Protecting against sideways inheritance
As well as providing some protection in the event of divorce, using Trusts can also help prevent children from missing out through sideways inheritance. Let’s consider a married couple, Mr and Mrs B, who wish to provide for their children but do not necessarily wish to give a lump sum in one go.
They could each gift £100,000 into a flexible, interest-in-possession trust, with their children as named beneficiaries, and their preferences specified in a Letter of Wishes. Should they both survive for seven years following the date of the gift, the gifts would be outside of their estate for IHT purposes.
Suppose one of their children seeks financial support – for example for a house deposit, or to support a business they run that has been adversely affected by the Coronavirus pandemic. They could receive a loan from the Trust, which would become a debt of the Beneficiary.
Some years later, Mrs B passes away. The Trust she set up is not part of Mr B’s estate, but he could now be added as a potential beneficiary. Should his needs change, and he require access to capital, this could be loaned to him from his late wife’s trust. As previously, the Trust assets are available to support the children, as loans or appointments, at any time at the discretion of the Trustees.
Now let’s consider what would happen if Mr B were to remarry. Unless a Will specifically stated otherwise, were he to pass away all his assets would automatically pass to his second wife. She would have no obligation to make financial provision for his children and they would be removed from the automatic line of inheritance – with the so-called ‘sideways inheritance’ principle directing assets towards his new wife and any children she may have from a previous marriage of her own.
Such a scenario might not be as surprising as it sounds – in 2017 there were 159,000 marriages where both partners were never previously married, and an additional 36,000 marriages where it was a remarriage for both partners.
In the case of Mr B, the assets held in Trust would remain effectively ring-fenced for the children of his first marriage. This would also be the case for the assets in the Trust set up by Mrs B. Sideways inheritance could of course work in the other direction depending on which partner outlives the other. In the case of remarriage, both new partners may wish to carry out some financial planning of their own.