How much and when to gift, and to whom, are all questions with their own set of difficulties to untangle. Getting all three right will take good fortune, but uncertainties can be reduced with prudent and long-term financial planning.
How much?
No one knows exactly how long they are going to live for and/or how much their later years are going to cost, and therefore the size of a savings pot needed for this time is nearly impossible to pinpoint.
Full-time care in a residential or nursing home is costly and can be exasperated if one spouse wants to remain in the family home – effectively it becomes double the living cost for the couple to fund.
Leaving inheritance questions unaddressed and taking no action until later life is problematic.
Therefore the balance between gifting assets to lower their estate value and retaining sufficient assets for their own use is not straightforward, particularly when you consider the likely largest asset will normally be the long-term family home.
To be effective for inheritance tax planning, a gift needs to be without reservation. Cash flow modelling, using a variety of assumptions and scenarios, can minimise this uncertainty and assist in identifying truly surplus assets that may be gifted.
When to gift?
There is a difficult balance with timing any gift and it is important to focus the client on their own needs, and not be swayed by the needs of their family.
Gifts need to be appropriately timed, depending on age and individual circumstances – for example, a large gift given to a recipient too young could have a negative impact on their career or lifestyle choices.
Furthermore, if there was a breakdown in the marriage of the recipient, the gift might not end up in the pockets of who it was intended for.
To be an effective gift for IHT planning, gifts need to be given seven years before death. Therefore, planning over the long term and making small, frequent gifts is likely to be the most prudent approach.
Estate and inheritance planning is best done conservatively and slowly over the long term.
‘Out of income’ gifts are a key part of estate planning conversations; although they may only prevent the estate from growing by distributing rather than reinvesting investment income, their ease and simplicity means that they are a valuable part of a long-term financial plan.
