Estate Planning for Blended Families: Trusts, Wills, and Protecting All Children

The traditional mirror will — husband and wife leaving everything to each other, then to the children — works well when there is a single family unit with children from one relationship. In blended families, where one or both spouses have children from a prior relationship, it can cause profound injustice and family conflict.

The core risk is straightforward: if a husband leaves everything to his second wife, and the wife later remarries or changes her will, the children from the husband's first relationship may receive nothing from their father's estate. This happens with uncomfortable frequency. Good estate planning for blended families requires explicit structures that protect all the children intended to benefit — including step-children and biological children from earlier relationships.

This guide covers the main planning tools available. It does not constitute legal or tax advice, and every family's circumstances are different.

Understanding the Risk

Consider a typical blended family scenario: Graham has two adult children from his first marriage. He is now married to Claire, who has one child from her previous relationship. Graham wants Claire to be financially comfortable for life, but he also wants his two children to inherit their fair share of the estate on Claire's death.

If Graham's will simply leaves everything to Claire absolutely, what happens:

• Claire becomes the sole owner of all of Graham's assets.
• Claire may subsequently remarry or change her will.
• Claire may leave her entire estate (including what she inherited from Graham) to her own child only.
• Graham's two children receive nothing from their father.

This outcome is not unusual. Without a trust structure, Graham has no way to guarantee that his children benefit.

Option 1: Immediate Post-Death Interest (IPDI) Trust

An immediate post-death interest (IPDI) trust — also called a life interest trust — gives the surviving spouse a right to income and/or occupation of a property for the rest of their life, with the capital passing to specified beneficiaries (typically the deceased's children) on the surviving spouse's death.

How it works:

• Graham's will creates a trust over his share of the estate.
• Claire is the life tenant — she receives all income from the trust and may live in the trust property for life.
• On Claire's death, the trust capital passes to Graham's children (or as otherwise directed in the trust).

IHT treatment: an IPDI is treated as part of the life tenant's estate for IHT purposes. On Claire's death, the trust assets are included in her estate. The spouse exemption applies on Graham's death (the gift to the life interest trust is treated as a gift to Claire). On Claire's death, the assets are in her estate and subject to IHT, with the benefit of her nil-rate band and (if applicable) the residence nil-rate band.

Advantages:

• Simple structure with clear outcomes.
• Retains the spouse exemption on first death.
• Protects Graham's children from being disinherited.
• Claire's income needs are met throughout her lifetime.

Limitations:

• Less flexible than a discretionary trust — Claire receives income only, not access to capital.
• Where the estate consists mainly of the family home, Claire may need to be able to sell and downsize — the trust should include appropriate powers.
• The trustee role requires management and decision-making.

Option 2: Flexible Life Interest Trust

A flexible life interest trust combines the features of an IPDI with greater flexibility. The trustees have powers to:

• Advance capital to the life tenant (Claire) if needed for specific purposes.
• Appoint capital among the beneficiaries during the trust's life.
• Vary the beneficiaries or their shares.

The discretionary element introduces more flexibility but may also affect the IHT treatment. If the trust is too discretionary in nature, it may not qualify as an IPDI — technical advice is required to ensure the trust retains its IPDI status for IHT purposes.

Option 3: Discretionary Trust

A fully discretionary trust gives trustees complete flexibility over how and when to distribute income and capital among the beneficiaries. All of Graham's children (biological and step-children), and potentially Claire, could be included as discretionary beneficiaries.

IHT treatment: a discretionary trust falls into the "relevant property" regime. There is no spouse exemption on the transfer of assets into the trust on death (unless assets pass via Claire first and then into the trust under a deed of variation, or via a two-year discretionary will trust under s144 IHTA 1984). 10-year anniversary charges and exit charges apply.

Advantages:

• Maximum flexibility for trustees to adapt to changing circumstances.
• Can include all family members without specifying fixed shares.
• Protects against beneficiary insolvency or divorce.

Disadvantages:

• IHT inefficiency compared with an IPDI (loss of spouse exemption).
• Ongoing trust administration and compliance costs.
• Requires well-chosen, impartial trustees.

