When Peter Featherstone, the childless local landowner in George Eliot’s Middlemarch, dies after a lifetime spent accumulating wealth and manipulating his relatives, he springs a final surprise on his anticipated heir and debt-ridden nephew Fred Vincy.

At the reading of the old man’s will, he cuts Fred out entirely, handing £10,000 and all of his lands to a “frog-eyed” stranger named Joshua Rigg, his illegitimate son, and leaving the assembled relatives with meagre gifts.

A shudder of disappointment passes through the room, and the wronged nephew cries: “The most unaccountable will I ever heard,” adding, “What is a fellow to do? I must go into the Church now.”

The shock bequest is a well-worn plot device in literature and film. But for wealthy families, the source of its dramatic interest remains potent. When it comes to the gift of a big inheritance, how much is enough to give a child a helping hand and how much risks ruining the life of the beneficiary? And is it possible to pass on a fortune without sowing family discord somewhere along the way?

The inheritance issue came to prominence earlier this year when Sting, the singer and former Police frontman, said in an interview with the Mail on Sunday that his children would not inherit his £180m fortune. “I certainly don’t want to leave them trust funds that are albatrosses round their necks,” he said.

Where substantial sums are involved, those who hand over their wealth may fear leaving their offspring or relatives with no incentive to strive towards a career or other goal through hard work.

The corrosive effects of money were memorably described by William K Vanderbilt, descendant of Cornelius Vanderbilt, whose dominance of the US railroad industry in the 19th century brought him an unprecedented $100m fortune. “It has left me with nothing to hope for, nothing definite to seek or strive for. Inherited wealth is a real handicap to happiness. It is as certain a death to ambition as cocaine is to morality.”

Evidence from a new Financial Times survey would seem to confirm that many are uncomfortable with the easy inheritance of wealth. More than 4,200 FT readers were asked whether they would leave “everything”, “enough to make a difference” or “nothing” to their children. Over a fifth – 22 per cent – chose the last option.

Not a penny

Wealth managers presented with a client who is intent on cutting out their children advise caution and reflection. The decision is the client’s to make, says Michael Maslinski, director at wealth manager Stonehage, but he adds: “We’d ask them if they have thought through the implications. There are a lot, including obviously their relationship with the children.”

Inheritance tax

Much will depend on the nature of the assets. One common reason why the inheritance might not be equally divided between children is that wealthy people may wish to perpetuate a legacy, such as a historic house, art collection or family business. These sorts of inheritances come with strong emotional commitments and may entail obligations to maintain them not only for the benefit of the family but for outsiders too. Some children may be competent and willing to shoulder such a burden; others may not.

In these situations, Mr Maslinski says, the words “fair” and “equal” can have very different meanings. “There are circumstances where it might be appropriate to leave one member of family enough to keep them comfortably where another one needs to be left enough to honour their responsibilities. This frequently occurs.”

Wealth managers agree that the key to a harmonious inheritance process is communication, often brought about by a consultative process that should ideally start well before a death occurs. A culture of openness can help decisions on what should happen next. Families should put down in writing a plan they can get behind, including priorities for saving, investing and spending.

But the process of reaching agreement is not always easy. Families may arrive at the doors of their adviser already riven with tension and division. Ian Marsh, chief executive of FF&P asset management, recalls one instance in which family members had to be placed in two rooms, the advisers shuttling between them as they arbitrated a future financial strategy.

A crucial part of the process, he says, is educating children in the stewardship of wealth. For the past 10 years, the wealth manager has run an annual “next generation” course designed to give clients’ university-age children a basic understanding of investment and financial planning. It includes talks by FF&P executives as well as external experts, as well as a Dragons’ Den-style presentation by participants. There is also a knock-on benefit: the opportunity for children to build a network with the offspring of other wealthy families.

The tradition of philanthropic giving for wealthy families may come into play, not only in the disbursement of legacies but in the training of the young. As well as putting their scions into the classroom for financial instruction, some families will give them a more practical demonstration by handing them the reins of a charitable trust – of, say, £10m. The child will be asked to dedicate it to the good cause of their choice and, with professional help, manage its investment strategy including dividend payments and asset allocation.

The dissipation risk

Counter to the view that children should receive little, Mr Marsh says the “vast majority” of clients want to preserve as much of their capital as possible to hand down to the next generation. Most certainly do not want to think that their fortune will have largely disappeared 50 years after they bequeath it.

Yet there’s plenty of evidence that in many cases, that’s exactly what will happen. Preserving money across generations is an extremely hard thing to do, particularly in big families where the simple mathematics of dividing wealth among numerous children and grandchildren naturally leads to its dissipation.

A US study by Merrill Lynch’s private banking arm this year found that, in two out of three cases, family wealth did not outlive the generation following the one that created it. In 90 per cent of cases, it was exhausted by the end of the third generation – illustrating the “clogs to clogs” adage.

But the research also found people were unrealistic about the level of spending adequate to allow them to sustain their wealth. Some 39 per cent believed their money would last for ever with an annual distribution rate of 6 per cent; in reality the richest families should spend no more than 2 per cent a year, the data suggests.

