There's an interesting paradox at the heart of almost every conversation I have with clients about succession planning.
Having worked all their lives, becoming successful and wealthy in the process, they now find themselves in a position to help their children – and to do so while they are still alive. This is how the conversation often goes:
“I had to work hard to get where I am today, and there were plenty of tough times along the way.
“But those are the times I’m most proud of; when I had to pick myself up off the canvas. In fact, looking back, I realise that those are the times when I was the happiest because I was proving myself.
“Now I’d like to help my children so they won’t have to struggle like I did.”
There’s the contradiction: We don’t want our children to struggle, even though the times when we struggled – and overcame – are also the times that made us the most happy in our careers and lives.
This issue, in an Irish context, is relatively new. Traditionally, wealth in this country was tied up in the family home with the farm/business passing to the eldest son when the parents died, while the other siblings generally had to fend for themselves.
Growth in wealth
The growth in wealth over the last century from land only to property, business assets and financial capital has opened up a new possibility for parents: to assist their children during their lifetime.
Naturally, parents want to help their sons and daughters but they also want to know:
- Will financial help stop my child from becoming self-sufficient?
- Will it kill their ambition to study, work and push themselves in life?
- Will they lack financial discipline, thinking they have a 'safety net'?
In my experience, most parents would like to alleviate life’s struggle for their children without eliminating it entirely, and where to strike that balance is a matter for individuals to discuss and decide.
In any case, the nature of parental assistance in Ireland remains largely property-related, with parents giving outright gifts, contributing towards deposits or simply agreeing to be guarantor for their children.
With renewed confidence now pushing asset prices back up, and with inheritance taxes having increased significantly, Irish parents are looking again at the area of succession planning.
As with all important decisions in life, planning is everything. In approaching your succession plan it is useful to begin with a statement of net worth and a schedule of income, which forecasts what you will spend now and into the future. This will help you decide a target level of funds you may need for your retirement, and what is potentially available to be transferred.
Transferring assets during your lifetime
Most parents are reluctant to transfer assets during their lifetime without maintaining some sort of control over what is being passed on. In the case of business assets, that means retaining more than 50% of the business or creating a special type of share that grants control over the board of directors.
In the case of purely financial assets, the creation of a Family Partnership can provide a structure that allows:
- Parents retain control of the assets
- Children to benefit from financial education and professional advice
- Any future growth of the asset to accumulate free from CAT
Transferring assets as part of the estate
For parents leaving assets as part of their estate to minors, children with disabilities or children who simply may not be ready to manage an inheritance, it is essential to draw up a will that allows for the assets to pass into a holding structure (discretionary trust). This means the assets are managed by trustees, ensuring that:
- There is flexibility to distribute the assets on a phased basis rather than a full transfer upon death
- Control is maintained by trustees who effectively step into the parents' shoes and operate in accordance with the trust document (or parents' letter of wishes)
- Certain tax reliefs are available, where conditions are met during the period in which the assets are held by the trust
In this instance, it is important to consider the 6% once-off tax on the Discretionary Trust, as well as an annual 1% charge. And in all matters of estate planning, parents need to ensure that the strategies and structures they put in place suit their individual circumstances.
Talking about money with your children
Equalisation of the estate is another important issue, where one asset (say the family business) is left to one child and an asset of equivalent value is left to the other(s). This can be dealt with in the will by ensuring that any residuary clause is worded to take account of gifts received by an individual child during the parents’ lifetime.
Equally important is the question of which assets go to which child. Countless family trees have been irreparably blighted by siblings falling out over inheritance, and the best way to avoid this is to include your children in discussions around succession planning.
In conclusion
The parental instinct runs deep in us all, and a desire to help one’s children is as natural as taking a breath.
Financial assistance raises a number of emotional concerns, however, children also need to learn, make mistakes and overcome life’s hurdles for themselves – just as their parents did.
On a more practical level, which assets to transfer, how to do it in the most efficient way, and when to do it – now or as part of the estate – are the key questions to be teased out as part of your financial life planning. If you are thinking about transferring assets to your children, start planning today.
Brian Walsh is Head of Financial Planning at Davy Private Clients.
There is no guarantee that your financial life plan will meet its objectives. You may lose some or all of the money you invest. Past performance is not a reliable guide to future performance.
Warning: The value of your investment may go down as well as up.
Warning: The income you get from savings and investments may go down as well as up.