According to new research from Coutts – Breaking the wealth taboo – 46 per cent of marriages are subsequent marriages and there are 2.5mn step-children in the UK.
Blended families are becoming increasingly common, therefore, but the fact that there can often be children involved from both sides of the partnership can make things more emotive and complex, with competing priorities from current and previous relationships.
Let us look in more detail at the key challenges blended families can bring to the financial planning process, especially in relation to estate and inheritance tax planning, and the strategies that financial planners can consider.
The role of trusts in balancing competing priorities
Estate planning can be particularly difficult for a blended family, in terms of balancing solutions that best serve current and past relationships, and may require a more nuanced approach than in a traditional family unit.
First and foremost, it is vitally important that financial planners have clear objectives, as to what the client or couple wants to achieve, as this normally informs the most effective approach to estate and inheritance tax planning.
Trusts in wills offer a highly effective tool to manage how an individual’s assets are distributed after their passing, with the ability to ensure that a current partner is well provided for, as well as the peace of mind that there is ultimately a legacy for their children.
A trust is essentially a way of ring-fencing assets whereby the appointed trustees take responsibility for managing the money or assets set aside in the trust and can have control over the timescales involved and when the beneficiaries will receive the funds.
This can be particularly relevant where young children are involved, or in other cases where parents would not want children to inherit the funds outright, such as those with poor money habits or where there are concerns about their relationships.
Trusts always involve three parties: the settlor, who is the person investing in the trust; the trustee(s), who are the legal owners of the assets held within the trust and act as custodians for these assets; and the beneficiary, who is the person or people nominated to benefit from the trust.
The settlor would usually be self-appointed as a trustee, along with up to three other people, including family members, friends, a trusted adviser such as a financial planner, lawyer or accountant, or an institution such as a bank or trust company.
Most types of trusts can be suitable for blended families but life interest trusts and discretionary trusts tend to be the more commonly used solutions.
A life interest trust is an arrangement whereby a will can provide for certain beneficiaries during their lifetime but, once that person passes away, the assets are transferred over to whoever the settlor had specified when they set up the trust, offering greater control over the distribution of an estate.
