The tax position of pensions also needs to be considered, as they are entirely tax free should death occur before age 75, or post 75 so long as the pension is kept in situ and no income is taken from it.
They are however taxable at the beneficiaries’ marginal rate of income tax on death at 75 or above if beneficiaries either take the funds as a lump sum or draw income from the pension fund.
In terms of blended families, there is also the consideration that if the pension is left to a current partner or spouse, they will have control over the future beneficiaries, and previous children of the deceased may not be included.
One solution to this, although less tax-efficient than ongoing drawdown, is to leave a pension to a family trust, which can benefit the current partner but leaves the pension holder with control over ultimate beneficiaries when the surviving partner dies.
In summary, estate planning for blended families involves complex legal and financial considerations, as well as challenges in ensuring fairness, transparency and peace of mind for everyone involved.
Working in partnership with legal professionals is of the utmost importance therefore, to ensure things are structured to both meet a person’s wishes and that their assets will be distributed in the most tax-efficient manner.
Zoe Webb is a financial planner and Sam Whitaker is a chartered financial planner at Progeny