For those who want to be able to hand the maximum down to their children, the UK government’s pensions reforms are set to open up significant new options. Under the changes, if someone dies before the age of 75, their family can inherit their assets free of tax. Caroline Connellan, head of UK Wealth at HSBC, said the changes represented a “huge opportunity” when combined with tax freedoms for contributions and investment returns.

She says: “We expect that pensions will become the retirement and estate planning vehicle of choice for many of our customers from next year and therefore believe there will be significant growth in this area.”

The sums – and savings – are not trivial: HSBC’s research showed almost two-thirds (64 per cent) of pension savers expect to leave a legacy to their children, with an average value of £182,144. One in five legacies by UK pensioners is expected to be over £250,000.

Beyond the attractions of new-look pensions, wealth managers say more people are avoiding the potential problems of inheritance by giving away their assets before they die, taking advantage of the rule that exempts gifts from IHT if given away seven years or more before the donor’s death. “We’re seeing it on the increase,” says Mr Marsh [see box].

The move away from complex trust structures that avoid inheritance tax towards lifetime gifting is partly driven by a government clampdown on avoidance and evasion, and likely restrictions on the use of multiple trusts to avoid IHT. “The very rich know they are going to have to get used to writing cheques to governments. They’re absolutely paranoid about being written about [in the media] as even tax-efficient, let alone tax avoiding,” he says.

Legal challenge

For those insistent on cutting close family members out of their will, there are legal as well as emotional issues to consider. There is nothing in English law to prevent someone doing as they wish with their assets – but the law also makes specific allowances for challenges to be brought to wills. Under the 1975 Inheritance Act, which defines a list of potentially eligible claimants, the spouse and any children – with no distinction between adult children and minors – may have a case to bring.

The house price boom in London and the Southeast over the past decade means there is often a lot more to fight over in terms of capital assets. The recession may have dented people’s ability to fund a court battle, but conversely they may feel it more necessary to take the risk to recover more funds.

Matthew Evans, a partner at law firm Hugh James, said an increase in inheritance disputes among clients had prompted a doubling of employees in the company’s specialist team in the past two years to six staff.

Disputes over agricultural estates were a particular area of growth, he says. The value of agricultural land has soared and many farmers find themselves poised to bestow unforeseen levels of wealth upon their beneficiaries.

There is a particular legal danger here, Mr Evans says. Asset-rich, cash-poor farmers may encourage their offspring to work on the farm – often for low wages and forgoing other career opportunities – on the promise that “one day, all this will be yours”. But some later change their minds about the inheritance, perhaps wanting to give their children greater incentive to work hard.

Under English law, when a person gives a clear assurance to another that they will have rights over a property, leading the latter to rely on this “to their detriment”, they may acquire a claim over the property. “It’s another thing for people to bear in mind if they’re thinking of excluding their children,” Mr Evans says.

On the other side, he advises disgruntled children thinking of disputing a will to do their sums. If the estate amounts to less than £100,000 it may not be worth it. “A fully contested hearing would cost between £30,000 to £40,000 plus VAT for legal services. There’s clearly a cost/benefit calculation to be done,” he says.

Some families believe the only solution to the problems of inheritance is to conceal the extent of their wealth from their children. Mr Marsh said one billionaire he met said he had told his children as little as possible of his fortune, intending to give them only enough to set them on their way. But he warned this is seldom easy in the era of Google. “Kids at a very young age know how wealthy their parents are.”

Passing on art

Art and other so-called “chattels” can be an emotive topic for the beneficiaries of a wealthy person’s estate.

Stephen Cooke, a consultant at law firm Withers, said he still encounters situations redolent of a Victorian novel, where a treasured object will be claimed by half a dozen relatives as unequivocally promised to them by the deceased.

“People can get very excited about things that mean a lot to them even if they are not of great value. Quite often it takes up a disproportionate amount of an executor’s time,” he says.

Donors can be “very casual” about how they transfer works of art, he says, which frequently causes confusion over whether something has been transferred or not.

He tells his clients with even modest collections of art or other valuables to make comprehensive database lists of their items with a preferred beneficiary and digital photographs.

One of the thorniest issues crops up when a piece of art or other valuable has been gifted but remains in the possession of the owner. Under inheritance tax rules, if the owner of a Turner watercolour gives it to her son but wants to keeps it above her fireplace until her death, she must take steps to demonstrate the gifting legally or HM Revenue & Customs may regard it as never having happened.

Under the rules, she must not only write a deed setting out the terms of the gift, but pay rent on her use of the work. Calculating the value of the rent can be difficult when there are no comparable values in the market, but Mr Cooke says works of material value should be valued by two surveyors – one appointed by the donor and one by the recipient – to satisfy the taxman. And decisions about who is responsible for insuring, restoring or maintaining the work will influence the rental level. As a rule of thumb, though, “the rent often comes out at 1 per cent of agreed value,” he says.

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