Blended Families

Generally, relatively few blended families receive adequate advice on the protection and inter-generational tax planning of their estates, be it pensions, Death in Service (DIS) benefits, life cover, property assets, savings and investments or lifetime inter-generational transfers.

Integrated financial planning and effective legal planning are  essential in delivering the desired outcomes for blended families. The use of lifetime and deathtime Trust frameworks is a popular, reliable solution but many clients are rarely advised to use them by legal service providers and may be led to believe they are overly complex and expensive to maintain which need not be the case.

Many couples within blended families do not even have Wills and do not fully understand what difficulties can be created at probate, and that their assets may not be directed where they would like them to go under intestacy rules. Their spouse is often excluded from benefiting from the residual estate.

Thankfully, the majority of blended families at least have simple Wills that direct assets “absolutely” to their chosen Beneficiaries which is effective for directing wealth but inefficient in protecting it and extremely tax ineffective when assets are directed to a Beneficiary where spousal exemption rules do not apply.

If you are a parent or have family members who you wish to benefit from the wealth you have created during your lifetime, you must consider possible future outcomes that may befall your chosen Beneficiaries and address any concerns that you may have now or that may emerge in the future.

Common concerns many blended families have are:

• If your spouse enters into a new relationship after you die, your share of the estate will be protected for your spouse and ultimately guaranteed for your chosen Beneficiaries.
• What is the risk to your wealth following your death?
• If you leave your estate to your spouse and they require long term care, what will happen?
• Loss of tax allowances because your Wills are tax ineffective.
• Will your assets ultimately pass to your chosen Beneficiaries after your spouse deceases if they change their Will?
• What would happen to the inheritance the chosen Beneficiaries receive if they were to divorce?
• There may not be IHT payable when you die but it means your spouse’s estate is highly likely to pay IHT because of your combined wealth.
• If you have an estate that may creep into the realms of IHT when the second of you deceases, a Beneficiary Protection Plan may help to reduce the tax burden for your primary Beneficiaries.

If you look beyond the inheritance to the Beneficiary, you will appreciate the many potential issues that exist and some of them are unique to blended families.

Generally, few blended families receive adequate advice on the protection and inter-generational tax planning of their estate, be it pensions, Death in Service (DIS) benefits, life cover, property assets, savings and investments or lifetime inter-generational transfers.

Integrated financial planning and effective legal planning are essential in delivering guaranteed outcomes, and DIS benefits are one of the most significant considerations often neglected by legal services providers. This is largely because blended families are unaware of the risks to their DIS benefits and do not understand what simple steps can be taken to address them. If you have a new spouse matters can be even more complex as both support for your spouse and the interests of your own children may be a concern.

The unpredictability of life requires us to be prepared. DIS is an excellent employer benefit that will pay out tax free (in many cases at the discretion of your employer) to your chosen Beneficiaries if you are employed by them when you die. It is good practice to check the details of your employer’s scheme and its benefits and establish the value of any likely payment.

Your DIS benefits will be paid to the approved nominated Beneficiary (usually your spouse) and it will be their choice how to use the funds, for example, to pay off a mortgage if required or to be invested by your financial adviser to provide a long-term income source.

You should consider any possible outcomes once your spouse receives the DIS payments.

• Do you want to support your spouse, but ultimately want your DIS benefits to pass to your own children? Unless your spouse makes a specific provision in their Will this will not happen.
• If your spouse enters into a new relationship could there be a potential risk to the funds intended for your family (especially if your spouse is younger)?
• If, historically, your spouse is not good with money, will the DIS benefits be used wisely?
• Would the DIS benefits be exhausted if they were required to pay for care for your spouse, with the result that your children would not then benefit?
• If your estate is likely to attract Inheritance Tax (IHT), will the addition of a DIS benefit make the requirement to pay tax more likely, resulting in your children (Beneficiaries) inheriting less?
• When the DIS benefits pass to your children as part of your residual estate, would you like them to do so in a protected and tax-efficient manner?