What is the Disinheritance Trap and How to Avoid It

It’s often assumed that your assets will pass to your spouse or partner if you die, and thereafter to your children. But this is not necessarily the case, and there are some situations where you may want to make different provisions.

In this guide, we consider how your loved ones might be unintentionally ‘disinherited’ and what you can do about it.

What Happens if You Don’t Have a Will?
If you don’t have a will, the rules of intestacy will apply. This means that your assets will be distributed in a strict priority order.

If you have a spouse and children, your spouse will inherit the first £270,000 of your estate plus half of the remainder. Your children will receive the other half.

If you are married with no children, your spouse will receive everything. Similarly if you have children but are not married, your estate will pass to your children.

If you do not have a spouse or children, your assets will pass to your other relatives. If you have no family, your estate passes to the Crown.

The rules above apply in England, but are slightly different elsewhere in the UK. You can find out more here.

If your family situation does not fit into the model assumed by the intestacy rules, your estate may not be passed on in the way you would like.

How Can the Disinheritance Trap Occur?
A common problem in estate planning is the ‘sideways disinheritance trap.’ This works as follows:

• On death, your assets pass to your spouse.
• Your spouse remarries and on their death, their estate (including your assets) pass to the new partner.
• On the death of the new partner, the entire estate passes to their children or family.
• This means that if you have children, or other family members you wanted to benefit, they will not receive anything from your estate.

Some other potential disinheritance scenarios include:

• Your assets bypassing your partner and being distributed to your children if you are not married. This may be in line with your wishes or not, but could cause problems if your partner is financially dependent on you, as well as conflict in the family.
• If you care for stepchildren or foster children, they will not automatically receive anything from your estate.
• If you get married and already have children, your new spouse will take priority when it comes to the rules of intestacy. Your children may receive less than you intended, or even nothing at all.
• If you are unmarried or divorced, and do not have children, your estate will pass to your other relatives. This means that if you have a partner, they may receive nothing.

Inheritance Tax (IHT) is another consideration. If your assets pass to your spouse, there is no immediate IHT liability and they will also inherit your nil rate band (£325,000) to set against their estate on second death. If your estate passes to anyone else, there could be an IHT liability, as well as the possibility of wasting some of the combined nil rate band. Advice is recommended if you are concerned about IHT.

Can A Will Solve the Problem?
A will can solve some of the potential issues. It allows you to nominate someone you trust to administer your estate (an executor) and you can decide how your assets should be passed on.

Making a will means that if you have a non-traditional family structure or simply want to make specific provisions, your wishes will be carried out. This can address many of the potential problems mentioned above. For example, if you have a partner or a blended family, you can specify who should benefit from your estate and in what proportions. You can make mirror wills with your partner to ensure that both sides of the family benefit.

Making a will does not necessarily solve the sideways disinheritance issue. While you may be in agreement with your partner about how to pass on your estate, their circumstances could change after you are gone. There is nothing stopping them from changing their will at a later date. You may need to take additional steps to ensure that your own children are protected.

Some Potential Solutions
There are a few ways in which you can protect your legacy for your children:

• Set up a trust via your will. If your assets pass into a discretionary trust, you can nominate your partner and children as beneficiaries. You will need to appoint at least one trustee who can ensure that the assets are distributed according to your wishes.
• Set up a trust during your lifetime. This gives you more control of the process, however there may be tax implications and the money will be out of your reach.
• A life interest trust allows you to nominate one beneficiary to have the use of the asset for the duration of their life. This could be income from an investment or the right to live in a property. On their death, the asset would pass to the other beneficiaries. This can provide a balance of security for the surviving partner while ensuring that your children do not miss out.
• Another option is to set up a life insurance policy under a suitable trust. This can ensure your children receive a fixed sum on your death regardless of what happens with your residual estate.
• A combination of these options can be even more effective.

The first step in creating a successful estate plan is writing your will. This is a simple and inexpensive process. You may even find that it opens up conversations about how you would like your estate to be passed on, allowing you to address potential disinheritance traps before they become a problem.

Please don’t hesitate to contact a member of the team to find out more about estate planning.