Second marriages can involve the introduction of step-children, step-siblings and full and half brothers and sisters, often with significant age differences between the oldest and the youngest family members.
A marriage inevitably sees the amalgamation of two financial pots to some extent, assets typically consisting of homes, pensions, savings and investments and, depending on age, inheritance from family or friends. Assets are often bought jointly, and each married couple has its own way of meeting bills and organising their finances.
While future life may be shared, other family members may have strong views about “their share” of their parent’s individual “pot”, especially if there are significant discrepancies between what each party has brought to the relationship.
Working through the needs of each member of the family, takes persistence, creativity and not a little luck. For some it is easier not to address it. They prefer to leave it to fate and to see what happens. After all who wants the arguments during their lifetime? Some even tell each beneficiary what he thinks he or she wishes to hear. Pragmatic but a recipe for confusion, at the least, and at worst litigation after the testator’s death.
None of this is easy. Part of our role as professional advisers is to help clients work through these sorts of issues so that their wills can be structured in a way which is most likely to achieve them while providing sufficient flexibility to cover the possibility of circumstances changing.
There are no fool-proof ways of preventing contention among the family, but there are ways to try to ensure a degree of fairness prevails. This article assumes that the wife will be the surviving spouse.
Establish what the testator wants to achieve.What are his priorities? Whatever his own wishes, the law imposes a duty that “reasonable provision” should be made for his spouse and financial dependants.
There may be children who are still being educated. Are they to have the same education that the other children had? What is the testator’s understanding of fairness? Is it meeting an individual’s needs or an equal division?
Is the surviving spouse to be allowed to live in the family home, even if it means no funds are available to go to the children until her death? What if she is very much younger than the deceased spouse? And how are repairs and maintenance to be paid for?
Are other issues, for example, the children’s prospects of inheriting from grandparents, to be brought into account?
Increasingly pre-nuptial agreements (prenups) are being recognised on divorce and by extension on death. On a second marriage a prenup can be very useful in ensuring that the inheritance of children of an earlier marriage is protected.
Another option, for insurable clients, is to generate a separate fund through a life policy written in trust to avoid it being subject to tax.
But what are the options available for dealing with a wide and conflicting range of beneficiaries in one’s will?
1. Giving funds outright to one’s spouse and trusting she will treat all the children equally on her death.
Pros: Simplicity.
Cons: Too many step-parents falling out with their step-children for this to be a reliable approach.
2. As above, but make a binding agreement with her that any funds left on her death will be divided equally among the children.
Pros: An improvement on 1 above.
Cons: There is also nothing to prevent the surviving spouse from giving away or frittering the estate so there is effectively nothing to leave on her death.
3. Give the capital outright to both spouse and children
Pros: Simplicity.
Cons: This is often only feasible for larger estates because there has to be sufficient funds for the needs of the surviving spouse to be met. As a result, it can give rise to unnecessary inheritance tax if the amount which is left to the children is in excess of the available nil rate band.
4: A Discretionary Trust of the Nil-Rate Band and life interest (the right to income or to occupy a property) to the spouse.
Pros: Ensures no taxes payable on the first death (assuming the surviving spouse is UK domiciled)
Cons: as the Nil-Rate Band is currently only £325,000, unless the surviving spouse consents, the children would have to wait for her to die before receiving any more and she may be much younger than the testator.
5. As above, but with a revocable life interest, that can be terminated at the discretion of the trustees of the will, without the consent of the surviving spouse.
Pros: This is an approach which combines flexibility with tax efficiency. No tax on the first death but the children do not necessarily have to wait for their inheritance.
Cons: The first spouse to die would leave a letter of wishes with his or her trustees (which can easily be updated) with guidance as to how funds are to be distributed. Such a letter is not legally binding so the testator is relying on his executors/trustees.
So the crucial question is who should be the executors/trustees? The second family scenario is one where appointing professional trustees ought to be seriously considered.
Pros: They have no vested interest in benefiting one beneficiary over another and are very likely to follow the letter of wishes carefully.
Cons: The deceased’s estate will have to pay for their services.
The alternative – of appointing family members or even close friends - can have dire consequences, as the scope for mistrust between family members can be significant. Such mistrust can be exacerbated (often inadvertently) by a lay executor applying his or her own definitions of the duties of executors and trustees, or quite simply making mistakes. In the fervid environment which can follow a death, mistakes which are merely the result of incompetence or human error can take on the look of a conspiracy.
So, having appointed trustees who know what they are doing and the testator can really trust – is there anything else he can do to try to stop the family from falling out? Well, he could insert a no-contest clause in the will. This is comparatively rarely done at present but may well become more common in future as litigation relating to estates is on the increase.
Such clauses are not always enforceable but the normative effect of them can be to discourage all but the most determined beneficiary from challenging a will, by indicating that any challenge will cause the funds which they would otherwise receive to be forfeited.
Some people regard this as quite an aggressive clause to put in a will, and it is probably true to say that, overall, the most effective methods of preventing disputes are probably to communicate well with everyone concerned, to shape their expectations, to foster as good relationships as possible among family members and to explain (either during one’s lifetime or perhaps afterwards in letters addressed to individual beneficiaries), what one’s thinking and approach was. After all the decisions that a conscientious testator will have made have not been made lightly and are often creative attempts to try to ensure that everyone benefits as far as possible.
If we as professional advisers are able to guide our clients through the process, then we will be doing them a great service.
Susan Midha is a partner at Sussex-based law firm Adams & Remers
Key Points
* It is not uncommon for second marriages to involve the introduction of step-children, step-siblings and full and half brothers and sisters, which can affect one’s estate
* There are no fool-proof ways of preventing contention among the family, but there are ways to try to ensure a degree of fairness prevails
* Appointing family members or even close friends as trustees can have dire consequences, as the scope for mistrust between family members can be significant.
