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5 of the simplest, most tax-efficient ways to distribute wealth to your family

By David Norton - January 12, 2021

I deal with a lot of senior international professionals who not only want help to grow and preserve their wealth...

But distribute it to their families too.

The latter part of financial planning is particularly important as family wealth can drastically decline across generations.

In fact, many family fortunes rarely make it to the third generation.

Which means your wealth most likely won't reach your grandchildren if you fail to plan.

Andrew Carnegie once said:

"Shirtsleeves to shirtsleeves in three generations."

The same expression is interpreted across cultures.

Clogs to clogs.

Rice paddy to rice paddy.

Stalls to stalls.

They all mean that the wealth gained in one generation will be lost by the third.

You, as the first generation, have worked hard for your money.

You've taken the necessary steps to grow and preserve it, hopefully in a portfolio of diversified funds with the confidence that you'll have enough to live out your ideal retirement.

You want to take what's left of your wealth and pass it on to your children.

And, hopefully, your children's children.

And their children after that so they can all get a head start in life.

But how do you do that?

Where do you even begin?

Here are some things to consider...

What’s the most important thing when it comes to distributing wealth to your family?

You might think it’s tax-efficiency or timing but it’s not.

It’s education.

Alongside tax efficiency, timely succession and estate planning, you must educate your children about money.


Consider this:

  • $68 trillion in US wealth is expected to change hands in the next 25 years.
  • At the peak – predicted to be between 2031 and 2045 – 10% of the total wealth in the US will be changing hands every 5 years.
  • 70% of family fortunes will lose their wealth by the second generation.
  • Another 20% won't make it beyond the third generation.

Without a solid foundation in financial basics, your wealth may be squandered.

It may not reach your children and grandchildren, despite your best intentions.

Many individuals surveyed by Merrill Private Wealth Management, part of Bank of America, said the most important thing they want to communicate to their families is how to use their money wisely.

Yet just 46% of respondents said they have talked with their families about things like values or principles.

How to educate your next generation

The good news is, there are numerous books that do a fantastic job of educating people on the world of finance.

Many help people develop better financial habits.

We've dedicated a blog post to this before.

There you'll find Tony Robbins' best-selling book Unshakeable along with Rescue Your Money by Ric Edelman, The 5 Mistakes Every Investor Makes by Peter Mallouk, and more.

These books changed my life.

And I'm confident they'll do the same for you and your children.

The lessons they'll learn will be invaluable.

How to distribute your wealth fairly and tax efficiently

Everyone's living longer than ever.

That's good news for us who have long lists of things we dream to do.

But it also means that wealth is being passed on to the next generation later when children are grown up with careers and families of their own.

If you have surplus wealth, making significant gifts before you die can benefit your family at a time when they most need help.

In addition, it can be a tax-efficient way to distribute your wealth.

On that note, here are 5 more ways to distribute your wealth fairly and tax efficiently...

#1. Determine how much you can afford to give away

Work with a financial planner to develop a cash-flow forecast on a worst-case-scenario basis.

This will determine how much you can reasonably afford to give away now

It will add up your outgoings, make an allowance for inflation, and consider money you might need for emergencies or even luxuries. 

It should also ensure you have a strategy to pay for care in your later life as often these are costs that go unaccounted for.

You will then see how your final figure compares to your total fixed income from pensions, properties and other income-generating investments.

At the end of the process, you'll know exactly how much you can afford to give away.


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#2. Work out when you should distribute your wealth

People often leave distribution too late to be tax efficient.

The best time to plan a distribution strategy is as early as possible.

This way, you will hopefully have many more years left.

If you're in the UK, for example, you have to live longer than 7 years after the gift's been made, in order for it to be inheritance tax (IHT) free.

#3. Decide who should benefit and by how much 

This is the hardest question for most people to deal with – especially those with several children and grandchildren, or more than one marriage behind them.

As uncomfortable as the idea may seem...

A good way forward is to have an open conversation with your entire family.

However, I appreciate family dynamics are complex.

Sometimes the simplest way is to give fixed amounts to any grandchildren, and then divide the rest equally between children.

But, if one family member needs money more urgently than another, explaining that they are getting their inheritance upfront could be a way forward if you can’t afford to give everyone an equal share right now.

#4. Make transferring wealth as tax efficient as possible

I recently covered the topic of UK inheritance tax (IHT) in a blog post.

If you survive 7 years after making a gift, it does not form part of your estate and is tax-free.

If you don’t survive 7 years, then taper relief might mean the IHT charged is less than 40%.

Other reliefs exist, such as business relief, and allow some assets to be passed on free of IHT or with a reduced bill.

Small gifts you make out of your normal income, such as Christmas or birthday presents are called exempted gifts and are also IHT free.

Other UK exemptions exist too.

While similar exemptions exist for other countries.

Additionally, if you're looking for more information on tax planning and how we can help, you may find this page useful.

#5. Get appropriate advice

I appreciate there’s been a lot to take in in this article and that you have your own set of individual circumstances.

After all, no two investors are ever the same.

The comprehensive financial plan you require will be vastly different from someone else's.

So let me offer you this...

If you're a senior international professional with a minimum of £250,000 to invest, here's a free 15-minute call to see if and how we can help.

And for you to see if we're the right fit for you and your goals.

Remember, the more you earn, the more complicated your finances will be.

Can you confidently say, without an inkling of doubt, that all your finances are set up and working for you and your goals?

Time for a second opinion