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Personal Wealth Planning for your Children

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Personal Wealth Planning for your Children

Much of your desire to learn about investing and growing a portfolio may derive from having children. The natural instinct to provide for family goes far beyond what’s on the table tonight, as we must think more and more about leaving behind something that will secure their future.

In this article, we will break down financial planning for children into three sections: creating wealth, passing it on, and education. All three areas are as important as each other, as you will soon find out.

Creating Generational Wealth

The first step in ensuring the financial safety of your children is to create generational wealth that can be passed on to them. To begin, it’s important when creating generational wealth to not have a large debt burden, be it a mortgage or credit cards. Debt can certainly be seen as a useful tool and a way to leverage your wealth creation (within reason), but it shouldn’t be a part of the end-game.

Another axiom in creating generational wealth is to ensure your own security into old age. Relying on your children to pay for your care, or not having your own healthy pensions, are some ways in which you can hurt your children by unintentionally becoming dependent on them.

Therefore, your own retirement savings plan is one of the most important aspects of passing on wealth - despite it being the money you won’t actually pass on. But, they do say, you must help yourself before you can help others. This means maxing out employment pensions and a long-term diversified portfolio, but it’s best to seek the help of a wealth manager with the specifics of retirement planning because it’s very circumstantial.

For most, acquiring assets and investments outside of your own retirement fund is the name of the game. However, the time frame is often underestimated. As these investments will need to be passed on, you may want evergreen investments, meaning they’re in businesses, sectors, and assets that have an indefinite relevance. So, Netflix and Apple may be performing great in the past 5 years, but will they outlive the European housing market?

Given that this time frame is likely decades away (or until your children become adults), it can be very difficult to predict the market. It’s difficult to know if the US will outperform the market average in 15 years’ time, let alone what industries will. For this reason, more conservative and well diversified investments are usually preferred.

It’s also worth considering that your children may want to do the same from an early age. Instead of gifting them cash, you could spend your own cash to create a better money saving environment for them. For example, building an annex in the garden for them to live in but gain some privacy could be a great middleground in allowing them to save up for a house deposit, rent free, as opposed to getting stuck into a rent trap as soon as they become an adult.

Passing on Wealth - Estate Planning Financial Advice

It’s no good creating all that wealth if you pass it over inefficiently, or can’t pass it on at all.

Tying up all of your wealth in a large home that you will eventually pass on may seem like a secure, well thought out plan, but you have to consider that they may not benefit from this until you pass away - they could be well into their 60s before this happens. If you would like to give them a head start in life as opposed to being stuck in a rent trap for decades, you will need some other investments to pass on.

Of course, there are tax implications to consider when handing over wealth, of which inheritance has some of the heftiest taxes. If you die within 7 years of giving away your property, it will be treated as a gift and thus may incur inheritance tax. Likewise, handing over assets to avoid paying for private care also has similar time limits.

This doesn’t mean handing over wealth all in one go at an early age, assets should instead be passed on in increments. If not to avoid spoiling your children before they have time to mature, this allows us to make use of as many years of allowances as possible.

One way of passing on money to help avoid taxes is to use the annual exemption limits (up to £3,000 tax free), making use of a Junior ISA (£9,000 limit in 2022-23), starting a pension for the child, and even through gifts, such as weddings, where each parent can give up to £5,000 tax free.

For a detailed plan regarding trusts and tax efficient inheritance, it’s best to seek help from a wealth manager who can assess your specific situation. Furthermore, it’s vitally important to create a will if you’re a parent, regardless of age, as this is the only way to guarantee that your estate falls into the right hands.

Financial Education

And finally, it’s somewhat futile to create generational wealth if the generation it’s handed to isn’t well versed in how to do the same; more than futile, it can become destructive. For this reason, educating your children on finances is perhaps the most important aspect of ensuring their financial security. Feed a child a fish or teach them how to fish… And so on.

Knowing what to teach them is a matter of passing on the knowledge you have accrued yourself when creating your own wealth. Mistakes made and basic principles to live by. This could be split into three areas:

  • Financial education (e.g. how tax works, what are pensions, fallacies)
  • Values (e.g. importance of emergency funds, deferred gratification, planning ahead)
  • Habits (e.g. creating plans, budgets, putting aside money)

If your children are getting older and there are red flags in them struggling to take on board your advice, even from an early age, then normalising the use of wealth managers to them could be a great option. Some children just won’t listen to their parents, but they might listen to the professional.

For expert guidance in retirement planning, inheritance, and pensions, get in touch with a Moneytree Wealth Management advisor. Moneytree Wealth Management provides expert advice and guidance on building wealth and tax efficient planning.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

Inheritance Tax & Estate Planning are not Regulated by the Financial Conduct Authority.

Haleam Muhashash

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