first piece of advice is that it is yours, if you don’t want to give it away then don’t. Yes, there may be tax consequences depending on your personal circumstances, but most of the families I speak to I consistently say that first and foremost, look after yourselves and enjoy your life, be happy. Just make sure you understand any exposure that does exist as there aren’t many things less welcome than a surprise tax bill.
For many, that approach isn’t sufficient as either they wish to mitigate estate taxes or they wish to see others benefit from their generosity a) when the recipient really needs it and b) when the donor is still around to be thanked for doing it.
So, if you do want to give something away to your children directly you probably need to accept that it won’t be yours anymore. For a gift to be effective for estate tax planning in most jurisdictions it has to be a bona fide gift as most international tax codes contain provisions akin to the UK’s gift with reservation of benefit rules which enable tax authorities to choose to ignore the legalities of a gift, typically where the donor has retained an interest in it (most common example being a property that the donor continues to use regularly) and doing so often results in an increased tax take for the public purse.
Trusts remain an extremely effective halfway house where you can protect assets, often reduce tax exposure, and retain at least direction via a well drafted letter of wishes, if not complete control. Over the last few years as offshore trusts find themselves ever more in the spotlight from a tax morality perspective we have seen an increasing use of them in their purest forms as a means to protect assets for the next generation, so often our structuring conversations seek only to understand the tax involved rather than how best to remove it.
In addition to seeking to retain control, another common pitfall we see is the failure to communicate effectively. So often I see grievances arise in families where gifts are made to meet the perceived needs of the recipient rather than following discussion of what that child actually needs or wants. You may, at this point, rightly refer to such beneficiaries as ungrateful so and so’s, and I would understand that, but I really recommend that you formulate your own appetite for generosity and then talk to your kids about it. Be clear about what you want to do, and why, and understand how that works for them. As noted above you have no obligation, but if you are seeking to give somebody something it is always nice to know they actually want it! I have seen this go wrong with house purchases or expensive car purchases, etc, where actually help with school fees would make a fundamentally bigger impact on that child’s life, or increasingly where they might much rather see your wealth deployed to help those who are truly needy.
In that vein we have seen a lot of family businesses and high net wealth families seek to increase their charitable donations or often consider the creation of their own charitable vehicle. There is no doubt that COVID-19 has brought into focus a degree of reflection as to who we are, what we have achieved, and what we want our legacies to be as well as a serious amount of perspective. Whether you are considering transferring wealth to your kids, a charity of your choice or your local sports team or school make sure you know what you want to do and why. Be aware of the tax considerations, but don’t let them determine everything you do and discuss your plans with those you are trying to benefit.