Inheritance Tax / Estate Planning / News

Estate planning for stepfamilies

It can be daunting enough to consider what you want to happen to your estate, but this can be made more complicated when it comes to families involving stepchildren and a blend of more than one marriage. Every situation is unique, and it can be a particularly sensitive area of financial planning for many families. Steve Wright, our Estates Director, takes a look at some of the key things to consider.

Sadly, Will disputes in the UK are growing. The Ministry of Justice reported that in 2019 188 will-challenging cases made it to high court, 47% higher than that seen in 2018. With inheritances growing, and sometimes complicated family dynamics at play, the task of effectively getting the right plans in place for your estate can seem overwhelming.

When considering estate planning for blended families, this situation can feel ever more challenging. Blended families, perhaps more traditionally referred to as step families, usually refers to a couple, the children they have had together, and any children from previous relationships. With divorce on the rise this is an increasingly common situation.

So, what are the potential problems?

In thinking about the importance of estate planning in these situations, a helpful example is where a widower re-marries but has children from his first marriage. He decides that he fully trusts his new wife to “do the right thing”, and plans to leave his estate to her, safe in the knowledge she will leave a share of the residual estate to the children from his first marriage. All feel that this is a much easier option; they don’t want anything too complex! However, after his death the wife remarries and as time goes by, loses contact with the children of her former husband. She’s then influenced by her current spouse to leave everything to him. As a result, the children from the former marriage miss out completely.

Sadly, this type of situation is all too common, and we’ve seen some high-profile cases along these lines. Most notably, is the Miles vs Shearer case which made it to the High Court this year. After making a gift to his daughters from his first marriage Mr Shearer advised he wouldn’t provide any further support and then excluded them from his Will. On his death his daughters applied for a portion of his estate as maintenance but the judge rejected their claims. The case illustrates how important it is to explain your plans to your family, ideally in writing, so everyone is aware of what will happen when the time comes.

What solutions are there for stepfamilies?

Thankfully there are some good solutions which can help smooth the way. These include certain trusts, such as Life Interest Trusts, one of the most common choices. This enables the surviving spouse to receive income or the use of any assets, such as the family home, during their lifetime. On their death, the funds pass to the children of the first marriage, exactly what the deceased would have wanted. It can be restrictive, but if written correctly, power can be given to the trustees to release capital where needed. This is very much a “locked in” option – a guarantee that the children will eventually receive their inheritance.

Other options include a Discretionary Trust which is more flexible, allowing funds to be released on death to potentially a number of beneficiaries. This would normally be backed up by a letter of wishes completed by the testator during their lifetime, which whilst it is not legally binding, indicates to the trustees how they would like the Trust to be distributed. The issue is that it falls to the trustees to make the right choices; they could still distribute the funds to the surviving spouse, if they choose. This can be overcome by appointing the children as one of the trustees so that no decisions can be made without their approval. Other options are to appoint the surviving spouse or, ideally, an impartial, third party professional.

And don’t forget about Inheritance Tax which could be an issue if the funds are left directly to children. In certain circumstances, IHT could force the sale of a property if funds are needed to pay the Tax.

The importance of communication

Ultimately, it’s vitally important to be open with your spouse or partner and discuss some of the potential pitfalls of simply leaving your estates to one another (referred to as ‘mirror’ Wills). Some of the main consequences to consider are:

  1. If the survivor passes funds to other beneficiaries; complete control is lost unless a Trust is created.
  2. Bankruptcy – if the surviving spouse is declared bankrupt, all the estate of the first to die is lost. A Trust will protect the funds.
  3. Divorce – if the surviving spouse, who has remarried, agrees to benefit the children from their former marriage and writes their Will accordingly, if they then divorce, all or some of those assets could be lost in any settlement.

Being open, where possible, and openly discussing the contents of your Will with your families, means there should be no surprises when the time comes. It’s always better to have these conversations with everyone now, to help prevent any misunderstandings and minimise potential for conflict later.  To help spur you on, a most useful quote to bear in mind is Tolstoy’s: ‘All happy families are alike, but every unhappy family is unhappy in its own way.’ 

Next steps

Taking the time to think through your wishes, and different scenarios, can help prevent difficulties in the future. One of the most important steps to consider is to write a Will, keep it up to date regularly (every five years can be a useful benchmark) or when family circumstances change. You may also need to consider associated estate tools such as a Power of Attorney.

To discuss any aspect of your estate plans with our expert team, please contact your nearest office.