Do the right thing

Inheritance disputes are on the rise, which is partly driven by the economic downturn and the incentive to fight for more money. But there’s also the impact of the modern family unit. One in three marriages breaks down before the 15th anniversary according to 2010 figures from the Office for National Statistics – up from a fifth of marriages in 1970. These complex separated families, differing interests and, quite often, underlying resentments can cause estate-planning problems.

When I sit down with clients who have been married previously, the starting point is
making sure they have an up-to-date will. It could not be more important as the intestacy rules will not begin to deal with the different interests that need to be accommodated.

One of the most frequent issues I encounter is where a client has remarried but has their own children from a previous marriage. Usually, they want assets to go to their own children ultimately. But they also need to adequately provide for the new spouse while ensuring said partner doesn’t mix inheritance with their own assets and pass them to their own children or other family on death to the exclusion of the client’s children.

I recently had a difficult discussion with a client facing a similar scenario. He wanted to think that his new wife would do the right thing by his children after his death. Sometimes, as an adviser, you have to press your clients to contemplate what could go wrong.

Great expectations

Generally, I discuss using a life interest trust for the spouse so that capital can be preserved by the trustees for the client’s own children on the spouse’s death. However, the client may want his children to have some assets before then. This is fine, but there will be an inheritance tax (IHT) penalty: gifts to spouses are free of IHT; gifts to children (subject to the nil-rate band and any exemptions/reliefs) are not.

In a non-separated family, a spouse can usually be expected to pass on inherited assets to the children, but you may not be able to rely on this happening in a step-family, particularly if relations between the step-mother and children are not harmonious. Sometimes IHT is a fair price to pay for the peace of mind of knowing that the children will receive something.

Disputes with step-children are another area where clients need to pre-empt any problems in their will. Step-children are often treated equally with a step-parent’s own children at home, and they might expect to be treated equally in estate planning. If they are not, there could be resentment and unhappiness for the whole family.

Step-children can potentially make a claim for a share of the estate under the Inheritance (Family and Dependants) Act 1975 if they haven’t been adequately provided for. Court action is a quick way to break up a previously happy family, and will quite often break the bank as well.

Communication in all these situations is key. If a client knows that they want to benefit children and step-children unequally, I encourage them to explain the reasons in a letter of wishes that the children can read after the death. Most often, if the disadvantaged beneficiaries understand what the client wanted, they are more likely to respect it, and the situation can be accepted, or resolved amicably, without court action.

Clients with step-families often face difficult decisions when it comes to estate planning, but it’s far better to address these than leave the extended family with an unhappy lasting legacy.

Fay Copeland is partner and head of private client at Wedlake Bell

She writes the regular comment on inheritance in Private Client Adviser