How do we protect inheritance from unreliable son-in-law?

I am suffering from a terminal illness and my husband and I would like to prepare our wills.

We have one daughter who has recently married a man who is very unreliable with money.

We are looking into ways that anything we leave would be protected. We have looked at post nuptial agreements and trusts but find it quite confusing.

Peter King, partner and head of the wills, probate, and tax and trusts team at Nockolds solicitors, replies: I was sorry to read about your illness, and I agree with you that in these circumstances it does seem sensible for you to prepare new wills.

The problem that you have experienced in connection with your son-in-law is not uncommon. The question in this situation is whether and how to attempt to protect a child’s financial situation after you (a parent) has died.

I expect that you and your husband will leave everything to each other in your wills and when you have both died the survivor’s will determines when, how and how much your daughter will inherit.

How do trusts work?

One approach is to include a trust in your wills. When you have both died some or all of your estate will pass to your trustees who will be given discretion as to when and how to benefit your daughter.

You can provide them with written instructions to confirm what you wish them to take into consideration when deciding whether to assist your daughter.

This will include your son-in-law’s financial situation – for example, does he have debts and creditors – and whether that could have an adverse impact on funds your daughter receives.

Peter King:  ‘The problem that you have experienced in connection with your son-in-law is not uncommon’

Your trustees can assist your daughter with regular income from the trust, payments of capital or perhaps loans, but it would always be at their discretion.

By creating the trust you are in effect postponing the decision as to when your daughter inherits.

Hopefully your son-in-law’s unreliability will prove temporary, meaning that the trust could be wound up if the trustees became satisfied that your daughter’s inheritance was not under threat because of his poor financial judgement.

You also need to consider how to provide for additional children and grandchildren in the will.

Who should you choose as a trustee?

Perhaps the most important choice you need to make is who to appoint as trustees. In these circumstances I would suggest that you look for independent trustees – who are not beneficiaries of the will – and that you would not include your daughter.

A professional trustee, usually a lawyer or accountant, will come at a cost of course, but these are future expenses, not payable when you make your will.

Ask your solicitor what they are likely to charge for dealing with the administration of your estate. Many lawyers will offer a fixed fee for estate administration work, but you also need to know what their likely fees will be for dealing with the ongoing trust.

A fixed fee will give certainty to the other trustees and to the beneficiaries for the initial work, but you may find that the future ongoing trust work is charged at hourly rates.

This work will include looking after the trust funds and investing them appropriately, preparing annual trust accounts and dealing with the trust’s tax affairs and distributions to beneficiaries.

What is the tax impact of creating a trust?

There may be tax consequences of using a trust rather than an outright gift to your daughter.

You could lose some or part of the benefit of the recently introduced Residence Nil Rate Band which is available where parents leave their estate – including the family home – to children. That relief is not available to trustees.

You also need to be aware of the income tax rates applicable to trustees and the impact of periodic inheritance tax charges.

I suggest you approach a solicitor who will be able to advise you in more detail of any possible adverse tax consequences.

Much will depend upon the value of your estates. The loss of the Residence Nil Rate Band is only an issue if the combined value of the estates exceeds £650,000.

If you do decide to use a will trust to protect your daughter’s inheritance, you should take appropriate advice from a specialist solicitor who is a member of the Society of Trust and Estate Practitioners.