Many households in Australia today are comprised of blended families with it being very common to have stepchildren of at least one of the parents within the family.
We recently met with a client Sue (not her real name) who was concerned about balancing both her desire to provide for her current partner and her desire to provide for her children from a previous relationship. Sue wanted to make sure her children received a benefit whilst also protecting her current partner from any conflict or claim.
Balancing these competing aims is complex and can be hard to navigate without the correct legal and financial advice. Traditionally, a will states that the deceased’s estate is gifted to the surviving partner in the first instance or, upon the partner’s death, to the deceased’s children. This is generally inappropriate for blended families. Furthermore, if adequate provision is not provided by an estate, an eligible beneficiary may make a family provision claim that could cause distress, delay and uncertainty.
The following estate planning tools may be useful when considering estate planning for blended families.
1. Mutual Wills
Many couples prepare wills on the basis that their estates are to go to each other. However, you are not restricted from changing your will, whether now or at a later date. When the first partner passes away, the surviving partner can alter their will. This may result in a new will that does not reflect your current shared intentions. Circumstances change and it is impossible to predict what might happen in the future, particularly if the surviving partner is under the influence of third parties.
A ‘mutual will’ is an agreement where the couple agrees to not change their wills after someone passes away without mutual agreement. It provides peace of mind as it ensures that the deceased’s property flows to the intended and agreed beneficiaries and prevents a surviving partner from disinheriting beneficiaries following the death of the first partner.
It is important to note that mutual wills add a layer of complexity to your estate planning and may be limiting on the long-term future plans of the surviving partner. Accordingly, mutual wills require specialist legal advice to ensure they are effective and balance the need for flexibility or unexpected events following the death of the first partner.
Generally, the proceeds of any superannuation fund are not distributed in accordance with your will but are paid to either a Binding Death Benefit Nominee or the trustee of your superannuation fund may have a discretion to determine who receives your death benefit.
If you do not have a Binding Death Benefit Nomination, then the trustee may use their discretion to pay your superannuation death benefits to your estate or direct to a relation of you (such as a spouse, child or dependant). They do not have to follow any non-binding nomination nor do they have to follow your wishes that are set out in your will.
Blended families may wish to use the Binding Death Benefit Nomination to direct their superannuation and insurance to their preferred person rather than to their estate. This is a useful strategy because superannuation is not generally subject to potential family provision applications under estate law.
While you may leave your estate to any one you choose, under the Succession Act 1981 (Qld), there are three classes of people who are eligible to contest wills in Queensland on the basis that they have not been adequately provided for. Those classes of people are spouses (including marital partners, de facto partners including same-sex partners, and civil partners, dependent former spouses), children (including step-children, adopted children and unborn biological children born after the will maker’s death) and various categories of financial dependents.
The financial impact of such a claim is that significant legal fees may be incurred in defending any litigation (including any threat of litigation) and the entitlements of the beneficiaries who you intend to benefit may also be significantly affected. This means that your intentions may not be carried out. Furthermore, the estate cannot be finalised until any litigation is resolved which may result in a significant delay.
In this way, you may wish to use your superannuation and insurance to provide for a particular person(s) and limit the ability for other individuals to contest the payment. It is important to note that this strategy requires specialist legal and financial advice to ensure it is effective.
3. Testamentary Trust
You can establish a trust via your will, commonly known as a testamentary trust. Simply, the trustee holds the estate assets on trust for your beneficiaries and deals with the trust assets as per your will. A will may contain more than one testamentary trust and may address all or any portion of the estate. This can be useful in blended families as a way to provide flexibility and control in asset distribution amongst beneficiaries. It also assists in protecting your assets from third parties and creditors.
Assets held in trust are afforded some protection simply by virtue of being trust assets. A testamentary discretionary trust gives flexibility as to how and when your beneficiaries receive their benefits from your estate, which protects the beneficiaries’ entitlements and minimises any applicable taxation consequences for them. This is possible because the assets of your estate will be held by a trustee for the beneficiaries, not by the beneficiaries.
Testamentary trusts can also be very tax effective. The Australian tax laws are regularly amended, updated and sometimes substantially and significantly redrafted. It is important to understand that the testamentary trust will, during its period of existence, be subject to whatever the prevailing tax laws are from time to time. We recommend you seek independent financial advice to address any specific taxation issues you may have.
It is important to note that testamentary trusts add a layer of complexity to your estate planning and it is very important you obtain specialist legal advice to ensure your will is effective.
We hope you found this useful.
Unfortunately, we no longer offer Wills & Estate or Business Law services.