Option 4: The Section 144 Two-Year Window

Under s144 IHTA 1984, if a will establishes a discretionary trust and the trustees appoint assets out of that trust within two years of death, the distribution is treated as if the will had always provided for it directly. This "look-through" treatment means that a distribution to the surviving spouse within two years passes with the benefit of the spouse exemption.

This gives a discretionary will trust significant flexibility: the trustees can assess the family's circumstances after death, decide whether the surviving spouse needs income only (and create an IPDI) or capital outright (applying the spouse exemption directly), and act accordingly. This flexibility in the two-year window makes a discretionary will trust a powerful planning tool.

The Mutual Will: Almost Always the Wrong Approach

Mutual wills are wills made by two people in an agreed form, pursuant to a binding contract that neither will revoke after the first death. They are sometimes suggested as a way of preventing the surviving spouse from changing their will. In practice, they are almost always the wrong approach for blended families:

• Difficulty of enforcement: proving the existence of a binding mutual will agreement is difficult. Courts are reluctant to find a contract merely from the fact that two people made mirror wills simultaneously.
• Inflexibility: the survivor is bound to leave the estate as agreed, even if circumstances change dramatically. This can produce unjust outcomes decades after the first death.
• Practical problems: a surviving spouse who is bound by a mutual will cannot make new gifts, reorder their estate, or respond to changed family circumstances — even to take advantage of tax planning opportunities.

Instead of a mutual will, a life interest trust (IPDI) achieves the same protection for the first spouse's intended beneficiaries, with none of the inflexibility.

Divorce-Proof Structures

A concern in blended family planning is that a beneficiary's inheritance might be claimed by their spouse on divorce. Several structural approaches reduce this risk:

• Discretionary trust on death: where a beneficiary receives assets through a discretionary trust rather than outright, the assets are more likely to be treated as non-marital assets in divorce proceedings (depending on the facts and the court's view).
• Trust with spendthrift provisions: some trust deeds include provisions preventing beneficiaries from assigning or charging their interest, making it harder for a divorcing spouse to reach trust assets.
• Letter of wishes: a letter of wishes accompanying a discretionary trust can direct trustees to take into account the risk of a beneficiary's divorce when making distributions.

No structure provides absolute protection against a court order in divorce proceedings, particularly where trust assets have become "intermingled" with marital assets. Specialist family law advice should be obtained alongside estate planning advice in complex cases.

Inheritance Act Claims

The Inheritance (Provision for Family and Dependants) Act 1975 allows certain individuals to claim against an estate where the will (or intestacy) fails to make "reasonable financial provision" for them. Blended family planning must consider the risk of an Inheritance Act claim from:

• A surviving spouse or civil partner
• Former spouses (in certain circumstances)
• Adult children (in limited circumstances)
• Anyone who was financially dependent on the deceased

Planning should aim to make adequate provision for all those who might have a legitimate claim, as well as those who are intended to benefit. An estate plan that completely excludes a surviving spouse or a financially dependent child is at risk of an Inheritance Act challenge.

Practical Recommendations for Blended Families

1. Make an explicit decision about who should benefit and in what proportions — do not leave it to intestacy rules.
2. Consider a life interest (IPDI) trust for the surviving spouse's benefit rather than an outright gift.
3. Name the ultimate beneficiaries of the trust capital specifically — do not leave it entirely to trustee discretion where certainty is needed.
4. Choose trustees carefully — an independent trustee (a professional or trusted friend) can mediate potential conflicts between the surviving spouse and the deceased's children.
5. Review the will whenever your family circumstances change — marriage, divorce, birth of children, or significant change in assets are all triggers.
6. Take advice on the IHT implications of any trust structure before implementation.

How Global Investments Can Help

Global Investments advises blended families and their advisers on the financial planning implications of estate structures. We help clients understand the IHT consequences of different trust approaches, model the long-term financial outcomes for the surviving spouse and for all children, and coordinate with specialist solicitors on trust drafting.

We also advise on the investment of trust assets — balancing income needs for the life tenant against capital preservation for the remainder beneficiaries.

This guide is for general information only and does not constitute legal or tax advice. Estate planning for blended families is a specialist area with significant legal complexity. Professional advice tailored to your family's circumstances is essential. The value of investments and income from them can fall as well as rise.