"Should I give more money to my child with a bigger family?"
Ask an expert: as clients become grandparents, we often see them wrestle with the question of whether to give more money to children with larger families.
Every family is unique and there is no right answer to this difficult question. We know that most parents strive for fairness, but circumstances can mean this is hard to achieve in practice. One approach that we have seen work well is for parents to plan to divide assets equally between their children – and then make separate and equal provisions for their grandchildren, if they so wish. Below, we show how one couple set about this. However, other approaches can also work well. We consider the key questions you should be thinking about before deciding on what is best for your family.
We have worked with Sophie and Gary for many years and manage SIPPs, ISAs and a taxable portfolio for the couple. They live in London, are both in their early 70s and have been retired for several years. They have two adult children, Michael, 42, and Joshua, 39, who are both well established in professional careers. Michael and his wife have two young children in a state primary school. Joshua and his partner have recently become fathers for the first time.
The arrival of a new grandchild prompted Sophie and Gary to come to us with a difficult question. Should they leave an equal amount of money to each of their sons? The couple knows that Michael and his wife want to send their children to a private secondary school – but they would struggle to afford it for both children. Both Michael and Joshua may have more children. Sophie and Gary are keen to avoid any arrangement that could leave either of their children feeling they have been treated unfairly or excluded in any way.
Cazenove Capital’s solution
We had a discussion with Sophie and Gary, helping them think through how they wanted to use their wealth in their lifetimes and how they envisaged it helping their children and grandchildren. We encouraged them to write a “letter of wishes” and have a conversation with Michael and Joshua to explain their plans.
Sophie and Gary decided to establish a trust for their grandchildren with an initial sum of close to £1m. This has been funded with the couple’s taxable portfolio as well as additional cash savings. The trust is managed by Cazenove Capital and, given its long time horizon, is managed using a higher risk mandate. Sophie and Gary plan to use their other assets to fund their relatively modest lifestyle. On the couple’s death, the remaining assets are to be divided equally between Michael and Joshua.
The trust will distribute £15,000 to each grandchild every year – including any future grandchildren. Sophie and Gary have expressed their wish that this amount is to be used for the children’s long-term benefit, such as school or university fees. They have indicated to the trustees that the trust should be unwound and remaining assets distributed to the grandchildren when they are settled in their careers.
By putting assets in a trust, Sophie and Gary will have taken a large share of their assets out of their estate for inheritance tax purposes (assuming they live for another seven years). This approach ensures each of their grandchildren will be treated equally, while also making equal provisions for Michael and Joshua.
Questions to think about
The approach Sophie and Gary have adopted is a sensible one – but it will not be the right one in all circumstances. The first crucial step is to examine and reflect upon your values and intent for your wealth. We would encourage clients to consider the following:
• How do you want to use your wealth? What proportion do you want to spend, save, grow or give?
• What is your intent for your wealth for your children and your grandchildren? Do you want to make any special provisions for them in your lifetime or beyond – e.g. for property, education or medical expenses?
• Are there any particular values and principles relating to wealth that you wish to impart to your children and grandchildren?
• Are there any scenarios that you want to avoid? How can you anticipate and manage these?
Once you have considered these fundamental questions, we suggest documenting your thoughts. This could take the form of a written “letter of wishes”. This is not a legal document, but it is a useful way of setting out your values and plans, both for yourself and future generations. If you do choose to share it with your family, they can go back to it over time. It is often a good way of sparking a conversation about money and wealth, which many families find difficult to have.
Communication is key
Whether or not your thoughts are written down, we believe it is crucial to clearly communicate your wishes to all of your children – ideally together and at the same time. Be as clear as you can early on and be sure to include all of your children (those with children of their own and those without). This way, everyone knows what's going on and there is less room for misunderstanding or surprises. Be sure to discuss your wishes with your solicitor as well and make sure that your will is up to date with any new family members included.
The trust structure outlined above could be suitable for clients looking to set aside larger amounts of money. However, there are other tax-efficient ways of providing for grandchildren, such as
• A Junior ISA (a “JISA”): a long-term, tax-free savings account for children. A parent or legal guardian will need to set this up and grandparents can then contribute in part or in full to the £9,000 annual JISA allowance, which is separate from their individual £20,000 ISA allowance. Children gain access to their JISA at age 18.
• A grandchild's pension: This is a good way of providing for children in the longer term. Though they take control of the account at 18, they are not entitled to the funds until much later in life. Over such a long time horizon, relatively small amounts of money can grow and compound into a meaningful sum. Under current rules, you can pay up to £2,880 into a children’s pension each year and then receive tax relief which will increase the gross contribution to £3,600.
• A bare trust for each grandchild: This way grandparents can hold and make investment decisions on the assets which are designated to the beneficiary, their grandchild. Funds must be used for the child’s benefit and when the child reaches 18 he or she has the right to take control of the money. A bare trust can be tax-efficient if a grandparent, and not a parent, sets it up as the assets are then taxed on the beneficiary (the child). There are no limits to contributions and so they can be useful inheritance tax planning vehicles.
Getting the principles right
You probably won’t be able to achieve total equality in what each grandchild receives, especially if they are born over a period of many years. £2,000 invested on behalf of a grandchild this year will likely end up worth a different amount to £2,000 invested on behalf of a grandchild in five years time – simply because the money has entered the market at different times. The real value of that £2,000 will also be different due to inflation.
However, none of this should matter if the values and principles for the gift have been thoughtfully established and communicated in advance. Your investment adviser can help you establish some guiding principles for gifting amounts and investing if needed.
The question of whether to give more money to a child with a family is a complex one. Successful clients typically do the following:
• Spend time reflecting on their wishes
• Communicate their wishes clearly to all children at the same time (those with children and those without)
• Are consistent in provisions for children and grandchildren – everyone knows what to expect
• Ensure their wishes are reflected in their will which should be regularly reviewed and kept up to date
• Speak to Wealth Planners about the use of tax-efficient vehicles for any gifts
For information purposes only and nothing in this article/on this slide should be deemed to constitute the provision of financial, investment or other professional advice in any way. You should seek professional advice for your individual circumstances. This article is for information purposes only and based on legislation in place at the time of publishing. Readers should seek professional advice for their individual circumstances.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
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