Inheritance – Why A Windfall Requires Sound Financial Planning

An individual’s response to inheriting a large sum of money – or indeed a portfolio of valuable assets – is often complicated. It’s not universally true, but an inheritance is frequently triggered by the death of someone close within a family. And while the value of the inheritance may be genuinely life-changing, the windfall often arrives at a time of emotional turmoil. That’s just one reason why it can be difficult to make good decisions about how to spend, invest and manage the newly acquired assets.

There is a further complicating factor in that an inheritance tends to be a one-off event. It’s not like selling a business where the process of building, adding value and then cashing in on exit can be achieved on multiple occasions. A major inheritance may represent the biggest influx of capital in a lifetime. Thus, before spending or investing, there are a great many important decisions to be made and it’s crucial to get them right.  

Existing Circumstances

But what does that mean in practice?  Well, inherited wealth does not arrive in a vacuum. Typically the recipient – unless very young – will already have an income, assets in the form of investments and property, and perhaps certain liabilities such as debt or a large outstanding tax bill. All this needs to be factored into the subsequent financial planning.  

Equally important, the individual will have life goals – short, medium or long-term – some of which may change over time. 

And of course, the individual could already be wealthy, comfortable or struggling – perhaps in the latter case, because a business isn’t going well.  

So when the inherited wealth passes to the recipient, it may mean little in terms of financial wellbeing, or it could be the factor that unlocks long-held ambitions or helps get that business back on track. Whatever the situation it should be managed wisely.   

The First Step

The first step is to undertake a cool assessment of the here and now. What is your financial situation as it stands today? What is the value of the inheritance?  And equally important, what are the accompanying liabilities. 

The biggest liability could be inheritance tax. For the current tax year, If the estate is valued at more than £325,000 all assets above that threshold are taxable at 40% (although there is an additional £150,0000 allowance relating to the value of residential property that is potentially available to be passed on to children who chose to live in it).  

In the case of a complex will and perhaps also a large family there may be a lot to sort out regarding the value of the estate and the value of assets bequeathed. All this will feed through to the ultimate inheritance tax liability. 

The Bigger Picture

Once that is done, you can begin to look at the bigger picture and the question of how to use the additional wealth. That could mean paying off debts, spending on luxuries, or making investments designed to deliver income or growth. In a few cases, the recipient might opt to do just one of those things – such as pay down debts or buy a luxury home – but the chances are that most High Net Worths will take a holistic view. Spend, yes, pay debts if necessary, but also invest and take steps to preserve wealth.   

The approach of the Route – City wealth club is to encourage Members to adopt a goal-based approach to the management of inherited assets. Once you’ve assessed your current financial situation you can begin to look at the inheritance in terms of the role it will play in enabling you to fulfill your life objectives.  

Each individual will be different both in terms of their pre-existing financial circumstances and their goals. To a great extent, these factors will define any spending and investment decisions and for most High Net Worth Individuals it is important to seek guidance from a wealth management firm that will tailor advice and investment opportunities for the individual, both now and in the future. The Route offers its Members two financial reviews every year. Equally important, The Route offers a full suite of wealth management services, that includes investment advice (and the provision of unique opportunities), tax advice and estate management.   

It’s an approach which enables Members to optimise their ongoing financial affairs while also factoring any additional wealth that arrives through an inheritance in the most effective way possible. 

To find out more about Membership, please call: 020 3141 9040