Two thirds of parents are hanging onto money rather than giving early inheritances in case their children lose it in a divorce, new research reveals.
Many believe that the coronavirus lockdown will trigger a rise in divorce rates, and are only gifting small amounts or giving directly to their grandchildren.
Some 27 per cent of parents have little or no confidence about their children’s marriages lasting, and the same percentage say their offspring are already separated or divorced, according to the survey by Handelsbanken Wealth Management.
Financial planning: Being too cautious about handing over your money during your lifetime could put it in peril from inheritance tax, and a future ‘wealth tax’
Parents often worry about their wealth falling into the hands of their children and grandchildren’s partners, because they regard them as bad with money, fear a break-up, or just don’t want them to benefit from it.
This is Money often receives reader questions on this topic, and financial experts and lawyers say there are ways to guard against daughters and sons in law getting hold of your cash – find out how below.
However, being too cautious about handing over your money during your lifetime could put it in peril from inheritance tax, and a future ‘wealth tax’ which could be on the cards to help fund the vast cost of combating the coronavirus.
Handelsbanken found that 67 per cent of parents have decided to delay family inheritance planning in case their children get divorced.
To avoid them losing large sums in a divorce settlement, 21 per cent are giving children small amounts to help with day to day living, and 19 per cent are skipping a generation and giving money to grandchildren.
Some 13 per cent of parents are holding back financial support because they believe it will reduce their children’s incentive to work, and 12 per cent do so because otherwise there might be little left for their grandchildren.
Handelsbanken surveyed 1,070 parents, who were nationally representative in terms of age and geography.
Christine Ross, a director at the wealth manager, says: ‘The emotional and financial pressures of an enforced lockdown have tested many marriages and sadly for some it will be the final straw.
How do you protect your inheritance from ‘unreliable’ partners?
‘It is not unusual for parents to disapprove of their children’s choice of partner, but they can be equally reluctant to interfere in case they cause a family rift.’
How do you protect your money from children’s partners?
Mitigation measures can range from parents favouring small financial gifts over lump sums to setting up discretionary trusts, explains Ross.
She says that when parents buy a home for their child, it is often advisable to put a co-habitation agreement in place, if a partner moves in.
‘This will avoid any future misunderstanding regarding contribution to the household, and any entitlement to value should the relationship end.’
Ross says that rather than making outright gifts to children, creating a family trust allows wealth to be passed out of the parents’ estate for inheritance tax purposes.
‘Whilst the parents cannot benefit from trust assets, they can exercise control as trustees, with additional trustees continuing to exercise control after their lifetimes.
‘Trusts have their own tax regime, and may not provide any immediate tax saving, but the protection they can provide is often the main attraction.’
‘The trust may buy property, advance capital or income from its investments, or even make loans to beneficiaries, which would include the children of a family and even unborn grandchildren.’
Ross adds that some wealthy parents ask their children to enter into prenuptial agreements, and these can influence the size of any settlement at a future date, especially in the case of a short marriage.
‘It should be remembered however, that no solution will guarantee that family wealth is 100 per cent protected in divorce,’ she warns.
Peter King, partner at law firm Nockolds, says: ‘There are alternatives to outright gifts that can protect parents’ hard earned inheritance for the long term.
‘Discretionary trusts allow a trustee to decide when is best for a child to inherit capital and income. This means that the children benefit and not their creditors.
‘These trusts are useful not just where there is a divorce or separation, but also where a child has learning difficulties.
‘There are also growing cases of addiction to gambling and substances that sadly make an outright gift to a child inappropriate, so the discretionary trust ticks those boxes too.’
He adds: ‘Gifts to a grandchild instead of a child don’t always offer a clean solution as the grandchild may still be within the sphere of influence of your son or daughter’s ex!’
King also notes that parents will often start making or revise their wills if a child announces they are getting divorced.
A will might be changed to say that the share the divorcing child would otherwise have inherited should go into a trust, so that the child themselves can still benefit.
Parents can then change the will a second time once the divorce is finalised to remove the gift into the trust, and have the child inherit directly again.
‘Wills offer a great way to navigate the problems that can arise where your nearest and dearest might be financially vulnerable,’ says King.
‘That includes where a former spouse might be looking to get a good deal in a divorce because their ex has inherited family money. But it could also be where the child isn’t very good with money, or is facing financial difficulty such as creditors or even insolvency.’