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.
Passing on wealth for future generations
It is worth noting that loans are subject to a formal loan agreement and may remain outstanding for the duration of the Beneficiary’s lifetime.
The loan is an asset of the trust and a debt of the beneficiary.
On the death of the Beneficiary of the loan, their estate would repay that loan to the original trust. Remaining assets could then potentially be available for the next generation, whilst remaining outside of their estate. It is important for the Settlor to write a detailed Letter of Wishes to the Trustees at the time the Trust is set up. It should also be reviewed regularly, so that the assets of the Trust are used as the settlor intended.
The past six months have been a stark reminder of how events beyond our control can set even some of the most carefully-made plans off course. For families thinking about how they can support the next generations, both protection and flexibility need to be integral aspects of their planning.
Mark Wintle is inheritance tax specialist at WAY Investment Services
