Giving money away to children - pitfalls? Suggestions?

metron

We've already given away a large part of our savings over the years, on the basis that we're very unlikely to need them.  We have no mortgage, the house is worth a fair bit, and we both have good pensions which are more than enough to keep us comfortable.  Care home fees are always possible, but the value of the house would more than cover that.

Our son's getting married soon, and we plan to give away the final chunk of savings (leaving a comfortable float) to enable him to move to a larger house. Frankly, we both get a lot more pleasure seeing our children and grandchildren well set up than chucking it away on expensive holidays and cruises.  It's been transformational for them, but does nothing at all for us just sitting there waiting to be taxed at 40%.

The aim has been, and is, to avoid overpaying inheritance tax at 40% - as the saying goes, nobody need pay inheritance tax if they trust their children, and we do.  We know that they, should the need arise, will provide us any financial support we might need, unlikely though that may be.

There are possible snags of course.  Death of son or daughter, for example, and assets passing outside the direct family.  We know and trust our son in law absolutely to do 'the right thing', but our daughter in law is fairly new on the scene.

How best to protect the money we give to our son?  Thought about creating a trust, which would do the trick, but that would involve an immediate IHT charge on the payment into the trust.

We'll probably just take a chance on it, for lack of alternative solutions, but if anyone has any suggestions I'd be delighted to hear them.

DT2001

How about an interest free loan? Your son and daughter-in-law to be get immediate benefit and you can keep control short term and cancel repayment whenever you are happy. I know it defers the start of the 7 years for IHT relief but maybe a reasonable compromise.

Marcon

metron said:

Our son's getting married soon, and we plan to give away the final chunk of savings (leaving a comfortable float) to enable him to move to a larger house. Frankly, we both get a lot more pleasure seeing our children and grandchildren well set up than chucking it away on expensive holidays and cruises.  It's been transformational for them, but does nothing at all for us just sitting there waiting to be taxed at 40%.

The aim has been, and is, to avoid overpaying inheritance tax at 40% - as the saying goes, nobody need pay inheritance tax if they trust their children, and we do.  We know that they, should the need arise, will provide us any financial support we might need, unlikely though that may be.

You seem to have three aims: avoiding as much IHT as possible; doing things to get pleasure out of seeing your children and grandchildren well set up; and keeping the family money in the immediate family. All are laudable, but now might be the moment to consider which is the most important to you.

People who are absolutely trustworthy in 'normal circumstances' can sometimes act out of character when unwelcome events such as death or divorce arrive on the scene, and it is entirely reasonable to do your best to ensure your assets pass down the blood line.

A chat with a solicitor about how best to protect a gift to your son would be your best bet - a discussion which should almost certainly include a review/update of your will and that of your spouse. 

OldMusicGuy

Why would you want to "protect" the money you give your son? It implies you don't trust him. You brought him up, you know whether he can be trusted or not. If his marriage fails, then that's just one of the things that happens in life and his partner will "get" some of the money. If you think his partner is a gold-digger, don't give him anything.

If you can afford to give your kids money, I think you should do it now. Kids need money when they are younger and getting established rather than later in life. We have downsized and given our son a chunk of the equity we realized to help him get on the housing ladder at some point. OK he might make an unsuitable marriage and lose some of that in the future but we're not going to try to tie him in knots in case he ends up in that situation. 

Complicated trusts and things like that will just create complexity and problems in the future IMO.  

metron

DT2001 said:

How about an interest free loan? Your son and daughter-in-law to be get immediate benefit and you can keep control short term and cancel repayment whenever you are happy. I know it defers the start of the 7 years for IHT relief but maybe a reasonable compromise.

Thanks - that was a seriously considered option.  Ruled out for two reasons, really - firstly that the IHT clock wouldn't start ticking until the loan was written off, and secondly that it would present difficulties with son's mortgage application because banks don't like the idea of additional loans knocking around.

metron

Marcon said:

metron said:

Our son's getting married soon, and we plan to give away the final chunk of savings (leaving a comfortable float) to enable him to move to a larger house. Frankly, we both get a lot more pleasure seeing our children and grandchildren well set up than chucking it away on expensive holidays and cruises.  It's been transformational for them, but does nothing at all for us just sitting there waiting to be taxed at 40%.

The aim has been, and is, to avoid overpaying inheritance tax at 40% - as the saying goes, nobody need pay inheritance tax if they trust their children, and we do.  We know that they, should the need arise, will provide us any financial support we might need, unlikely though that may be.

You seem to have three aims: avoiding as much IHT as possible; doing things to get pleasure out of seeing your children and grandchildren well set up; and keeping the family money in the immediate family. All are laudable, but now might be the moment to consider which is the most important to you.

People who are absolutely trustworthy in 'normal circumstances' can sometimes act out of character when unwelcome events such as death or divorce arrive on the scene, and it is entirely reasonable to do your best to ensure your assets pass down the blood line.

A chat with a solicitor about how best to protect a gift to your son would be your best bet - a discussion which should almost certainly include a review/update of your will and that of your spouse. 

Thanks - a good summary. 

This may need some input from a solicitor at some point, and I'm just putting my thoughts together at the moment, considering the options.

