Feb 13

Feb 13 Case Study: Balancing Second Marriage and Legacy Planning

Robert, age 65, is in his second marriage with Sarah, age 45. He has two adult children from his previous marriage. The couple's combined assets include:

Primary residence valued at £850,000
Holiday home valued at £975,000 (90% owned by Robert)
Pension fund of approximately £1.45M (Robert's)
Investment portfolio worth £425,000
Current annual household expenditure of £95,000

Robert’s key objectives involve fairness and legacy to his adult children after his death, whilst ensuring his wife is well looked after during her lifetime and after he dies.

Ideally, Robert would like to keep the holiday home for all to use, including his adult children, and see what he can do with his pension and investments in terms of passing on to the family tax efficiently, after his death. As Robert is much older than wife, he wants to consider and act on his financial planning options now for family harmony.

Critical Tax Planning Challenges

Robert’s primary concern is to maintain his current standard of living and be able to respond to any unexpected financial events.

Current Income Need: £95,000 annually
Income Sources:
- Pension drawdown potential: £58,000/year (4% sustainable withdrawal rate)
- Investment portfolio income: £17,000/year (4% yield)
- Holiday home rental potential: £25,000/year (seasonal letting), if needed for additional income but as a last resort as the holiday home is in active use by family

Robert’s property assets means he has options for either rental of holiday home or downsizing to access more cash now for himself and/or his loved ones.

Robert also holds a large pension, and needs to consider pension planning in light of changes announced at the Autumn Budget 2024 that pensions to be included in inheritance tax calculations from April 2027.

Available tax-free cash: £362,500 (25% lump sum of £1.45m pension pot)

Remaining pension fund worth £1,087,500
Robert needs to consider:
- Who he would like inherit his pension fund after he dies?
- Whoever inherits the pension pot, will need to be aware and ready for an IHT liability on the remaining pension pot
- If Robert leaves his pension to his wife after he dies, it is very likely that after his wife dies, there may not be any pension funds left to pass on to his children

Planning Options

Robert has a couple of options that he can consider to address his estate planning challenges, whilst achieving family harmony and income protection in his lifetime.

Setting up a Trust

A discretionary trust would be particularly beneficial for Robert's situation as it provides him with flexible control over how and when assets are distributed between Emma and his 2 adult children from his previous marriage, while also offering potential inheritance tax benefits through the nil-rate band allowance of £325,000.

The trust structure allows Robert to maintain oversight of the assets while protecting them for future generations, and importantly, the discretionary nature means he can adapt distributions based on changing family circumstances or needs over time

Additionally, this arrangement can help minimise potential family conflicts as the trust provides a clear legal framework for asset management and distribution, which is especially valuable in blended family situations where balancing the interests of a current spouse and children from a previous marriage is crucial.

The trust potential income sources:

Pension tax-free cash
Investment portfolio
Property equity release

Insurance Solutions

A second-death whole of life policy could help offset potential inheritance tax liabilities, particularly on the holiday home (valued at £975,000) and pension fund (£1.45M)

Joint life second death policy could provide Robert's adult children with tax-free funds to pay IHT bills, preventing the need to sell the family’s property assets at Robert’s death.

The estimated IHT liability on Robert's estate (excluding primary residence nil-rate band) could be substantial, making insurance an important consideration despite the higher premiums at his age of 65.

This solution would complement the discretionary trust strategy and provide additional security for both Emma and his children.

Questions to consider for your own inheritance tax planning

Your personal situation

How does your family structure impact your estate planning needs? Do you have multiple people who you would like to leave an inheritance?

What potential conflicts exist in your current inheritance plans?
Have you considered the long-term implications of who will inherit your pension?

Your current financial security

What is your household's sustainable spending level?

How would your spouse's lifestyle be maintained after your death?
Have you stress-tested your financial plans against different scenarios?

Your assets and passing on to loved ones

What structures do you have in place to protect your assets?
How are you balancing control with tax efficiency?
Have you considered the impact of future tax changes on your planning?

Compliementary wealth check

Book a no-obligation consultation to review your assets and determine your current inheritance tax position. You will receive personalised recommendations for your situation: