Complex families are becoming the new norm. Even if your client isn’t currently in a complex family structure, they could be one day, or their children could be. With four in ten marriages ending in divorce 1, nearly half of which may involve dependent children 2, and one in 20 under 16 year olds experiencing the death of a parent 3, the family structure can change rapidly. It is estimated that around a third of families 4 now have a step-child, showing just how common the blended family has become.
Complex families make estate planning more important for a number of reasons. How wealth is distributed on death under the legal system may not be how your client wants their wealth to be distributed, highlighting the potential conflict between the legal and the desired outcome.
If plans are not put in place, the legal outcome, for example, could be that all wealth is passed to the spouse. In a complex family situation, this could mean that any children from the client’s first marriage do not receive any of their wealth on their death. Click here for a simple case study highlighting the impact that not planning can have when a widow remarries.
Family disputes over how assets are distributed on death can be extremely distressing at what is already a very difficult time. To help ensure your client’s assets are distributed in accordance to their wishes, plans need to be put in place, and even just a few simple steps can make a big difference:
- Talk – clients should be encouraged to talk openly with their family about what they would like to happen on their death. The subject of dying and inheritance is often viewed as a taboo subject in families, but unless those conversations take place, it may be really difficult for family members to understand what their loved ones may want.
- Write a will – a will is a way for clients to legally express how they want their assets to be distributed on their death, although a will can still be challenged through the courts. Around 60% 5 of adults in the UK have not written a will. No one likes to think death will happen to them, and many think they don’t have enough money to worry about writing one. However, wills aren’t just for deciding how valuable assets are divided on death, they are also used to determine how any personal belongings and sentimental items are distributed.
- Keep the will updated – wills cease to be effective when certain life events take place, such as remarrying. It is important to regularly update a will as there may be new beneficiaries to consider, and the client’s wealth may also change over time.
- Create a will trust – a will trust only becomes effective when someone dies and is a way for assets to be protected and distributed to beneficiaries in the future. They are a popular way for step-families to provide for the surviving spouse during the remainder of their lifetime whilst ensuring the assets eventually pass to their children. For example, the remaining spouse can remain in the family home, but on their death the home will pass to the children from the first marriage.
- Write policies in trust – a simple step, often overlooked by clients, is to ensure any life assurance policies are written in trust. This will enable the money to be passed on to beneficiaries immediately without having to wait for probate. Any pension policies should also have named beneficiaries. Clients should continually review their named beneficiaries, especially after any life events.
- Make gifts during lifetime – clients don’t need to wait until death to pass on money to the next generation. If inheritance tax is a concern, clients can use their annual gifting allowance of £3,000, or can use a number of trusts, including the Excess Income Trust or Best Start in Life Trust to pass money on tax efficiently. Clients can also pass on family heirlooms during their lifetime.
- Trust planning – for clients wanting more control and certainty over how their wealth is distributed, combined with possible inheritance tax advantages, trust planning should be considered. Unlike wills, trusts are not public documents and are less likely to be challenged in court. There are a wide range of trusts to choose from, which have varying levels of access, flexibility and inheritance tax efficiency to suit the needs of the client. Click here for a simple explanation of Old Mutual International’s range of trusts. Trusts help ensure assets are passed to beneficiaries as and when required, and can be distributed immediately on death, avoiding lengthy probate delays.
Clients with dependent children will have other complications to consider, such as who will be the legal guardian of their children should anything happen to them, and how will they provide for them financially. These are important decisions and will require careful planning to help ensure their children are protected.
When a client has worked hard to acquire wealth, build their own business, or when they have been fortunate enough to inherit some family wealth, the natural instinct and desire is to protect that wealth for future generations. In a blended family structure, clients have a number of decisions to make, including how much of their wealth they want to protect for their own bloodline, and how much they want to provide for other loved ones.
1 Office of National Statistics estimate 42% of marriages end in divorce
2 Office of National Statistics, Divorces in England and Wales: Children of Divorced Couples, released Nov 2015, shows in 2013, 114,720 couples divorced, 55,323 had one or more child under age of 16.
4 Aviva - The Family Finances study 2014
5 Research from unbiased.co.uk in Sept 2016.