As the law currently stands, if a person is married or in a civil partnership, their spouse/civil partner has first claim on their estate if they die. Provision may be made for minor children but not for adult ones (barring special circumstances). This fact has implications on inheritance for parents even if they’re not thinking of remarrying.
From whirlwind romances to fraudsters
Life is full of surprises, good and bad. If you have children and are legally eligible for marriage, then it’s beneficial to have a plan in place just in case you do meet that special someone. This may sound unromantic but the reality is that the law is not known for its romantic inclinations. It is, literally, a set of rules and you need to understand their implications.
There are four main ways you can protect your children from being accidentally disinherited. These are gifting, trusts, prenuptial agreements and wills.
The easiest way to ensure that an asset goes to the person of your choice is just to give it to them yourself. This can also be beneficial from the perspective of minimising inheritance tax. Under current rules, if you live for seven years after making the gift, it is exempted from your estate for the purpose of calculating IHT. Even if you don’t, the liability can be reduced.
It is, however, important to understand that, legally, giving someone a gift means that you give up the beneficial interest in it. For example, if you gift someone your family home, you can only go on living in it if you pay a fair market rent.
There may also be tax implications in the present. For example, a transfer of assets may trigger capital gains tax. This is a complicated area, so it’s advisable to get proper legal advice.
The basic concept of a trust is simple. A trust is a legal entity in its own right (just like a limited company). As such, it can hold assets, earn income and distribute that income. Trusts are managed by trustees on behalf of beneficiaries.
Actually setting up a trust can be a lot more complicated. It’s definitely preferable to get legal advice. In some instances, however, it can be very worthwhile. Firstly, moving an asset into a trust removes it from your estate. This can lower your IHT bill.
Secondly, it means that the asset will go to the intended beneficiary even if you happen to die without an accurate will. Thirdly, it may help to preserve the asset for the beneficiary in the event of them divorcing. Their spouse may be able to claim a share of any income from the asset but not the asset itself.
Technically, UK law does not recognise prenups. It does, however, recognise contracts between two parties. It therefore generally respects prenups that meet the necessary requirements to be considered legal contracts. Again, therefore, it’s strongly advisable to get legal advice here. In fact, it’s strongly advisable for both parties to have their own legal counsel.
For completeness, if a prenup becomes outdated, then it can be replaced by a postnup. Essentially the same principles apply. The only difference is that postnups happen after a marriage has taken place.
A will is generally invalidated by a marriage. The exception to this rule, however, is when the will has clearly been made with the marriage in mind. Again, this is an area where it’s advisable to get legal advice.
The importance of keeping documents up to date
Possibly the single, most important point to take away from all this is that it is vital for you to keep all legally relevant documentation up-to-date. It’s strongly advisable to make changes in advance of significant events, if at all possible. If it’s not possible, then documentation should be updated as a priority afterwards.
For advice and to protect your finances, please get in touch.