In our latest blog, we’re looking at estate planning and second marriages. When your first marriage ends there is much to consider. You may be divorcing, or you have lost your spouse. Both reasons present challenges that you must address through your estate planning to ensure that your estate is passed on to the people that you choose.
Wills, Estate Planning and second marriages, and fair distribution of assets
Sometimes marriages fail and end in divorce, or you might lose a spouse. Getting married for a second time might feel like a fresh start, but there are things that you need to consider together as a newly married couple. A second marriage could affect your own financial plan, and that of your new spouse, so putting the correct financial arrangements in place early on should be a priority.
High on your list of considerations should be estate planning and how you both intend to distribute your assets after you die. You might both have children from a previous relationship or previous marriage, or are planning to have children in the future. There is a lot to consider, and putting the right structures in place can be complex.
Getting married and your will
When you remarry you could well be creating a blended family. That is to say, a new family which includes children from previous relationships, and possibly your own children together in the future. There are, of course, many complexities besides estate planning to consider including day-to-day finances, and bringing your respective children together in a way that recognises each individual, their thoughts, feelings, and expectations. It can be a stressful, challenging time, as well as a happy time for the new marriage.
You will need to consider your own children, your stepchildren, the assets you both bring to the relationship, and the assets you might acquire during your second marriage. And of course, treasured possessions and who you wish your benefactors to be.
A key point to remember is that any marriage, whether it be a first marriage or a fourth marriage, will invalidate any Will that you had in place prior to that marriage (unless the Will was made in anticipation of marriage and clearly states this within the Will). Estate planning and second marriages are a complex combination. Putting the right measures in place is best achieved with professional advice and support.
The risks of mirror wills in a second marriage
It’s often the norm in a first marriage for a couple to create mirror wills. Where there aren’t complex, high-value assets this can be a tax-efficient way for a couple to pass assets to one another when one spouse dies.
Mirror wills, as the name suggests, are a mirror image of each other. There may be minor differences, but for the most part, they are identical.
The main benefit of a mirror will is that you can pass your Nil Rate Inheritance Tax Band to your spouse. The current Nil Rate Band is £325,000 per person. So your spouse can transfer their Nil Rate Band to you if it is not used on their death. That increases your Inheritance Tax threshold to £650,000 for the surviving spouse. So upon the death of the second spouse, if your estate is valued at less than £650,000, there will be no Inheritance Tax to pay; clearly a big benefit to lots of families.
The risk to mirror wills is that the surviving spouse can change their will to suit their own circumstances such as benefitting a new partner and their children rather than their children from their first marriage which was likely the intention when setting up the mirror wills.
Plans that a married couple put in place can be changed. Not only that but the family assets could be left to new family members like a new spouse or stepchildren, who the deceased spouse is unlikely to have even known.
Step Children and Sideways Disinheritance.
We’ve looked at sideways disinheritance in detail in recent blogs. There are good reasons for that. It is all too easy to write a will that leaves your own children disinherited if your estate planning isn’t completed with the correct structures in place.
Equally, you may wish to make provisions in your will for your stepchildren, so the right structure, in this case, is all important. You could divide the assets that you have acquired during your second marriage between your spouse, children, and stepchildren and protect the assets that you came to your second marriage with for your own children.
The question often asked is ‘how do I protect my assets in a second marriage?’, and how do I do this effectively and in a tax-efficient way? This is where professional estate planning services can be a real benefit. An estate planning professional can help you to put together the right legal documents to protect your assets and final wishes.
Trusts and Estate Planning
Trusts can be used for a number of reasons, but for the purposes of estate planning and second marriages they are used to pass assets on after death. These assets include money, investments, property, or land. Other assets could also be included like life insurance or pensions.
There are three key positions involved in a trust:
- The settlor: the person/people who set up the trust
- Trustee: the person/people who manage the trust
- Beneficiary; the person/people who benefit from the trust.
A trust is governed by the Trust Deed. This is the document that is created by the Settlor when the trust is set up. It lays out clear instructions for who the Trustees are, the Beneficiaries, which assets are to be included, and how the trust and its assets are to be managed.
The Trustees manage the trust on a day-to-day basis, pay any tax due and in a discretionary Trust, decide which Beneficiaries are to benefit from the Trust and in what amounts.
Trusts, when set up properly, protect your assets and ensure that they go to your chosen Beneficiaries. They protect from sideways disinheritance, and changes in relationships like divorce and remarriage. The risk is that assets could be redistributed in a way that you would not wish. In short, the wishes of the deceased spouse are protected.
They also protect from the risk of generational inheritance tax. This is a scenario where an estate could be subject to inheritance tax every time a will is executed. Assets are not ring-fenced for tax purposes once IHT has been paid on them. A trust, if set up correctly, protects against this.
Trusts are highly complex legal structures, and taking legal advice from an estate planning professional is critical. If set up incorrectly, a trust is vulnerable to legal challenge.
How Will Protect can help with your Estate Planning
Our expert team takes a holistic approach to estate planning. We’ll work with you to understand your wishes, the assets that you wish to leave, and to whom. We understand that contemplating your wishes after you have passed away can be difficult.
We’ll work through the estate planning process with you to develop a structured plan that will protect your interests, ensure that your final wishes are carried out, and manage the exposure of your estate to inheritance tax and other risks.
