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HCR Law Events

29 April 2021

Blended families and inheritance – what is the best way to leave my money?

Happily, in many ways, second marriages are more commonplace now than even 20 years ago. Whilst this is something to celebrate, it does bring its own unique set of issues to consider when thinking about how to provide for children from the first marriage, the second spouse and children from the second marriage. Add more marriages/serious relationships and children in, and you just add to the issues.

Even if money is no object and there is plenty to go round, how do you look after everyone and also keep an eye on being tax efficient into the bargain?

If everything is left to the second spouse outright, this is very tax efficient, as spouse relief means that no inheritance tax (on present legislation, which is being reviewed) is payable.

But will that second spouse leave anything in their own will to step children who are the deceased’s children from their first marriage? Or will the second spouse just leave it all to their own children? Their own children may include children of the second marriage if there are any, but could ignore the spouse’s children from their first marriage, depending on the wording and the instructions.

The second spouse could, of course, spend the money during their lifetime so there is nothing to be left under their will at all. Or they could be made bankrupt. If the second spouse remarries, their own new spouse may receive that money under a new will or on intestacy or may take a large chunk if they divorce.

If the opposite approach is taken and everything is left to children from the first marriage, then they won’t complain, but the second spouse is likely to, especially if the house they live in has to be sold to ‘pay off’ the step children. Inheritance tax could be due without the benefit of any spouse relief.

If there are sufficient assets, consideration should be given to something being left to children of the first marriage and something to the second spouse. But how much will keep everyone happy and be as tax efficient as possible?

Another option to be considered, is for the second spouse to be left assets in trust rather than outright. This means that they would be entitled to the income only during their life or until their remarriage, but the capital in the trust passes to joint children and the children from the first marriage on the second spouse’s death. The second spouse is not in control of the capital so cannot spend it or give it to anyone else.

It does mean that the second spouse can’t spend the money if they need to, for example, on paying for their own care, unless there is power in the trust to use it in such a way and the trustees agree to this.

The choice of trustees is crucial and very careful consideration should be given to who should be appointed, bearing in mind creating conflicts of interest.

What assets should go into the trust also needs consideration, as, if private company shares are included, will children of the first marriage running the business stop declaring dividends on the shares so there is no income to be paid to the second spouse?

There is no simple answer and it is vital that advice is taken from a will solicitor who has the expertise to advise in this complex area. This doesn’t of course mean that the will won’t be contested by a disgruntled party, but at least a robust process will have been gone through to consider matters.

Beth King-Smith, head of disputed wills, trusts and estates, commented: “Sadly, I see many wills being disputed where the deceased hoped for the best and thought everyone would get on after their death, or just hadn’t thought about the issues at all. High-quality advice is a MUST for blended families.”

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Laura Banks, Partner

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