How to support the next generation during a recession

Family finances
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When economic uncertainty prevails, these steps can help make sure your wealth planning supports the next generation.

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When talk of a recession intensifies, it’s natural to reflect on your financial position and think about how to secure the financial wellbeing of your family.

For high-net-worth individuals – who often have complex wealth profiles – a recession can mean revisiting your wealth plans to ensure your children and younger generations are adequately provided for. But before looking at what this means in practice, it’s important to understand the context driving these decisions.

What is a recession?

The word “recession” can often be emotive and unsettling. Yet while the popular definition is typically considered to refer to at least two consecutive quarters of economic contraction – or “negative growth” – in gross domestic product (GDP), that definition has no official status.

“It’s understandable that talk of a recession can be alarming, especially because people will have memories of the recessions that occurred after the global financial crisis and at the height of the COVID-19 pandemic,” says Chris Wilson, an investment counsellor for RBC Wealth Management in the British Isles. “Not to trivialise it in any way, but while this recession may have implications for investments, it is one of a series of market events and should be viewed as part of a bigger picture.”

Wilson says that it’s at times like these that HNWIs turn to their wealth managers, who are familiar with all stages of the market cycle and are used to positioning wealth accordingly. “They can also provide comfort in the fact that recessions are typically much shorter than expansionary periods, and reinforce the need for a holistic, long-term view when it comes to planning for the next generation,” he says.

This is a sentiment echoed by Nick Ritchie, senior director, Wealth Planning at RBC Wealth Management in the British Isles, albeit with an important caveat: “planning is undertaken with clients’ long-term goals in mind and so short-term volatility shouldn’t necessarily result in a change in strategy,” he says.

“However, there may be immediate goals that a client, for whatever reason, has to achieve during a volatile period. So, while they may have an investment plan or an estate plan mapped out over 15–20 years, if they want to downsize a property or make a gift to a child in the next year, then they may need to consider the current macroeconomic environment and decide whether to pursue that course of action or delay the decision until conditions are more favourable.”

Five considerations for next generation planning

It’s clear there is a balance to be struck when it comes to planning for the next generation during times of economic instability. Here are five key considerations:

1. Don’t panic

It’s understandable that during volatile times, HNWIs will be concerned by multiple factors, such as asset protection, falling investments, rising interest rates, the possible erosion of wealth due to inflation, and providing for children and grandchildren.

“During periods of volatility, pessimistic news is unavoidable. This can tempt clients to take action for action’s sake, with some tempted to make lots of changes, particularly if they’re concerned for the next generation,” says Ritchie. “It’s important they take a step back here and look at the bigger picture before taking any action. That includes speaking to their advisor.”

At this point, it’s helpful to be reminded of how the markets usually move. U.S. recessions, for example, typically correlate with bear markets. But over the long term, as the graph below shows, markets have historically trended upwards, riding out any volatility. However, downturns or times of stagnation can last for protracted periods and should be factored in.

Performance of select major equity indexes

The line chart compares the value of four major equity indexes since December 1959 on a logarithmic scale, indexed to December 1959 = 100, and highlights recessionary periods. Values of all indexes fell during recessions. The indexes shown are the S&P 500 Index, S&P 500/TSX Composite Index, FTSE All-Share Index, and MSCI Europe Index.

  • U.S. recessions
  • S&P/TSX
  • S&P 500
  • FTSE All-Share
  • MSCI Europe

Source – Standard & Poor’s, Toronto Stock Exchange, FactSet; quarterly data through 10/31/22, shown on a logarithmic scale, indexed to December 1959 = 100

2. Ensure long-term goals are defined and stay the course

The long-term strategy should be underpinned by a robust financial plan and there are often a lot of moving parts.

This could cover ongoing cash flow requirements, entity structuring, retirement, estate and succession planning. There are also the next generation’s key life milestones to account for, such as paying education and university fees and buying property.

“It’s really important that clients see past the short-term noise and ensure that long-term goals are on track,” says Annabel Bosman, regional centre head – London & South-East for RBC Wealth Management in Europe. “If the long-term strategic plans are in place, with investments and wealth planning aligned, then smaller, tactical changes can be made, if required, to ensure those goals are reached despite what markets might be doing.”

