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  1. Law
November 30, 2023

Worried about children-in-law inheriting your wealth? This is how to avoid it

When an inheritance becomes matrimonial property then how can your assets be ring-fenced for your child’s benefit on your death?

By Greg Fletcher

High-net-worths are well versed in concepts of estate planning to benefit direct descendants. But how much time is spent thinking about children-in-law and their inheritance?

The topic of extended family and inheritance can be emotive and fraught with complexity. Predatory marriage and financial exploitation hit the headlines surprisingly often, illustrating how important it is to set out a clear estate plan to avoid future disputes.  

The ‘in-law’ dilemma is nothing new, but families have become more complicated, with divorce creating many second and third families that add another level of complexity to the family unit and, in turn, inheritance.

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[See also: What is succession planning? How to pass on wealth, control and knowledge to the next generation]

These factors, combined with traditional parental concerns such as a child’s relationship breaking down or their partner’s motivations, mean it is vital to give careful consideration to your estate planning in order to protect an inheritance against any claims children-in-law may have, if that is your wish.

How can assets be ring-fenced for your child’s benefit and protected from an inheritance claim by children-in-law on your death?  

How to make sure children-in-law don’t inherit

Define ‘family’ in black and white

The first step to allow you to disinherit your children-in-law is to ensure you have a valid will or to review your existing one. 

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The law of England and Wales allows testamentary freedom, which means you decide who should benefit from your estate. Listing the beneficiaries of your wealth is an important part of your estate plan.

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If the priority is to pass assets to direct family members, the most basic protection is to ensure your will does not include in-laws within the class of beneficiaries.

In particular, check that the definition of beneficiaries does not include spouses, widows and widowers of children.  

Why gifts expose you to greater risk

The next step is to consider the most appropriate way to leave your assets.  

An outright gift to your children leaves them with full control to use the assets as they wish. But this also leaves them fully exposed to a claim on divorce.  

In contrast, a trust structure, which leaves family assets in the control of a trusted person or people to benefit specifically named individuals, retains a level of control against dissipation of assets (when a spouse spends, or sells marital assets to reduce the amount of money they have to provide to their former spouse) by your children, as well as preventing access to their spouse.

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The trust may not entirely exclude in-laws, and there can be a flexible power to add them as a beneficiary if that becomes appropriate in the future.  

A discretionary trust provides higher protection as the child does not have a right to any particular asset or proportion of the trust. This makes it difficult, although not impossible, for the court to factor the value of trust assets into a divorce settlement.

Consider a Family Investment Company

A more active approach would be to move assets into structures during your lifetime. Family trusts have traditionally played this role and can be created during your lifetime as well as in a will, as discussed above.  

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A Family Investment Company (FIC) is an increasingly common alternative to a trust. These can be structured to achieve similar outcomes to a trust and are particularly suited to clients who are already familiar with corporate structures.

Family members own shares in the company, which as a personal asset, are potentially exposed on divorce. But protections in the structure of share classes can mitigate how much a child in-law might benefit.  

[See also: Trusts continue decline as self assessments fall and HMRC bureaucracy intensifies]

Alternatively, making outright lifetime gifts can move assets out of reach of children in-law, but these can the recipient at risk of exposure on divorce, while gifts to the wider family members could create a financial imbalance and, ultimately, be detrimental to family dynamics. 

There are important tax considerations when creating a trust or family investment company but those are beyond the scope of this article and specialist advice is strongly recommended.  

Don’t be stung by ‘reasonable financial provision’

It is important to be aware of the potential for a claim against your estate under the Inheritance (Provision for Family and Dependants) Act 1975 (‘1975 Act’). 

This act allows people, for example a child or someone dependent on the deceased, to make a claim against an estate of a deceased person where ‘reasonable financial provision’ has not been made for them under the terms of the will or on the intestacy of the deceased.

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A claim can be brought regardless of any express direction that they should not benefit from the estate.  

Leaving a legacy in a will to recognise an individual’s expectation of benefit could dissuade them from making a full claim under the 1975 Act. 

Set expectations for your children-in-law’s inheritance

Some ways of disinheriting children in-law are more subtle than others, but all can have an emotional strain on the family – particularly relationships with children and within their family.   

Family governance plays an increasingly important role in avoiding conflict and emotional fallout from inheritance planning. 

[See also: Why the Great Wealth Transfer will be a dangerous time for global capitalism]

Discussing the reasons for structuring your inheritance as you have, is often the antidote to conflict. 

Including children in-law in the discussion can diffuse resentment and help communicate the positive reasons for your choices while also setting expectations and avoiding costly disputes later.  If it proves difficult to start the conversation, entering a more formal dialogue through a family charter may help create a road-map for the future.

Non-binding wishes

Additionally, guidance can be given to the trustees of a discretionary trust through what are known as non-binding wishes. 

Non-binding wishes can explain why in-laws were not beneficiaries and the circumstances in which the trustees might consider adding them to the pool of beneficiaries. 

Not only does this help guide trustees but also gives them written support to exercise their discretion should they want to benefit certain individuals or exclude others.

It is important to seek advice on your family’s individual circumstances and the most appropriate ways to mitigate the risk of your inheritance being redirected away from those you most cherish. 

Greg Fletcher is an associate solicitor, Private Wealth at Cripps


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