Estate planning is a complex process, from both a financial standpoint and an emotional one. Helping clients understand the various options available to them and how to select the best products to suit their needs can be a challenge – especially when the family’s situation is complicated. For blended families, where couples have children from previous relationships, careful consideration must be given to ensure the testator’s wishes are met and all assets are sufficiently protected.
Blended families – what are they?
Blended families – or stepfamilies as they’re sometimes called – are those where two people with children from previous relationships form a new partnership or marry. They may then choose to have more children together. Some blended families also opt for stepparent adoptions if they wish to take legal parental responsibility for their new partners’ children, but do not wish to marry their new partner.
Blended families are becoming increasingly usual in modern times due to the rise in divorce.
Estate planning considerations for blended families
When making estate planning provisions for blended families, there could be any number of potentially challenging considerations. The individual family’s situation is one, and this can be further complicated by how individuals feel about and interact with one another. In addition to this, the average estate value is increasing, and inheritances are getting larger.
There is also the added difficulty that many traditional approaches and estate planning products don’t serve the needs of blended families, which can make planning for complex family dynamics seem like an overwhelming task.
Why wills aren’t always the way
One example of how traditional estate planning products aren’t in keeping with the needs of modern, blended families is mirror wills. While a mirror will ensures a person’s share of their estate passes to their surviving partner upon death, it doesn’t protect the assets from a change in the surviving partner’s will. And while most people would like to think their new partner would ‘do the right thing’ by their surviving family, this isn’t always the case, particularly as unforeseen circumstances arise in the future.
Let’s say Jane, who is divorced, marries Peter. She has two children from her first marriage – Claire and James. She and Peter also have a child together, Kate. She dies with a mirror will in place, leaving her share of the estate to her husband, Peter. Jane trusts Peter will give Claire and James their share of the estate upon his death, just as Kate is due a share also.
Shortly after Jane’s passing, however, Peter meets fellow widower Cath, whom he marries. Cath has a child from a previous relationship, Greg. Over time, Peter loses touch with Jane’s children, Claire and James, and when it comes to redrafting his will, Peter leaves the estate to his new wife, Cath, disinheriting Claire and James of their mother’s share of the estate in the process.
This is known as sideways disinheritance, and it can happen accidentally in blended families, even if a surviving partner doesn’t intentionally amend their will. This is because, upon marriage, any existing will an individual holds is automatically revoked. So, had Peter married Cath and not updated his will, he’d have effectively died intestate. And according to the laws of intestacy, the estate would still pass to Cath, who is under no obligation to consider any of Peter’s children in its distribution.
In Trusts we trust
Fortunately, there are solutions to the problems presented by outdated estate planning products. At CTT, we excel at creating new ways to make estate planning easy for advisers working with blended families through our innovative approach to trusts.
Trusts are the ideal way to protect certain assets and ensure they pass on to beneficiaries in the way clients want them to, be it immediately following their death or many years after it.
A Life Interest Trust, for example, allows a person to place their share of a property into trust so their spouse or partner has full use of the property up until their death, whereupon the share placed in trust goes directly to the beneficiaries.
In the instance outlined above, Jane could have placed her share of the family home into a Life Interest Trust, with the children from her first marriage, Claire and James, as named benefices. This would have allowed Peter to continue living in the property with his new wife, Cath, and upon his death, Jane’s share of the property would have gone directly to Claire and James, regardless of any changes in their father’s will. This is because the trust protects Jane’s share of the property, ringfencing it from the rest of the estate.
This approach also protects assets in the trust from any financial misfortunes that may befall the surviving spouse, such as bankruptcy, or a future divorce, where they could otherwise form part of the settlement agreement.
A Life Interest Trust won’t solve every tricky estate planning problem, and it may be considered too restrictive for some blended families’ situations. It is, however, one way of ensuring the intended children eventually receive their inheritance, no matter what the future holds.
Another more flexible approach would be to use a Discretionary Trust, which allows a client’s estate to be distributed among multiple beneficiaries and can be a good way of mitigating certain IHT liabilities.
Discretionary Trusts are usually accompanied by a letter of instruction from the testator that offers guidance to the trustees on how they want the trust to be distributed. Ultimately, though, it’s at the discretion of the trustees how assets in the trust are divided up and used.
One way to safeguard against sideways disinheritance using a Discretionary Trust is to make one or more of the children from a client’s previous relationship trustees. This would mean no decisions can be made about the trust or its assets without their consent.
Another, better, option is to appoint an impartial third-party professional as a trustee. At CTT, we offer a Professional Trustee Service for our members’ clients.
Appointing LPA in blended families
Drawing up a trust will safeguard a client’s assets within a blended family situation, but what about the client’s welfare?
Having an LPA in place is perhaps even more important in blended family situations, as without one, someone whom the client would not wish to make decisions on their behalf could easily step into the role.
It can sometimes be difficult to appoint an LPA in complex family circumstances as the most obvious choices may not always be the best option, particularly if there’s conflict between family members.
In these instances, it’s advisable for clients to appoint an independent LPA.
Estate planning for blended families can present you with a host of challenges, both immediate and in the future. The best way to address these is to establish an open and honest conversation with your client about the intricacies of their financial and family situation and encourage them to do the same with their family members. This way, everyone is aware of any planning you put in place on behalf of your client and are less likely to contest it in the future.
Trusts offer the best estate planning solutions for modern, blended families. For more information about the innovative trust options CTT offers its advisers, contact our Tax & Trust experts and ask about our Fixed Fee Probate Services.