denotes premium content | Jan 9 2009 Feature
posted 1 Sep 1996 in Volume 1 Issue 6
Planning Appropriate Life Interest
Wills for Second Marriage Situations
Ralph P. Ray, BSc (Econ) TEP FTII Solicitor, Tax Consultant with Shoosmiths & Harrison
Over one in three marriages come unstuck. Therefore, second and subsequent marriages with stepchildren are a frequent occurrence and concept.
This situation has to be contrasted with more "normal" situations of the united family or husband and wife and their own children. The motives and approach in preparing appropriate Wills is, therefore, quite different. In particular in such "normal" circumstances it is clear cut that on the death of the surviving spouse the family assets will devolve to the children and issue.
Set out below are some of the key features to be borne in mind where this "unity" is absent, namely in the stated context of a second or subsequent marriage and stepchildren.
The considerations and motives of husband and wife in these situations are the same or similar but for the ease of treatment let us assume that it is the husband considering the situation of his Will.
- Main Intentions
That the current wife should be adequately provided for but that eventually, namely on her death, the capital, so far as not used for her necessary support and maintenance, will devolve to the husband's own children and issue. - The Basic Structure of the Will
The basic structure of the Will is likely to involve a flexible life interest in favour of the wife whereby she will be entitled to the income from the husband's estate and use of these assets, particularly the main home, for life. On the wife's death the assets will devolve to the husband's children, probably in equal shares per stirpes. The flexible nature of this life interest will be that the executor/trustees can at any time terminate in whole or part, the entitlement to the income and use of the estate assets and, with the capital so released, advance the capital or assets to other named or specified beneficiaries who are likely to include children, grandchildren and, of course, the wife herself. From the point of view of Inheritance Tax ("IHT") , the termination in whole or part of the life interest will constitute a potentially exempt transfer. - The Basic Tax Position
As to IHT, under IHTA 1984 s.18 the inter-spouse exemption will be obtained on the husband's death because whether the wife receives an absolute entitlement or merely a life interest enables the exemption to apply in either situation. As regards Capital Gains Tax ("CGT") under Taxation of Chargeable Gains Act 1992 s.62 the exemption on the husband's death will apply together with the uplift to the then market value. - Letter of Wishes
In the envisaged circumstances, it would be very important for the husband to leave with his Will, addressed to the executor/trustees, a detailed Letter of Wishes as to how he wishes the income and capital of his estate to be utilised in the immediate, medium and long term situation. In particular, if the wife has substantial/adequate assets in her own right, there could be indications of terminating the life interest in various circumstances prior to her death, e.g. if the husband's children need capital to purchase their homes or set themselves up in business, etc. (The wife's circumstances and possibly her consent would have to be carefully considered). - Remarriage
In some cases, perhaps a rather "Victorian" husband might include provisions in his Will to the effect that the life interest in favour of the wife is automatically terminated should she remarry, i.e. cease to be his widow. This is likely to be a rather unsatisfactory, inflexible arrangement because the remarriage, constituting the end of the settlement, would be a disposal for CGT purposes as well as a possible IHT liability, i.e. as a failed PET if the wife does not survive seven years from the remarriage. It is probably simpler for the flexible character of the life interest to dictate the appropriate circumstances accompanied by provisions in the Letter of Wishes. - Wife as Executor/Trustee
This aspect will also need careful consideration as there could be some element of "conflict of interest" whereby the wife's interest in respect of her own children could conflict with the husband's beneficiaries. As a general rule it may be appropriate for the wife to be one of say three executor/trustees with provisions for such trustees to act by majority (this is a clause more often found in lifetime trusts but there is no particular reason why this cannot be incorporated in a Will trust). - The Home
· As already mentioned, the wife will be entitled to occupy the home as life tenant and the particular clause would make provisions about the cost of insurance, maintenance, repairs and upkeep, i.e. whether payable by the wife or out of the residuary estate.
· The above proposal as to leaving the matrimonial home (as it exists from time to time up to the husband's death) or a share therein by way of life interest, can result in among the best tax planning possibilities. Thus the executor/trustees could terminate the life interest in the home in part and arrange for the widow and others, e.g. children, to occupy as co - owners, thereby reducing the wife's IHT liability providing she survives seven years under the PET rules. As stated, the inter-spouse exemption between husband and wife under s.18 will stand; the gift with reservation rules will not apply in FA 1986 s.102; and a disposal of the property will give rise to full CGT private residence exemption under TCGA s.225. - Pension Amounts
The husband may have been a participant in an occupational pension scheme and up to four times final salary may be payable on his death prior to age 75 as a capital sum. This sum is not part of his estate for IHT purposes and could satisfactorily, from a tax point of view, be diverted to the husband's children or an appropriate discretionary (where wife could be a beneficiary) or other trust; and without swelling the estate of an elder beneficiary such as the wife. Similar considerations apply to the payment of personal pension or retirement annuity pension premiums and any bonuses attached to them where the husband dies before retirement age. - In respect of the husband's divorce from the earlier marriage, there are three main aspects to be considered:
· The husband's earlier divorce or nullity will have the effect that an ex-spouse ceases automatically to be executor/trustee of the husband's Will and gifts to such an ex-spouse cease to have effect subject to clearly expressed contrary intention. This is the result of the Administration of Justice Act 1982 s.18(2) as amended by s.3 of the Law Reform (Succession) Act 1995 for deaths on or after 1st January 1996; the effect now being as if the former spouse had died on the date when the marriage was dissolved or annulled. (Contrast this with the previous unsatisfactory position in re. Sinclair [1985] 1 ALL ER 1066 whereby the effect of such a marriage breakdown was that the gift lapsed and that an intestacy situation arose rather than a contingent gift, e.g. to a charity, applying.
· The subsequent marriage automatically revokes a Will unless made in contemplation of that particular marriage which is later solemnised or, possibly, where the Wills were "mutual". Goodchild v. Goodchild, Times Law Report, 13th December 1995.
· Where the ex-spouse has not remarried, she would have a claim under the Inheritance (Provision for Family and Dependants) Act 1975. The husband should leave a written statement accompanying his Will as to the reasons for excluding such ex-spouse, e.g. adequate provisions made on the marriage breakdown.
It all goes to show that there is no such thing as a standard Will; family circumstances will dictate the provisions of a tailor made product.
This article raises some interesting points on "good practice" and in the next issue of ECA, Richard Peel from the Office for the Supervison of Solictors will look at possible areas where complaints could be raised by disappointed beneficaries (who are only too alert these days to demanding higher standards of expertise by solicitors and other professionals).
