Estate planning for blended families

Simon Mitchell, Partner in the Wills, Estates & Tax Planning team, recently wrote an article for ePrivate Client.

Families come in all shapes and sizes, and it is very common for extended families to be made up of parents, step parents and half and step siblings. While there can be many positive elements of being part of a ‘blended’ family, when it comes to estate planning, it can make things more complex.

Many people are understandably keen to ensure that their assets can be passed on to benefit both their current spouse or partner and any children or step children from current or previous relationships.

The role of trusts

There are some estate planning solutions that can help ensure that the needs of everyone involved are catered for. One of the most popular of these is to set up a life interest trust under a will.

For example, taking this approach would allow an individual to ensure that their surviving spouse can continue to live in the family home and receive an income from the estate until their death. The remainder of the estate would then pass on to the various children. The life interest in favour of the surviving spouse benefits from spouse exemption for inheritance tax purposes, and the structure also guarantees that the deceased’s children can then inherit the estate outright following the survivor’s death. In this way, the deceased can strike a balance between the needs of the survivor during his or her lifetime and the desire to leave the estate on second death to the children, especially if they are children from an earlier marriage.

A note of caution

While the above mentioned structures can be extremely useful estate planning tools, especially when it comes to catering to the needs of blended families, caution should be exercised, particularly when choosing trustees.

This has been highlighted by a recent case (Ramus vs Holt 2022) at the High Court, where the Judge was asked to consider a claim for reasonable financial provision by the widow of the deceased under the Inheritance (Provision for Family and Dependants) Act 1975 (Inheritance Act 1975).

The terms of the deceased’s will gave the majority of his estate to a trust under which his widow had a life interest. The three trustees of the estate had the power to apply capital for her benefit, but could also terminate her life interest.  A letter of wishes accompanying the trust stated that she should receive income from the estate, unless the trustees decided she did not need it or if she remarried or cohabited with a partner.

Aside from this life interest, the trust fund was also to be held on flexible discretionary trusts for the deceased’s children and also for his widow unless the trustees decided to exclude her from benefit.

However, due to a character clash between the widow and one of the trustees, she was worried she may not be reasonably provided for.

The Judge decided that the will did make reasonable financial provision for the widow and so it was not necessary to consider whether the court had power to remove a will trustee in order to secure that provision. Importantly, the Judge also observed that in any case, the Inheritance Act 1975 did not give the court jurisdiction to remove trustees.

Points for consideration

In light of this, those advising clients in setting up will trusts, whether those be life interest or discretionary trusts – or both – should urge caution when choosing trustees.

It is vital to consider any existing or potential character conflicts. While it is natural for individuals to want to appoint their children as trustees, they need to realistic about whether this will work with their particular family dynamic.

One way around this is to appoint one or more neutral third parties, such as professional advisers, as trustees who can guide the parties through the trust provisions and advise on the options available whilst still protecting the interests of the beneficiaries.

If you have any questions about this article, please get in touch with a member of the team.