Valentine's day is upon us; love is in the air, and so what better time than to commit to the most romantic act there is and make provision for those you love in your Wills. Here we shine a light on the points you should not ignore in your Estate planning considerations.
Blended families are becoming increasingly common, with many households including children from previous relationships and even children together. The 2021 ONS census found 1.1 million of dependent children in the UK lived in stepfamilies. While these non-nuclear families can bring immense joy and fulfilment, they can also present unique challenges when it comes to Estate planning. Ensuring that your wishes are heard, and your loved ones are provided for requires thoughtful planning and clear communication.
The Challenges of Estate Planning for Blended Families
One of the primary challenges for blended families is balancing the needs of different family members while avoiding potential conflicts. Some common issues include:
- Unequal Inheritances: Ensuring fairness among biological children, stepchildren, and any new spouse can be complex. What feels fair to one party may feel inequitable to another.
- Ex-spouse Claims: In some cases, an ex-spouse may have ongoing financial claims that can complicate the division of assets. Speak to our Family Team to understand whether you are open to financial claims from an ex-partner.
- Conflicting Priorities: A surviving spouse may have different intentions for the assets that they may inherit from their spouse than the original parent, potentially sidelining children from a previous relationship.
- Intestacy Laws: Without a valid Will, the rules of intestacy apply, which may not reflect the unique dynamics of your blended family. For instance, stepchildren do not automatically inherit unless legally adopted, however they may have a claim under the Inheritance (Provision for Family and Dependants) Act 1975 if they are financially dependant upon the deceased.
Solutions for Effective Estate Planning
While these challenges can seem daunting, there are several strategies to ensure your Estate plan meets the needs of your blended family. These will be explored below:
- Create or Update Your Will
- Mutual Wills
- Mirror Wills
- Consider Trusts
- Life Interest Trusts
- Discretionary Trusts
- Declarations of Trust
- Use Life Insurance Policies
- Open Communication
- Seek Professional Advice
- Create or Update Your Will
A comprehensive and up-to-date Will is the cornerstone of effective estate planning. Specify exactly how you want your assets to be divided and ensure your Will reflects your current family situation.
Mutual Wills
Some people may lean towards mutual Wills whereby the spouses agree that their Wills cannot be changed without the other's consent. The effect of this is that it is still binding and irrevocable after the first spouse dies. This would be used where the couple wishes to ensure that their children will not be written out of the survivor's Will after their death or that their wealth will not be passed on to somebody new, such as a new partner. However, this type of Will promotes inflexibility as it restricts the surviving spouse's options if they decide to enter a new relationship.
So, if mutual Wills are not the answer, what is?
Mirror Wills
A safer option available to couples looking to make a Will is the simple and traditional mirror Will. This is where you would leave everything to the surviving spouse and then on the second death everything passes to your children and or stepchildren. This type of arrangement in a blended family requires trust, but there is no reason why it cannot be done. However, the surviving spouse is free to amend their Will at any time and therefore there may be more suitable options available such as the use of Trusts.
- Consider Trusts
Trusts are an excellent tool for blended families, allowing you to provide for your spouse while safeguarding assets for your children.
Life Interest Trusts
The purpose of a Life Interest Trust is to provide for the surviving spouse whilst promoting flexibility. The way this type of arrangement works is that the couple will (generally) prepare mirror Wills containing such Trust provisions, and each leave their own assets (usually their share the property or the entire Estate) to the Trust upon their death.
In order to leave a property to a Trust in this way, it is important that the property is either held in the sole name of the Testator or held as Tenants in Common between both spouses rather than as Joint Tenants.
Tenants in Common
To hold property as Tenants in Common simply means that you will both own a specific share of the beneficial interest – for many couples, this would be a 50/50 split, but the circumstances will differ for many couples, where perhaps one has invested more into the property than the other. Unlike where you are Joint Tenants, you can do as you wish with your share of the property as it will not automatically pass to the surviving spouse upon your death.
Once the first spouse dies, the surviving spouse will have the benefit of the use and enjoyment of the physical property and/or the benefit of the income that the assets in the Trust may produce for the remainder of their lives, or for a fixed period. Please note, however, that ending a Trust during the lifetime of the survivor may have unintended tax consequences – you should seek advice from a solicitor before terminating. The surviving spouse will not actually own the underlying capital, but they will merely receive the benefit of it. In doing this, the capital of the assets are protected from being intermingled with the survivor's Estate in the event that the survivor re-marries, needs to move into care, is made bankrupt or gets divorce.
This type of arrangement is also Inheritance Tax neutral. This means that it does not offer any advantages but equally, it does not generally have any pitfalls either. The caveat to this is if you are unmarried – if you are, please seek specialist advice as this type of arrangement may not be suitable from an Inheritance Tax perspective.
Discretionary Trusts
Another form of Trust available in blended families is the Discretionary Trust. Assets are placed into the control of the Trustees, and they have discretion to distribute the assets to the class of potential beneficiaries. It is important to note that these trusts are truly discretionary and therefore none of the beneficiaries have any entitlement to any of the assets contained within the trust.
This type of Trust offers great flexibility to families. It allows the Trustees to assess changing circumstances in the lives of the beneficiaries and when considering whether to make a distribution. Trustees will usually be guided by a Letter of Wishes prepared by the Testator setting out how they wish for the Trustees to deal with the trust.
As mentioned above, whilst the assets are under the control of the Trustees, the beneficiaries do not own the assets and therefore they cannot be touched by divorce, bankruptcy or care needs of the individual beneficiary. These trusts are therefore useful if the beneficiary has poor financial restraint, is on means-tested benefits or has personal troubles.
The downside to this type of trust is that families may lose the Residence Nil Rate Band available to Estates where individuals own property and leave that property to lineal descendants. However, there are options to consider that may mitigate this risk and you should speak to a qualified legal advisor to explore these. The Residence Nil Rate Band is a tax-free relief currently set at a maximum of £175,000 and is dependent on the value of your property which can be used to mitigate the effects of Inheritance Tax. The available Residence Nil Rate Band is deducted from the value of your Estate before the Nil Rate Band when calculating the Inheritance Tax position of an Estate. This relief can also be transferred between spouses.
In addition to the risk to the Residence Nil Rate Band, it is also important to highlight that Discretionary Trusts have their own Inheritance Tax regime and the Trust may be charged to Inheritance Tax periodically every ten years and when assets are distributed from the Trust. This is subject to various monetary conditions.
These trusts are incredibly useful where one is considering flexibility over the potential tax savings.
3. Declarations of Trust
For families with shared property, a Declaration of Trust can formalise and quantify each party's financial interest. This document aids clarity with regard to your intentions and can prevent disputes over property ownership or inheritance in the future.
4. Use Life Insurance Policies
Life insurance can be a useful way to provide for specific beneficiaries, ensuring that your children or spouse receive financial support without depleting other parts of your Estate.
5. Open Communication
Discussing your plans with your family can help prevent misunderstandings and conflicts. Transparency about your intentions ensures everyone is aware of your wishes.
6. Seek Professional Advice
Given the complexities of blended families, it's essential to work with a solicitor who specialises in Estate Planning. They can help you navigate potential pitfalls, draft precise documents, and consider tax-efficient strategies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
