As advisers, we have all seen it – even within our own families. A wife (or husband) dies, and the surviving spouse (let’s call him Colin) remarries or cohabits with Pam, who is significantly younger than he is.
They agree that they have to manage their financial relationship carefully. They want to ensure that Colin’s son and daughter, Rob and Cheryl are not disinherited, so Colin puts a provision in his will that Pam will have the right to occupy his home, Woodlands (which is in his name only) for her lifetime, and after Pam’s death, the property will go automatically to Rob and Cheryl in equal shares.
The trust of the property in the will includes the option of moving to another property, and Colin decides to give the income from any cash released on the sale of Woodlands to Pam for her lifetime, rather than having the capital go direct to his children.
One reason for his decision is to discourage, as far as possible, a claim by Pam under the Inheritance (Provision for Family and Dependants) Act, 1975 on Colin’s death.The Act gives Pam broadly the same rights that she would have had on divorce. The longer the marriage lasts, the greater her potential claim becomes.
A pre-nuptial agreement is suggested, but Pam finds the idea rather unromantic, and Colin is resistant when he hears that full disclosure of all his assets would be needed and that a pre-nup would not necessarily prevent a claim.
The trustees of the will trust are discussed. Colin sees no need to appoint professional trustees because Pam and the children get on really well together (they are all, after all, of a similar age) and Colin is sure that as trustees they will be able to make sensible decisions between them.
He says he will give some thought to how the maintenance and repair of the property is to be dealt with, but adds that it is unlikely that Pam will contribute to the value of the property, so there is no need to cover that contingency.
The will is executed, the couple live together happily for 10 years, during which there are the normal family ups and downs, and then sadly, Colin dies.
Pam continues to occupy the property as planned. She decides there is no need for her to make any claim for a greater share of Colin’s estate, particularly as she is satisfied that this is what Colin wanted, and she does not have the enthusiasm for a fight with the family.
The years pass. In fact, many years pass. Rob and Cheryl can only wait until Pam dies before they can benefit from the capital from the house. As they get older, they need the capital less. Their children are now grown up, and it is potential inheritance tax that starts to become an issue for Rob in particular.
He does the usual things to keep the value of his estate as low as possible – making gifts, using the normal expenditure relief, marriage exemptions (three of them) – but he is very concerned about Woodlands.
The house has risen in value considerably over the years and it would significantly increase the value of his estate if he were to die. Happily, there is a remedy for his sleepless nights. If he dies while Pam is still alive, none of the value of Woodlands will be taken into account in valuing Rob’s estate. His reversionary interest is excluded property under the Inheritance Tax Act, 1984.
But as soon as Pam dies, the reversionary interest vests, and Rob’s estate for IHT purposes will then include the value of the property.
So, feeling no need for the capital (and despairing of ever living to see it), he assigns his right to a trust, which his widow and children can benefit from without it forming part of their estates.
As excluded property, it is not subject to the normal limit of the amount that can be put into a trust without a charge to tax. So though Woodlands itself is worth £800,000 the reversion will be transferable to a trust inheritance tax free. After Pam’s death, the relevant property regime (with its decennial and exit charges) will apply.
Rob cannot be a beneficiary of the trust and still remove it from his estate for inheritance tax purposes, but his view (which turns out to be correct) is that he is likely to die before Pam anyway.
Pam meets someone and moves out of Woodlands to live with him. She, Rob and Cheryl as the trustees, have to sell Woodlands. Pam’s grandson, a builder, has done some work on Woodlands, extending the lounge and repairing the roof, and Pam says that, as well as the income, she should be given some of the capital proceeds of the sale of Woodlands to represent her contribution to its value.
After much unpleasant correspondence involving solicitors, a compromise is reached. Then the trustees have to invest the funds. Pam wants income, Rob, on behalf of his trust and Cheryl, argue for growth. After more unpleasant correspondence (with Rob’s widow now speaking on behalf of the trust), an investment strategy is agreed.
Cheryl does not send a card to Pam that Christmas.
Pam, however, then dies. Inheritance tax is paid on her life interest (out of the capital from Woodlands) and Cheryl and Rob receive half of the net proceeds between them.
Cheryl does not go to Pam’s funeral.
As you will know advising the clients with second families is a minefield, and it is difficult to advise a husband and wife together in these circumstances, particularly as the parties themselves will often not see (or admit to) having different agendas.
Professional trustees, while not a cheap option, may prove good value by reducing the possibility of disagreements that lead to even more expense on legal fees. Including a mechanism for how one assesses “contribution” to the value of the property by the occupying spouse would also help to prevent problems, as would including in the will trust a condition of the occupation of the property by the surviving spouse that he or she will not make contributions to the value of the property without the written consent of the trustees.
Equally, providing a fund from which repairs and maintenance can be paid for could help to reduce difficulties arising in that regard.
And, although not a legal solution, I sometimes suggest to clients in this situation that they leave a personal letter for each of their children explaining what steps have been taken, and more importantly how valued and loved they are. It is unlikely to do any harm and could, in some families, set and maintain a different tone to the relationships following one’s death.
Susan Midha is a partner at law firm Adams & Remers
Key points
Estates can be confusing when there is a second family involved.
Despite putting in detailed plans, things can still go awry when a partner dies.
Even if people initially get on well, deciding on the future of estates can jeopardise relationships, and experts should be called in to put in place some agreements.
