25 March 2012

Barmaid Syndrome - Some Solutions

In a recent post, I introduced “barmaid syndrome” – the fear a woman has that, after her death, her husband will re-marry, then die leaving everything to the new wife and nothing to the children.

In this post I will examine some of the simpler solutions, and in a future post, I’ll finish off this topic by mentioning the more technical or complex solutions. (I have written this as if I’m writing to a wife, but husbands can have the same problems, with the same solutions.)

Solution 1: Trust the survivor. Reach an agreement with your husband, and have it set out in both of your wills. Then just carry on with your life, trusting and believing that your husband will stick to the agreement.

In reaching this agreement, try to respect the thought that if your husband does remarry, his new wife will have financial needs, which will have to be met, too.

Solution 2: Pay the children upfront. For the very wealthy, this solution is simplest and the best. Make gifts to your children now, while you are still alive. Or, set up your will such that the children get their inheritance on your death, even if you die before your husband. (You might want to couple these ideas with a trust if the children aren’t old enough to handle the money responsibly, yet.) Once you’ve done this, it doesn’t matter what your husband does, since you already know the children will be OK.

In my third post on this topic, I’ll deal with some more technical approaches. In the meantime, though, please think about “Solution 0”: Don’t even have the problem! For the very poor this is the best solution, and even some wealthy people like it. It works like this: tell the children that they will have to make their own way, without any expectation of money from you. Tell your husband that you trust him to do what is right, and that if he remarries you want him to make sure his new wife is provided for. Who knows: your family may be stronger for your refusal to let them be emotionally and financially dependent on you.

18 March 2012

What is Probate?

Apparently "what is probate?" is one of the top ten "what is..." searches on Google in the UK. My assistant is writing a sensible article on the subject at the moment, explaining the problem for someone bereaved who might need to obtain probate. But I thought I'd devote a blog post to explaining the problem from a different angle. Because I think it's easier to understand what a grant of probate is, and why one is needed, if you look at things from the point of view of a bank.

Suppose that I own a bank. And that you have a million pounds deposited at my bank.

Now, suppose that one day, some guy walks into my bank and tells me that you have died, and that he is your executor, and I pay him the million pounds. Then the next day, you walk into my bank and ask where your million pounds is. I tell you that I paid it to a guy yesterday, because he told me you had died. And you point out that you self-evidently haven't died and demand that I pay out your million pounds again - which, of course, I have to do.

Or, imagine the same scenario, but this time you really have died, and the guy comes to me with your death certificate and I pay him the million pounds. Then, the next day another guy walks in with a copy of your will, pointing out that he is your executor and not the first guy, and that I must pay out the million pounds again to him.

Or, this time a guy comes into my bank with your death certificate and a will showing that he is your executor. So I pay the million pounds to him. Then the next day, another guy comes in and says he is your executor. When I protest that I've already paid the first guy, the second guy produces another will, dated later than the first will, revoking all previous wills and appointing the second guy as executor. So I have to pay out the million pounds again.

But suppose the first guy comes to me with a grant of probate. This time I can pay the first guy with confidence. Because the grant of probate is, in effect, an order of the court authorising me to pay estate money to the person named in it. And if it turns out that there is another guy out there with some kind of claim against your estate, he has to take it up with the person named on the probate. And not with me.

So that is why probates are necessary, really. It's not so much that they protect the executor or the estate. It's that they protect anyone who has to pay money to the estate: like the deceased's banker or stockbroker or the buyer of the house.

A FOOTNOTE: As you might imagine, doing what I do for a living, I could come up with an unlimited number of these one-guy then-another-guy scenarios. A lot of them would involve the first "guy" being, or claiming to be, your widow(er). And you may be thinking that if the first guy in each scenario is some kind of fraudster then my bank might be able to recover the million pounds from him. But he isn't necessarily a fraudster (in the real world, problems more often happen where there are genuine competing claims against an estate). Besides, if he really is a fraudster he might have disappeared off the face of the earth, as fraudsters often do.

AND A POSTSCRIPT: Nina Sampson's article, metioned above, appeared in London Business Matters, April 2012, Page 32.

