Married with children from a previous relationship – how can I divide my assets fairly between them when I die?

There are several ways of doing this. If sufficient assets are available apart from the family home, dividing those between the surviving spouse and children from a previous marriage may be possible. But if, as is often the case, most of the assets are tied up in the family home and/or the spouse needs most of the other assets to live on, a life interest in some or all of the assets can be given to the spouse with the children ultimately receiving the capital on the death of the spouse.

A life interest would give the surviving spouse a right to income, such as interest on investments and a right to occupy the property.  That would mean the children have to wait for the surviving spouse’s death to receive their inheritance. Still, at least the underlying capital is ultimately protected for them and cannot be diverted elsewhere post-death. Alternatively, the will could include a discretionary trust which creates flexibility and enables the trustees, who should be carefully chosen, to take account of the needs and circumstances of the named beneficiaries at the date of death in deciding what each beneficiary should receive.

Division of assets – the impact on your tax

Each option has tax consequences, so these should be carefully considered before proceeding. An English-domiciled surviving spouse is a fully exempt beneficiary, so no Inheritance Tax (IHT) is payable on assets passing to a spouse, whereas if non-exempt beneficiaries such as the children receive more than the tax-free allowances of £325K plus the £175K residence nil rate band, IHT at 40% would be payable on the excess.

The ‘tax tail should not necessarily wag the dog’, but the tax effects will be important in deciding how to divide an estate between exempt and non-exempt beneficiaries.  This is an area of potential conflict, so appointing neutral executors and trustees to administer the estate and ongoing trust would make sense. Neutral lay executors may not be easy to find, so a professional executor as a solicitor may be a useful option.

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Jan Atkinson Partner
Wills, Probate and Disputed Estates

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