Second marriage spouses sometimes have Wills that do not
leave their assets to their second spouse outright. This is particularly the case when there are
children from the first marriage and the intention is to ensure that everyone –
the second wife and the children from the first marriage – receive
something. For some clients, this can be
a hard balancing trick to get right but careless will drafting can make
the situation a lot worse.
Let’s take the example of a husband (H2) and wife (W2), both
of whom have been married before and both have children from their first
marriages – H2 dies first. If H2 leaves assets to W2 outright, W2’s Will can leave
H2’s assets in line with W2’s own wishes on death, disinheriting H2’s children
in the process. You may think that all
your clients know that one by now but those stories of horrified children inheriting
none of their father’s assets after their step-mother’s death that keep appearing in the press from time to time suggests not.
The solution tends to involve one of two options involving
will trusts: H2’s Will either gives W2 a life interest in some or all of the
assets or, if it is just a matter of controlling how the home devolves and
perhaps H2 and W2 own their home jointly as tenants in common, W2 is given a
right to occupy the home.
There are three key bear traps to watch out for in these
arrangements:
- It is possible that the will drafter has not considered the inheritance tax (IHT) implications for either H2 or W2’s families in this arrangement. Giving W2 a right to income, or exclusive rights to occupy, in H2’s will trust means that, on W2’s death, some of W2’s IHT nil rate band and (perhaps) new residence nil rate band will get used to benefit the will trust and usually that means H2’s children, to the detriment of W2’s own family. This is because the assets of the will trust are aggregated with W2’s own assets for IHT purposes only and IHT calculated accordingly. This can mean that W2’s family misses out on some of their parent’s own assets passing down IHT free to them.
- If W2 is given a right to occupy only, check when this right ends. Sometimes it ends if W2 has to leave the home involuntarily, perhaps to go into care. The IHT effect of this involuntary termination of the right can put a gift on W2’s IHT gifting clock (if the trust assets then pass outright to H2’s children, for example), at a time when W2 is unlikely to survive that gift by 7 years. Accordingly, H2’s children get the benefit of W2’s nil rate band, rather than W2’s children, as the nil rate band is matched to lifetime gifts first.
Either of these two outcomes can break what can be a fragile
harmony between the two sets of families.
- It is also possible that no provision has been made for who will pay for the upkeep of H2’s share of the home that is left to the will trust. Often these will trusts just contain real estate and no liquidity, meaning that no funds are available to maintain the property. The problem becomes particularly acute if H2 owned 100% of the house and W2 is asked to pay for repairs after H2’s death, or even the professional fees associated with keeping the will trust running. W2 may be being given the roof over his/her head till death by the will trust but is ultimately paying for an asset that H2’s children will benefit from. Cue more unhappiness.
The moral of these tales of woe is, if you have clients who
are on their second or later marriage, please check their Wills and, if they
contain a trust for the second spouse, be very clear about where the IHT burden
will fall. Do not assume that the will
drafter has thought about it!
