A Divisive Subject

Do you plan to leave an inheritance? What about receiving one – do you factor this in to your financial plans?

Inheritance is a divisive subject and people have very strong opinions on what ‘should’ be done. In this post we will explore what inheritance means to us and how we plan for it.

We will split this into two parts; leaving and receiving.

Leaving an Inheritance                  

A large number of people plan to leave an inheritance. Usually, this is intended to give their children/grandchildren a head start in life. But is this the best way?

In ‘The Millionaire Next Door’ we learnt that only 20% of millionaires inherited their wealth. This means that 80% of millionaires are ‘First Generation Millionaires’. Let’s think about why this might be.

Receiving an inheritance can really reduce your drive to succeed for yourself. Not many people have the desire to graft unless they have NEEDED to at some point in their life. If you have been able to coast through life knowing that you would be financially secure regardless, it is likely that you would lack this ambition and determination. Obviously there are outliers, but this appears to be the trend.

Coming back to inheritance, this makes us question whether leaving a significant sum to future generations will really have the intended positive impact.

For this reason, we don’t specifically intend to leave a large inheritance to whoever might succeed us. If some of our ‘freedom fund’ is left at the end of our lives, this will of course be passed on. But we don’t intend to specifically plan to leave an amount to our beneficiaries.  If we happen to spend all of our money while we’re alive, we won’t be too concerned.

Of course our feelings on this may change if and when we start a family. Thankfully, being in a strong financial position will allow us the freedom to make these kind of choices.

If you’ve considered the implications and still intend to pass on an inheritance, it’s really important to consider the tax implications. Whoever the intended recipient, you’ll want them to get as much as possible while keeping the tax man away!!

Inheritance Tax

You don’t have to pay Inheritance Tax (IHT) if the value of your estate is below the £325,000 threshold OR if you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club. If you’re passing on a home to your children or grandchildren, the limit can increase to £475,000. This is really important to know, especially since house prices have risen so dramatically over recent years. We won’t go into too much detail on these rules because they are very liable to change. We’ll simply suggest you always check the latest guidance in your country!

IHT on Pensions

There are also ways to pass on a pension pot without any IHT due. For this reason, if you intend to leave an inheritance, it is a good idea to work out the best vehicle to store the money in. It’s no good realising you should have had it all in pensions later in life when that’s no longer an option! Consider where you store your money if you intend to leave it behind.

Our Plans

As we touched on above, our current plans are to accumulate our ‘freedom fund’ without much thought to inheritance. As mentioned in this post, the majority of this money is currently in our Stocks & Shares ISA accounts. This is because we need to access the money long before pension accounts allow.

As we approach later life we may decide to switch more of our assets into protected pension wrappers, or to pass some money on as ‘gifts’. Until that point, we don’t see much need for a more comprehensive plan. Your wishes may vary so do your own research and decide the best way forward!

Receiving an Inheritance

When it comes to receiving an inheritance, we have one simple rule:

NEVER plan to receive an inheritance!

It is our belief that you should always forge your own path and not rely on hand-outs from others to achieve your success. You never know what might happen. Even if it was the deceased’s intention to leave you some of their estate, a badly worded will could scupper their plans.

This article suggests that 40% of over 50s actually plan to put themselves first and spend their cash while they can. You could well be left without!

Again, this (albeit US-based) article details how a survey showed that 68% of young people expect an inheritance, yet only 40% of their parents will leave one! That’s quite a significant shortfall.

If you do happen to receive an inheritance, you need to think about the tax implications. If you don’t have much financial know-how it probably makes sense to seek financial advice to make sure it doesn’t disappear before your eyes! Most of those in the ‘FIRE’ community, however, will know that an inheritance should simply accelerate your accumulation phase without a drastic change of approach.

Our Plans

Clearly, our plan is to ignore any potential inheritance. It may well be the case that we receive an amount from either of our families, but equally we may not. It would not be wise to rely on this ‘potential’ money!

Instead, we’ll be continuing with our plans as detailed here. Mr Way intends to (at least semi-)retire pretty early, so we are currently saving aggressively at a savings rate of over 50%. This will continue as long as needed to reach our goals, or until those goals change! If we ever do receive an inheritance, it will simply pull Mr Way’s retirement forward as we’ll reach the goal quicker!

How About You?

What are your plans for inheritance – either giving or receiving? We would love to hear your take on this very emotive topic!