Our wills are OK at the moment.  I have a legal background, and I've ensured they're up to date.  Protection of the assets is rather more complex, and the one that I'd have used a few years ago (a trust) now has less than favourable IHT consequences. Plus a load of hassle. We used discretionary trusts once before, but they were hard work!

german_keeper

OldMusicGuy said:

If you can afford to give your kids money, I think you should do it now. Kids need money when they are younger and getting established rather than later in life. 

I would echo this and just add another angle. My mum is in a care home with dementia. Recently my 2 aunts, mum's sisters, have told us that a couple of years ago just before she got ill they were talking about giving money to their kids. One of my aunt's also has substantial savings and has I think given some to my cousins. We have POA and both my aunts have suggested me and my 2 sisters do the same, but even though we are happy it's what our mum would want we just can't bring ourselves to do it as it feels like stealing.

We may also have a difficult decision regards IHT in a couple of years. I am probably quite unique in that I don't have an issue with IHT and would quite happily pay it. But my sisters and my aunts all think that mum would be horrified at the thought of some of her money going to the taxman rather than us 3, and I do agree with them. She is fully funded under Section 117 so most of the money that was going to fund her care is now accumulating. It looks like 2 to 3 years depending on how her investments perform before IHT will become an issue. If she is still with us we have read about gifts from normal income being exempt from IHT and it seems to fit the situation. But again it would feel like stealing.

So in a rather long winded way I think what I am saying is give them the money!!   

metron

OldMusicGuy said:

Why would you want to "protect" the money you give your son? It implies you don't trust him. You brought him up, you know whether he can be trusted or not. If his marriage fails, then that's just one of the things that happens in life and his partner will "get" some of the money. If you think his partner is a gold-digger, don't give him anything.

If you can afford to give your kids money, I think you should do it now. Kids need money when they are younger and getting established rather than later in life. We have downsized and given our son a chunk of the equity we realized to help him get on the housing ladder at some point. OK he might make an unsuitable marriage and lose some of that in the future but we're not going to try to tie him in knots in case he ends up in that situation. 

Complicated trusts and things like that will just create complexity and problems in the future IMO.  

Thanks for the input.

Why would I want to protect it? Purely because marriages do fail, and people, however young, do die. I trust my son and daughter absolutely, and all this is being openly discussed with both of them.  This gift, if it went outside the present family, would adversely affect my daughter and her children - so it's not so much protection of myself that I have in mind, but them.

We've already made absolute gifts to both children which have helped them buy houses they couldn't otherwise have afforded.  This last gift leaves us with enough capital to live comfortably, but it will mean that we've given away more than 90% of our liquid assets.  I absolutely agree with you that they need it when they're younger, not older, and that - plus the obvious IHT benefits - made us decide to do it.

I also share your concerns about the complexity of trusts, having been down that route once before.

theoretica

metron said:

There are possible snags of course.  Death of son or daughter, for example, and assets passing outside the direct family.  We know and trust our son in law absolutely to do 'the right thing', but our daughter in law is fairly new on the scene.

Are you worried about if your son dies before you do any you do after all need this money for care?  In which case you could discuss your son leaving it back to you in his on will.  In any case encouraging your son to make sure his will is updated would be wise.

metron

Mickey666 said:

DT2001 said:

How about an interest free loan? Your son and daughter-in-law to be get immediate benefit and you can keep control short term and cancel repayment whenever you are happy. I know it defers the start of the 7 years for IHT relief but maybe a reasonable compromise.

Good idea.

However, you say that this approach SHOULD defer the start of the money being a PET, which is fair enough, but who would ever know?

What if . . . 

1 - draw up a loan agreement between parent and child, duly agreed, signed and even witnessed by 3rd party if necessary
2 - Only the parent keeps the original agreement and NO copies are made
3 - hand over the money, effectively recording the date by bank transfer

Then there are two scenarios:

1- time moves on, parent falls out with child (for whatever reason), produces the signed loan agreement and demands their money back

2- time moves on, everyone is happy, parent can decide at any time to burn the loan agreement (the only copy remember), the loan disappears and the money transfer suddenly becomes a PET gift made on the date of the money transfer.  Seven year from the DATE OF THE TRANSFER, the money is out of the parents estate for IHT purposes - regardless of when the loan agreement was burned.

Just a hypothetical scenario you understand.

Thanks again.  An interesting scenario, and I had considered it!  Ruled it out immediately though, on the grounds that my son is an executor of my will and would have to commit fraud!

metron

theoretica said:

metron said:

There are possible snags of course.  Death of son or daughter, for example, and assets passing outside the direct family.  We know and trust our son in law absolutely to do 'the right thing', but our daughter in law is fairly new on the scene.

Are you worried about if your son dies before you do any you do after all need this money for care?  In which case you could discuss your son leaving it back to you in his on will.  In any case encouraging your son to make sure his will is updated would be wise.

Thanks - sound advice, though I don't want it back in my estate again! I'm chatting options over with him, though care home fees aren't a particular concern. I do want, should the need arise, to be able to access money should we have some exceptional expenditure, but I'm happy to take my chances on that with son and daughter. I can't demand it, of course, but I'm pretty sure they'd oblige!