Barmaid Syndrome - Introduction

“Barmaid Syndrome” is the fear a woman has that, after her death, her husband will drown his sorrows at the golf club, fall in love with the blousy barmaid, re-marry with her, then die leaving everything to the new wife and nothing to the kids.

The phrase “barmaid syndrome” was coined by Ralph Ray, one of the founders of STEP - the Society of Trust and Estate Practitioners. 

Where a husband has the “barmaid syndrome” problem, it used to be known as “coalman syndrome”. For the twenty-first century, I have suggested re-naming it “personal trainer syndrome”, but my idea hasn’t caught on, yet.

Any married woman with children might have a barmaid syndrome problem. However, the problem is more intense and real where yours is a second marriage. That’s because in a first marriage, your kids are his kids, too, so the risk of his deliberately leaving them in the cold is much less. (The worst risk in that circumstance is that he remarries then doesn’t bother to make a new will. In that case the new wife probably would grab the lot. I’ve said it before and I’ll say it again: whoever you are, you owe it to your family to make a will.)

With a second marriage, though, the problem is real. It’s at its most intense where the second marriage happened later in life, when both parties already had grown-up children of their own. In such cases the stepfamilies are often not friends, and do not even know each other particularly well.

Barmaid Syndrome is a tricky problem to deal with. There are emotional issues and legal issues, and they often don’t dovetail neatly. Although there are things you can do by yourself, ideally the couple should face the issue together, and reach a joint conclusion. Some possible solutions are discussed in future postings to this blog.

11 March 2012

Ten Reasons Not To Give Your Home Away: 5 to 8 - Tax Problems

Continuing my series of reasons not to make a gift of your home, here are some tax problems.

For inheritance tax:

5.     The Gift With Reservation Rule. This rule says that if you give something away but continue to reserve a benefit in it (for example, by giving your home to your children and continuing to live in it) then you are inheritance-taxed at death as if you still owned the asset. (Of course, this is no worse than not making the gift in the first place - but it is the reason why the gift might not work.)

6.     Double Jeopardy. Remember that although the house is treated as part of your tax estate because of the gift with reservation rule, it in fact belongs to your children, and will be taxed as part of their tax estates if they die.

For capital gains tax:

7.     No PPR. Most people never pay capital gains tax on their home because of “principal private residence relief”. But if you give your home away, the owners, your children, are not the same people who reside in the property. So that relief is not available to them and they will suffer capital gains tax on an eventual sale.

8.     No uplift. If you hold onto any asset until your death, all gains made in your lifetime are wiped out. But if you gift the property in your lifetime that never happens - so your children eventually suffer capital gains tax on the whole gain in the property's value, from the date of the gift, until the date of the sale.

4 March 2012

Ten Reasons Not To Give Your Home Away: 1 to 4 - The King Lear Problem


I am quite often asked whether it is wise for elderly parents to make a gift of their home to their adult children (sometimes expressed as “putting the house in the children’s names”). It is thought that doing so might save tax, or avoid a liability for care fees.

This posting, and two others which will follow, concentrate on the reasons not to do it.


The King Lear Problem

These first four reasons relate to the difficulty of living in a home owned by someone else, and effectively at their mercy. It is a sad fact that many parents are put into care before they themselves think they are ready for it. At the worst, the children could force you out of the home to sell it from under you. And, even if you trust your children to ‘play the game’, there are at least four ways in which the matter could be taken out of their hands.

1.       A child dies before you. In this case the property passes to the child’s executors or administrators, who would need to sell it to realise its value for the beneficiaries of the child's estate. (Unlike the other problems mentioned here, there is some limited action the family can take to try to prevent this: namely the children could make a will giving the property - or a right to reside in it - back to you.)

2.       A child loses mental capacity. In this case the child’s assets pass into the control of his or her attorney or deputy, who may need to sell them in order to pay that child’s living expenses, or care fees.

3.       A child divorces. In this case your home becomes an asset in someone else’s divorce settlement.

4.       A child goes bankrupt. This is probably the worst of these cases, since your home almost certainly would be sold for the benefit of the child's creditors.