26/08/2013

There are a number of ways to protect the inheritance of the children of your first marriage from your second spouse who may have other ideas.

Take the case of widower Keith who remarries and wants to make sure his new wife Tessa feels at home in the family home, but not so "at home" that his two children from his first marriage would miss out if he dies first.

Keith wants to allow Tessa to live in the home for as long as she likes provided that on her death it is given equally to his two children.

Keith has a number of options to achieve this aim, for example:
-    giving his children the rest of his estate;
-    giving Tessa a life estate in his Will;
-    transferring the property to a discretionary trust before his death;
-    putting the property into a testamentary trust in the Will; or
-    setting up so-called 'mutual wills'.

If the estate is large enough Keith could balance the fact that his second wife is to have the property by giving the rest of his estate to his children and only giving the second wife the property.  Effectively this balancing of the estate could provide inheritance in shares that the parties would accept.

If Keith gives Tessa a life estate in his Will she will receive the right to live in the property subject to the conditions set out in the Will, which could include that she loses the right once she re-marries (whether formally or de facto).  Her death vests the property back to the children. Long term provisions in Wills should be avoided as they require on-going maintenance by the Executors which could become very burdensome if the life estate lasts a long time.

Keith can set up a discretionary trust during his lifetime, nominate himself or a controlled company as the trustee and list the beneficiaries as the second wife during her lifetime and thereafter his children in equal shares. But transferring the property to the trust attracts both substantial state duty and makes the residence ineligible thereafter for the main residence exemption to capital gains tax.  The trust also pays land tax at the maximum rate.

Keith can put the property into a testamentary trust created by the Will which lists his second spouse as having the right to residence during her lifetime and thereafter giving the property to his children.  The trustee of that trust need not be the Executor of the estate but could be the two children or Keith’s professional advisers or a company controlled equally by his second wife and the children. In that way the administration of the life interest could prove less burdensome.

Finally, Keith and his second wife could draft ‘mutual wills’ in which Keith agrees to leave his share in the property to his second wife provided she leaves the property to the children.  Although the courts will not stop the second wife from changing her Will after Keith’s death to disinherit her stepchildren, they will hold the executor of the second wife’s estate as a trustee for the stepchildren under a constructive trust so that those stepchildren can then move to have that trust vested and the property transferred to them.  This may involve a level of risk and a prospect of litigation that some may not care to entertain.

There is more than one way to protect the ultimate interests of the deceased’s children from claims by their step-parent following the death of their real parent.  Perhaps you can think of others.

For more information, please call Townsends Business & Corporate Lawyers on (02) 8296 6222.