Navigating inheritance challenges for blended families

More than 10% of Australian families  include children from previous relationships.^disclaimerAlthough these blended and step-families may love each other dearly, these family structures can create complications when it comes to planning inheritances – potentially jeopardising that unity.

Relationships between members of blended and stepfamilies can be complicated and may open the door to inheritance disputes, will challenges, legal stoushes, erosion of the estate’s wealth and even chicanery among family members.

These issues can be exacerbated in cases where one partner is wealthier than the other, according to Lubi Kierno, ANZ Advice Director for Queensland, Western Australia, and South Australia.

However, Ms Kierno cautioned that even where both spouses have significant wealth individually, issues can arise.

“Wealth disparity does exacerbate the issues somewhat with different views on what is fair distribution of the wealth, particularly given the lifestyle individuals may quickly become accustomed to,” she said.

“But they occur even when there is wealth on both sides, with human nature leading to feelings of entitlement. The key factor seems to be the source of the funds and subsequent right to distribute.”

Fortunately, proper forward planning helps overcome these challenges. And given how much money will be transferred over the next decade via inheritances, it’s never been more important to start this planning process.

Between 2002 and 2018, the aggregate total value of Australian wealth transfers was roughly $1.5 trillion. It now accounts for 6.5% of Australia’s gross national income, according to data from the Productivity Commission. Of that total, $1.3 trillion represented inheritances.

The Productivity Commission estimates that the value of these transfers and inheritances will continue to grow over time, with a further $3.5 trillion tipped to change hands in the next two decades.

The common challenges

By their very nature, blended and stepfamilies can be complicated, not only in family composition, but also in the pooling and creation of wealth when parents re-couple.  It is therefore not surprising that in respect of inheritances there are more opportunities for potential beneficiaries to be disappointed, increasing the likelihood of estate disputes. By some estimates, as many as 8 in 10 legal actions involving estates relate to blended families.^disclaimer

The Head of Legal ANZ Wealth Legal Services, Peter Holdsworth, says that all Australian jurisdictions have legislation that enable a person who has not been adequately provided for in the will of a deceased, to make a claim for additional provision from the estate. Initially the legislation limited claims to close members of the family – hence the term ‘family provision legislation’ – but the range of prospective applicants has broadened over time.

The failure to make adequate provision in the will for the surviving spouse, children or other persons for whom the deceased had a moral obligation to make provision, may result in a family provision claim.

Understanding legitimate claims

For a blended family, Mr Holdsworth said the main difficulty is balancing the competing interests of those who have a legitimate claim to a share in the largess of the estate. For example, the need to adequately provide for a second spouse will reduce or delay the expectations of any adult children from a previous relationship.

Sometimes, spouses in a second relationship will gift their respective estates to each other in the expectation that the survivor will do the right thing and leave the estate equally among all the children. However, the surviving spouse may favour their own children over the interests of stepchildren.

Even with the best of intentions, a surviving second spouse may need to sell assets to maintain their lifestyle as they age. As a result, the children of the deceased spouse can sometimes come to resent this erosion of the estate.

“There’s also the unquantifiable matter of personal distress,” Ms Kierno noted.

“There is an enormous emotional cost, as after a sad event people feel obligated to take sides and positions instead of grieving together,” Ms Kierno said.

“A lot of wealthier families are also quite private so the public scrutiny the legal battle brings can have an additional emotional cost.”

Planning can protect families

What can be done to guard against or reduce these possible risks? The answer may depend upon the family dynamics, but a good first step is to make a proper plan and to discuss it with everyone. This can reduce confusion and ensure everyone is happy before anything happens to either parent.

This planning should start early too - anyone starting a second relationship should, Mr Holdsworth said, consider entering into a Binding Financial Agreement pursuant to the Family Law Act – in other words, a pre-nup 

However, whilst pre-nups can be an effective way to protect personal and family wealth, they only apply in the event of a relationship breakdown. They do not prevent family provision claims against the estate of a deceased.

An important step in estate planning is determining how family wealth is to be owned.  Family provision claims can only be made against assets that the deceased owned personally at the date of their death or are paid into the estate of the deceased after death.  For example, assets held in a trust do not form part of a deceased’s estate.  Similarly, a jointly owned asset passes to the survivor directly and does not form part of the estate.  Superannuation will not be an asset of the estate unless it is paid into the estate.  Non-estate wealth is generally not subject to a family provision application, however in New South Wales, some non-estate assets may be included as “notional estate” and subject to family provision claims.

While the use of trusts or other forms of asset holding (such as jointly) may offer some protection, Mr Holdsworth noted that each asset holding strategy will need to be reviewed from time to time to ensure they remain effective.   Family trusts, for example, often feature an ‘appointor provision’. The appointor of a trust generally has to ability to hire and fire trustees, and thereby effectively controls the trust.   In the absence of proper planning, the appointor position may pass to an unintended person, such as a current or former spouse.

Superannuation and inheritance

Superannuation is an increasingly significant component of individual wealth.  As noted above, superannuation (including life insurance attached to superannuation) will only form part of an estate if it is paid into the estate of the deceased following death.  A person may make a binding superannuation death benefit nomination directing the trustee of the super fund to pay the superannuation death benefit in accordance with the nomination.  If the death benefit is paid directly to a spouse or child, the death benefit will not form part of the deceased’s estate.

In addition to making a valid death benefit nomination, where there is a self-managed super fund, consideration should be given to ensuring that the control of the superannuation passes to an appropriate person on death of the member.  The appropriateness of having both parties to the relationship as members of a self-managed fund requires careful consideration. 

Protecting the family home

In relation to the family home, Mr Holdsworth said a common solution was for the property’s owner to grant their surviving spouse a right to continue to reside in the property.

“Such a right would typically include a provision that the home may be sold, and a substitute property purchased from the proceeds of sale. This would help ensure that the needs of the surviving spouse continue to be appropriate to their needs including suitable aged care accommodation”, he added.  

This strategy can ensure that the family home can both provide for the surviving spouse, with ownership, or the sale proceeds, eventually passing to the deceased owner’s children.

One other option for families to consider is drafting and implementing a family constitution to govern how decisions about wealth are to be made.

Seek advice

While these considerations are important to preparing a useful plan, Mr Holdsworth added that alone, these may not be enough.

The best and surest method of putting in place appropriate arrangements, he said, is to seek the advice of a suitably qualified lawyer who practises in this area of the law – estate planning and succession. He also noted that ANZ’s team of in-house lawyers and specialist advisers have extensive experience in this field.