Financial literacy is something a great many people take for granted, especially those of an educated background, with comfortable family finances and the future to prove it. The reality for the vast majority of UK citizens is much darker, with over 24 million UK adults estimated to have poor financial literacy – a gap that costs as much as £20,000 per person.
It is for this reason that complacency cannot become the natural conclusion to your financial journey, even as someone with an affluent family to shore them up. Risk does not discriminate, and no one’s money is ever safe. Here, we’ll explore risk as a mechanism, and the various ways in which you can mitigate risk for the finances your predecessors worked so hard to grow.
1) Understanding Risk
Financial risk might look different when someone comes from wealth, but its underpinnings are exactly the same no matter your holdings. Indeed, despite the ‘cushion’ that healthy finances can appear to provide, it is affluent families that shoulder more financial risk by way of their wealth structure – and by way of financial complacency. Failure to properly tend to investments can result in negative returns, especially where gambles are made on volatile markets; seemingly-safe markets, like rental property, are also prone to sudden and seismic shifts.
There are also some specific risks to which affluent families are inherently weak, including tax obligations relating to inheritance. Poor management of money and holdings leading up to the death of a family member can result in serious erosion of family wealth through inheritance tax.
2) Estate Planning Essentials
With the acknowledgement that the taxation of your family’s estate poses the biggest overall risk to the health of your finances, it would behove you to avail yourself of knowledge pertaining specifically to estate planning. Put simply: with the right approach to structuring your family’s estate, you can minimise the impact of Inheritance Taxation on your family’s holdings.
Properly-drafted wills and trust structures can protect assets not just from taxation, but also from unintended legal disputes, forced sales and delays; so too can trustee arrangements and discretionary trusts offer flexibility and control over asset distribution across generations. Utilising these pathways isn’t a simple thing, though. When it comes to wealth management for families, it is important to consult professionals with in-depth understanding of these mechanisms and how they can benefit you specifically and individually.
3) Insurance And Liability
An often-overlooked avenue to mitigating risk for affluent families is that of insurance. Appropriate insurance protection is protection against catastrophic loss, and nothing short of essential for the upholding of family wealth in the face of huge personal or professional risk. Life insurance can be a powerful tool, providing liquidity for tax bills and bolstering wealth security in the face of unexpected work or life events.
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