3. Be flexible in the approach to short-term goals

While long-term plans may need some tweaks as life unfolds, it’s fair to say economic uncertainty can create some more immediate financial concerns. “We have conversations with parents who were expecting to follow a normal path towards inheritance,” says Bosman. “And suddenly their children may need assistance be that with rising mortgage payments, a squeezed job market or unexpected business challenges.”

As a result, Bosman says clients are asking how they can gift money efficiently, not only from a tax and wealth-planning angle, but so it won’t have a negative effect on longer-term estate planning. Indeed, findings of RBC Wealth Management’s survey found 62 percent of respondents aged over 55 were concerned about how and how much to gift.

This is particularly acute when financially supporting children and grandchildren with purchasing their first homes. As the chart below demonstrates, the rising house price to income ratio in England and Wales has made it increasingly expensive for first-time buyers to get onto the property ladder, meaning more support may be required from family.

The rising house price to income ratio

 Chart of house price to income ratio

The line chart shows house price to income ratio, demonstrating that getting onto the property ladder in England and Wales is becoming increasingly expensive.

   Source – Office for National Statistics, Land Registry, Office for National Statistics – Annual Survey of Hours and Earnings

“The costs involved in buying a property have risen, and taken together with prolonged economic uncertainty, high-net-worth clients are more cautious than ever about how they financially support their children, and how that support is structured,” says Helen Clarke, partner – Private Client Services, at law firm Irwin Mitchell. “They don’t want to just give lump sums to facilitate a property purchase. We’re seeing more structured gifting with controls and restrictions in place, methods which provide income for the next generation when they really need it – in a climate like this, wealth protection is a top priority.”

Being flexible in your approach to wealth planning is key. “A lot of our client conversations about gifting have been fast-forwarded given the current economic conditions,” says Bosman.

But this short-termism may require a change in the parents’ mind-set of how they’re gifting and what they’re doing to support their children. This may mean gifting becomes more targeted and immediate, rather than the typical longer-term succession plan of a lump sum of money set aside in a particular structure such as a trust or corporate entity.

4. Communicate with the next generation

Estate and succession planning can be an emotional topic for families. Frequent communication between parents, children and their family lawyers can be key to avoiding any unnecessary upset. In some families, this may extend to having a family constitution and guiding principles on succession that act as a North Star.

Communication is particularly important when arranging pre- and post-nuptial agreements. “We’re finding that families have moved away from the idea that pre- and post-nuptial agreements are unromantic. People are being a lot more practical in embracing these documents and see them as a valuable wealth protection tool,” says Sarah Balfour, partner – Family Law at law firm Irwin Mitchell.

Although an effective control to safeguard wealth, it’s vital these discussions are handled with care. “It’s not the same as negotiating a commercial contract because there are so many sensitivities, it’s all about family and trust. A lack of communication between parents and children about why a pre- or post-nuptial is being introduced can easily breed insecurity and mistrust between generations,” says Clarke.

When parents feel the need to make changes to their estate and wealth plans that will affect their children, it’s often advisable these are communicated and any feedback taken into consideration as early as possible. But communication is a two way street. Parents should listen to their children’s position, since the next generation may well need financial support ahead of time, which will have an impact on any longer-term plans.

5. Review plans on a regular basis

Wealth, estate and succession planning can be complex. And against an uncertain economic backdrop, many clients are looking to simplify or consolidate their holdings. This can make things easier for the next generation after their parents pass away.

As indicated above, reviewing objectives on a regular basis allows for amendments to be made to both long- and short-term planning. Circumstances can also change significantly over time, with marriages and children affecting the shape of the family and illness affecting people on a personal level. At the very least, ensuring an up-to-date will is in place is crucial.

It’s also essential to note the legislative landscape is always changing, especially when it comes to taxation. The aforementioned survey revealed that 85 percent of those HNWIs aged 2554 need guidance on taxation planning. It’s easy to see why: rules around inheritance tax, capital gains tax, owning property and holding certain investments can change, particularly when there’s a challenging economic environment or a change of government you don’t want to get tripped up. One solution gaining increasing attention among HNWI families is using insurance as a mechanism to protect an inheritance tax liability, for example.

“The environment that financial decisions are made in is constantly changing,” concludes Ritchie. “So, the only way to make sure the wealth plan you put in place is still fit for purpose and supports the next generation is by routinely having conversations with your advisor.”


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