Estate planning considerations for blended families

Estate planning for blended families can often pose significant challenges for clients and their lawyers.

In most instances, the couple (whether they are married or in a de-facto relationship) wish to provide a benefit for each other in the first instance and then for their collective children once both parties have died. Achieving this aim sounds straightforward enough, but there are risks involved with structuring simple wills in this way for blended families.

There are a range of strategies available to provide the best chance that the will maker’s wishes will ultimately be achieved. In this article, we take a look at a number of estate planning strategies available to blended families.

The risks

The principal risks include:

  1. the will of the surviving party made during the relationship later being revoked, either through a subsequent marriage or by the surviving party making a new will which benefits their own children and excludes the stepchildren; and
  2. a failure of clients to understand that certain assets fall outside the parameters of their will and must be dealt with in other ways.

An estate plan

The couple (either together or separately, if need be) should meet with a lawyer specialising in estate planning to discuss their personal situation.  An estate plan consists of more than just a will - it also includes other legal documents and strategic planning for assets which sit outside of the estate.

It is essential that the couple have a full understanding of their options and the advantages and disadvantages of each so that they can make an informed decision.  It is equally important to trust your lawyer and equip them with all the facts so that they can recommend the best course of action, based on your circumstances.

Simple wills

A simple will typically involves the couple leaving everything to each other in the first instance and then to their collective children in equal shares once both parties have died. It is a straightforward and simple solution to a complex scenario and in the best case scenario achieves the parties’ aims.

However, there is a risk that the surviving party could re-marry, re-partner or change their will, leaving the children of the deceased party out, meaning they ultimately receive nothing. It is unlikely (except in very limited circumstances) that those stepchildren could challenge this by making a claim against their step parent’s estate.

Despite legal advice about the risks involved, many couples still proceed with simple wills.

Mutual wills

Mutual wills mean that the couple agrees not to revoke their will without the consent of the other party. This means that upon the death of one party, the survivor is no longer able to change the substantive clauses of their will. The couple makes a contract with each other called a Mutual Wills Agreement.

This option provides some protection for a will maker to feel comforted that their children are not going to be left out by the surviving party later changing their will to benefit their own children. If the survivor does change their will, it provides a legal mechanism for the children to challenge the change.

Unfortunately, mutual wills can also be inflexible, which can be an issue should circumstances change.

Life interest

A life interest provides a benefit for life as opposed to an outright gift.

This strategy is commonly used in respect of the family home as this is often a person’s main asset. Most couples who own property together do so as joint tenants. Under this arrangement, the property automatically passes to the surviving joint owner and not as per the terms of a deceased joint owner’s will.

However, it is possible to change this joint tenancy and for the couple to then hold the property jointly as tenants in common (either in equal or unequal shares). Owning a property as tenants in common allows each party to leave his or her share of the property in their will.

With this estate planning strategy, a will maker is able to leave their share of the property to their children, giving peace of mind that their children will receive some inheritance, while allowing the surviving party to remain living in the property (or a subsequent property if required) for a specific period. This might be for life, until they re-marry or no longer wish to live there. This arrangement could be rent free, provided they pay the outgoings including insurance, council rates, etc. The specific terms are tailored to suit each clients’ requirements.

There are advantages to this option since, in practical terms, little changes. The surviving party continues to live in the property and the children can’t force a sale as the will legally provides for the surviving party to live there for the term indicated in the will. Other advantages include that the exemption for Capital Gains Tax (principal residence exemption) is still available, the benefit for the children is preserved and the children also ultimately receive any increased capital gain.

There are legal formalities required to put this strategy into place. In addition to preparing a will which incorporates the relevant provisions, changes to the property title may also need to be effected at the Lands Titles Office, and the bank’s consent may need to be obtained if there is a mortgage registered on the property.

Testamentary Trust wills

A Testamentary Trust will creates a trust of which the terms can be drafted to provide benefit to a number of different beneficiaries. Unlike a simple will, a Testamentary Trust envisages that the estate assets will be held on trust for the beneficiaries after the estate has been administered.  In practical terms, this means that assets are left to a Trustee(s) who has discretion as to who the income and/or capital of those assets are paid. A Testamentary Trust will may include a wide range of potential beneficiaries such as the surviving spouse, a partner, children, stepchildren, grandchildren and step-grandchildren.

There are distinct advantages for creating a Testamentary Trust including potential significant tax savings and asset protection. However, Testamentary Trusts are more complex from a legal point of view which means that they are more expensive to set up and administer. These additional costs may be prohibitive for some clients.

Life insurance

Using life insurance to create a lump sum cash amount to be paid to natural children may be a good option so that the other assets can pass to the surviving spouse without any of the complexity referred to with the structures above. However, this strategy may not be possible or affordable given the cost of life insurance premiums which are assessed on a person’s age and health.

The importance of an estate plan

Only assets which fall into a person’s estate are dealt with in accordance with their will. Any assets which fall outside of a person’s estate will not necessarily be distributed in accordance with the will maker’s wishes, so it is important to be clear regarding what does and doesn’t fall into your estate.

Common examples of significant assets which fall outside of a person’s estate include:

  • property held jointly as joint tenants - as discussed above, these assets automatically pass to the surviving joint owner/s upon the death of a joint owner;
  • assets held in a discretionary or family trust - these are dealt with in accordance with the terms of the trust;
  • superannuation and life insurance proceeds - these assets often fall outside of a person’s estate and are paid to a nominated beneficiary (or beneficiaries) directly, circumventing the person’s will.  If there is no binding nomination in place, the Trustee of the super fund may exercise their discretion as to who the death benefit is paid to. 

Determining what assets fall within your estate is critically important when formulating an estate plan to ensure all assets are captured and dealt with from a legal perspective.

Claims against your estate

Certain people are able to bring a claim against an estate (often referred to as challenging a will) pursuant to the Inheritance (Family Provision) Act 1972 (SA).  This usually occurs when a person feels they have not been adequately provided for under a will. The list of people able to make a claim includes a spouse, a former spouse, a domestic partner, a child, a grandchild and other people who were wholly or partly financially supported by you immediately before your death.

Unfortunately, even a properly considered will cannot prevent a claim being made.  However, a good estate plan can go a long way towards mitigating the risks of a claim and there are strategies for limiting the assets that can be made subject to a claim.

Conclusion

Legal considerations for blended families can be complicated. We strongly encourage that when making or reviewing your will, you seek advice from an experienced lawyer specialising in wills and estate planning. As we’ve discussed in this article, there are a number of aspects to consider and an estate planning specialist can talk you through the options available to minimise the risks, ensuring that you have the best chance of having your wishes fulfilled when the time comes.

This article was written by Senior Associate, Kerry Miller. 

Practice Area: Wills & Estates

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