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Estate Planning for Blended Families

A recent conversation with a Solicitor who is an estate planning specialist reminded me of the importance of not only planning your estate arrangements but also getting expert advice.

It’s not uncommon these days for a couple who are nearing, or are in retirement, to have had a previous relationship and have adult children from that previous relationship.  These situations can introduce extra complexity to achieving your desired estate planning objectives.

Consider the situation where the couple in question wish to ensure their likely substantial assets, transfer smoothly to each other should one of them die, and once they have both died their assets are split evenly between their children (including those from their previous relationships).

Often there is a concern that one or more of the children may not be completely happy with assets passing to the new partner upon the death of their parent, particularly if the relationship between these parties is not great.

In this situation, the couple’s wills may say to distribute all assets to each other, and then equally to their children if they are both no longer alive.  A nice simple solution.

Any asset owned by the deceased is going to pass into their estate and be distributed to their spouse in accordance with their Will.  However, should the will be successfully challenged by the children, the spouse may not receive all the assets which may end up causing financial hardship.

One solution in such circumstances could be to ensure that no assets will pass through to the estate of the first deceased partner.  How could you achieve this?

  • Ensure your residence is owned as joint tenants with your spouse – upon your death, it would pass to your spouse automatically without going through your estate;
  • Ensure your superannuation binding death benefit nomination pays your benefits directly to your spouse rather than via your estate.
  • For those receiving a superannuation income stream, ensure that the income stream is automatically reversionary to your spouse.  That way, the pension would automatically continue being paid to your spouse rather than being paid out of superannuation as a lump sum.
  • For personally owned investments and assets, consider gifting those assets into a family trust.  Assets owned by your family trust are not personal assets and therefore do not form part of your estate.

As with all strategies, there are some complexities and issues to understand before implementing such a solution.  Some of the main considerations are:

  • If your superannuation binding death benefit nomination lapses after three years, ensure your Enduring Power of Attorney document specifically allows your attorney to renew your nomination;
  • Beware of the impact of the $1.6 million Transfer Balance Cap when receiving a reversionary pension – the recipient of such a benefit may need to obtain financial planning and tax advice to ensure they do not end up with benefits in excess of the cap.
  • The way in which assets are transferred to a family trust matters – if done incorrectly it could result in a loan owing to the deceased which becomes an estate asset and payable to the estate upon their death.
  • Transferring assets to different ownership structures is effectively a disposal of the asset…meaning that such action will likely trigger a capital gain.  There could be a tax cost of taking such action.
  • A family trust can be a great planning tool, but you also need to consider the transfer of control of that entity once the survivor of the couple dies.  This may include the vesting of the trust directly to the children or their heir upon the death of the surviving spouse, or it could mean transferring control of that entity directly to the children at that time.

Estate planning can be a complex area, especially when dealing with blended families or beneficiaries who have an inability to manage their own affairs.

Your financial planner is a great place to start to discuss any concerns you have about your estate planning arrangements.  And they will be able to refer you to an appropriate estate planning lawyer for comprehensive advice as required.

General advice warning.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.au

Please note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.