Married with children from a previous relationship – how can I divide my assets fairly between them when I die?
News article published on: 7th February 2020
There are several ways of doing this. If there are sufficient assets apart from the family home, it may be possible to divide those between the surviving spouse and children from a previous marriage. 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 property. That would mean the children have to wait for the death of the surviving spouse to receive their inheritance, but 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 as at the date of death in deciding what each beneficiary should actually receive.
Division of assets – the impact on your tax
There are tax consequences of each option 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 necessary wag the dog’, but the tax effects will be an important feature in reaching a decision as to how to divide an estate between exempt and non-exempt beneficiaries. This is an area of potential conflict so it would make sense to appoint neutral executors and trustees to administer the estate and ongoing trust. Neutral lay executors may not be easy to find so a professional executor in the form of a solicitor may be a useful option to consider.
Blog post written by Jan Atkinson, Head of Wills, Probate and Disputed Estates team