How can we fairly divide inheritance between stepchildren and surviving spouse?

[TheReplacement]

Recently married couple have one child each from our respective first marriages (now in 20s / 30s with own houses) but no children together. We are fairly balanced in terms of equal salary and equal assets brought into the marriage.

We own a house worth £300k as tenants in common with a mortgage of £100k.

Currently have life insurance for £250k so that when first one dies the survivor has £100k to pay off the mortgage and £150k to pay their step child for their share of the house.

However that means that when the second parent dies, their child inherits a house worth £300k, so doubly disadvantaged - loosing their parent first and then only getting half as much as step-sibling.

Without going into the realms of taking out multiple expensive life insurance policies, how on earth do we make it fair - any suggestions please?

TIA

I think you’re chasing something unachievable.

You want them the children of the first to die to have liquidity but also to retain an interest in the illiquid asset for “fairness”.

You can only really achieve this by selling the house on first death, giving the share to the children of the person whose died and then buying another property worth half the value to leave to the surviving spouse’s children.

Or you make up the difference with life insurance.

You could have the life insurance of the second to die pay out to the step children rather than their children, then on second death your children get £300k house and step children get £150k cash to top up their inheritance to £300k? But that only works with a whole of life insurance policy as it’s likely at least one of you will outlive your life insurance term…

There is no easy answer to this.
Parents no longer with their children's other parent may want their children to inherit asap when they die. But if they have established a new relationship and bought a house together, the surviving partner's health and comfort are likely to be badly affected by losing their home following a major bereavement. Allowing the survivor a lifetime interest in the shared home causes all kinds of practical problems.
The only way to reliably avoid this situation is never to buy a home with a new partner, and not to mix up finances in a way that means the surviving partner will find it hard to cope alone.
Another way ahead is to accept that once a parent mixes finances with a new partner, the goalposts have changed and the children can no longer expect to inherit in exactly the same way they would if their parent died unattached. They won't necessarily 'lose out' once you take into account the ways their parent's financial and emotional lives may have been changed for the better by the presence of that partner during their last years.

But what happens if the one who dies last needs more than half of the equity in the house for their care costs before they die? I would expect my dh to prioritise my care costs above any inheritance to his children.

I would expect my dh to prioritise my care costs above any inheritance to his children.

yes, but what if the bulk of the inheritance he left was made up money his first wife worked hard for with the intent of her children inheriting it? IN the above suggestion, his children would have to pay for the second wife's care? That's not right either...

No, his children wouldn’t have to pay my care costs because it isn’t their money, it’s dh’s money.

I take your point in the scenario of where the first wife worked for some of it, but if she left it to her dh then it’s his to disperse as he sees fit, and personally I believe that in a very long second marriage it’s natural to prioritise your spouse having adequate care before handing inheritance to children.

Apologies, my answer was in response to pusspuss9

Talk to a lawyer.

No, his children wouldn’t have to pay my care costs because it isn’t their money, it’s dh’s money.
practically yes, but imo morally not.
But it's not really yours either is it.....

If a surviving spouse has the right to remain in the house, what happens if s/he wants to downsize but won't have enough equity to buy something suitable? I don't think this has been addressed.

You can only state your opinion I suppose but in my case It absolutely would be mine if I needed it for care, and so it should be after a long marriage.

Which just goes to prove my point; women wanting to protect their children's inheritance need to make a will leaving their money directly to their children. Otherwise, the husband remarries and his second wife feels entitled to use that first wife's money for herself.

I think the fundamental issue here is that there are simply more assets when the second partner dies, because of the insurance pay out.

Imagine that you structured it differently- your partner leaves you a life interest in his share of the house with it going to the SC on your death, while your child inherits your share. On your death your SC would get half the house (£150k) and your child would get half the house (£150k). But your child would also presumably inherit the other £150k left over from the insurance (assuming that you hadn't spent it). Either way your child gets more, because there is simply more to get.

We have 2 DC each and none shared. We have a life interest trust, however we have each named all of the DC in our wills. So whoever dies first- our share is held in trust for all 4 children. The survivor gets to stay in the house but only technically owns half of it. On the second death their half is also split equally. This means all 4 children get an equal share in the house, and also it means, in the case of the survivor needing to use their share of the house for care costs etc in later life, at least the children still get something.

We did this when we realised that otherwise the children of the longest-living parent might end up with less.