Around one-third of parents are unwilling to leave an inheritance to their children or provide them with financial aid as they are concerned that divorce may mean that money leaves the family.
Research carried out by Investec Investment & Wealth found that 14% of parents had little or no confidence that their children’s marriages would last a lifetime.
It is an understandable concern, with the Office for National Statistics saying that around 42% of marriages are failing.
When a couple divorce, the starting point is a fair division of assets, meaning that should your child inherit money from you, they could lose half if they subsequently divorce. A judge will try to ensure that both parties are adequately provided for, and this could mean that your child could lose even more than half if it is decided that their ex-spouse reasonably needs the money.
For those wanting to leave money to their children, there are steps you can take to ensure that your money does not end up as a divorce settlement for your child’s ex-spouse.
Make use of your gift allowance
The research found that one in six parents are giving their children gifts of money to help with the cost of living.
Everyone has an annual gift allowance of £3,000, meaning that this amount can be given away each year without any Inheritance Tax implications. Additional sums of £250 can also be given to any number of people each year, although not to someone who has already received £3,000 from you.
Skipping a generation
The research also noted that around 14% of parents are leaving their money to their grandchildren instead of their children, to avoid the risk of the inheritance being lost in a divorce. This is not always an ideal solution, as children will then miss out entirely on what you might have wanted them to have and your grandchildren may inherit a substantial sum when they are still fairly immature.
Putting money in trust
One in seven of those questioned for the study are considering putting money into a discretionary trust. This would allow your children to benefit from the assets, for example, living in a trust property and having sums paid out for items of expenditure or day to day costs.
By putting money into this type of trust, the trustees will be able to make the decision as to who receives the money and when. You can set up a trust straightaway and appoint yourself as a trustee or use your Will to set up a trust in the future and appoint trustees that you believe will deal with the money in the way that you want.
You could select the same people you are appointing as your executors or family members to be your trustees or appoint professional trustees to take on the role if you do not have anyone suitable you can ask. A good compromise can be the appointment of a close family member alongside a professional.
A letter of wishes can be provided to the trustees setting out how you would like the money to be dealt with, although you should note that this will not be legally binding upon the trustees.
While it is not guaranteed that a discretionary trust will completely protect your assets in the event of a divorce, it is generally felt to be one of the strongest options.
Other advantages include that your children’s spouses will not be able to inherit the money, which would mean a risk that they might spend the money or leave it to a new partner and not to your grandchildren, as well as the fact that Inheritance Tax will not be payable on funds contained in the trust when you die.
When deciding whether to use the trust option, you should take into account that there are running costs associated with a trust as well as 10-year charges of up to 6% of the capital value above £325,000.
You also need to be certain that your trustees will be able to manage the role and deal with the money in the way that you would want.
It is strongly recommended that you speak to an expert if you would like to safeguard your estate for your children and grandchildren.
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Our lawyers have extensive experience in ensuring that estates are left in the best way possible for your loved ones. If you have any questions about setting up a trust to protect your assets and you would like to speak to one of our specialist Wills and Probate lawyers, call us now on 0117 952 0698 or Contact Us and we will be pleased to help.
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