Life begins after divorce. For many clients, finally achieving some financial independence can be empowering.
But many of my female clients are not immediately motivated to revisit their estate planning after dealing with all the possible trauma and upset of a divorce. Many recent divorcees are just looking forward to beginning a new chapter of their life as ‘newly single’. They would rather go on a holiday of a lifetime than consider the potential pitfalls of death in a post-divorce scenario.
A new start
Making a new will post-divorce and setting up the correct type of trust are vitally important, especially if the divorcee is going to be co-habiting and moving in with a new partner.
Remarriage changes things again so another new will is required. But as they say, ‘once bitten, twice shy’ where sharing assets a second time is concerned. Many people in second relationships will choose to keep their finances separate and purchase property under a tenants in common agreement rather than a joint tenancy. It might be preferable to look at creating an interest in possession trust (IIP) in this situation.
An IIP set up on the death of the first spouse will ensure the surviving spouse is provided for. At the same time, it protects any children of the first marriage from passing to the beneficiaries of the surviving step-parent.
On the death of the surviving spouse, the assets held in the trust will be passed to the children/grandchildren in accordance with the parents’ wishes.
It is useful in situations where a share of the property and personal assets from previous assets is left to children or grandchildren. It also ensures the new spouse is not left ‘out on the streets’.
Passing down property
IIPs are regularly recommended in the wills of people marrying for the second time, where each person has children by their first marriage.
They can also be a valuable tool when looking at estates for inheritance tax (IHT)planning. Having remarried, couples will regain the opportunity to inherit their new spouse’s unused nil-rate band on first death and the new residence nil-rate band (RNRB) available to homeowners from April 2017.
The government’s valuable new IHT allowance allows parents to leave the value of their property to direct descendants, starting at £100,000 in the current tax year. To qualify for the RNRB the property must be ‘directly inherited’ by direct descendants. These include children, stepchildren, adopted, foster children, and grandchildren.
This allowance will eventually be worth £175,000 per person in 2020/21. When added to an individual’s current £325,000 nil-rate band, this will result in a new allowance for property owners of up to £500,000, or £1 million for couples.
In the past, discretionary trusts may have been written in a will as part of a couple’s IHT planning and to ensure assets are left to their intended beneficiaries, such as children from a previous marriage.
However, this area may now need to be reviewed where an IHT liability exists. This is to avoid losing the RNRB and to protect their own bloodline where different sets of children exist with the new relationship. Individuals who leave assets in a discretionary trust on death will not benefit from the RNRB.
As advisers, it is our responsibility to deal with this area for full holistic planning, not just the pension sharing and split of the other assets.
Taking advice on legal planning post-divorce is in the best interests of your family members, both new and old. Maximising the client’s IHT allowances when estate planning ensures their assets are left to their chosen beneficiaries as tax-efficiently as possible.
Jo Noon is head of CL4Women.