As at the 2021 Census, over 10% of families with dependant children were blended or step families1. These can present additional challenges in estate planning, particularly in relation to balancing the needs of a new spouse and those of children from a prior relationship.
What if you get it wrong?
In an ideal world, an estate plan should provide for all the important people in your life in a manner that ensures the risk of family conflict is minimised.
There are two main risks if the estate planning in a blended or step family is not adequate:
- People will miss out – in a traditional family, the estate planning is often on the basis that a surviving spouse will take the estate, with a reliance on them to pass it on to mutual children in due course. Even in this traditional scenario, there is some risk that the survivor will re-partner, fall out with intended beneficiaries or otherwise be influenced to change their planning from what was originally agreed. In a blended or step family, this risk is heightened given there may not be as strong a relationship between step parent and step child or the same feeling of obligation towards them.
Equally, if the planning goes entirely the other way and exclusively benefits children then it may be the spouse that misses out.
- Dispute – a significant proportion of estate disputes involve step children and step parents and this is often motivated by the fear of missing out on an inheritance. The step parent may have every intention of passing on the inheritance to step children in due course, but that intention (unless formalised and binding) is unlikely to prevent any claim from either being made or succeeding.
Common strategies for planning with blended families
There are a number of strategies that can be utilised to mitigate the above issues in a blended or step family context:
- Life interest – this is a form of trust that can be created by a Will to allow a particular person to have use and benefit of assets for lifetime, while preventing them from dispersing the underlying capital. A common example is for a homeowner to provide a life interest to their spouse permitting them to live in the home for life, before it then reverts to their children. There needs to be consideration of issues like trustee selection, funding maintenance and debt, and tax outcomes. This can be very effective in the right situation and provides great certainty of benefit for the eventual beneficiaries.
- Mutual Wills Agreement – this is an agreement between parties (usually a couple) not to change their Will in the future to defeat an agreed distribution. The fact that a couple create Wills together does not give rise to a Mutual Wills Agreement in itself. There needs to be an actual agreement (usually in writing) that they are prevented from changing their planning in the future. While such an agreement is binding and enforceable, it does have some limitations and cannot prevent legitimate third party claims (eg/ family law claims or estate challenges) from impacting the estate. It nevertheless remains a useful planning tool in the right scenario.
- Direct gifts – where the size of the estate permits it, there may be merit in making direct provision for intended eventual beneficiaries up-front, rather than only when surviving spouse has also passed. This provides certainty that, regardless of the surviving spouse’s own planning, the eventual beneficiaries will have received a portion already. It also reduces or eliminates the need for step children to ‘look over the shoulder’ of their step parent to see how assets are managed and what may be becoming of their inheritance.
Whether these strategies are workable in your estate planning will depend on a number of factors including how assets are owned, age of relevant parties, the value of the estate, whether any structures (companies, SMSFs or trusts) exist, and, ultimately, the people involved and their relationship with each other.
How we can help
No one wants to leave a mess for their family when they pass. The planning in blended or step families requires careful consideration. This article touches on some key planning strategies for this scenario but is only the ‘tip of the iceberg’. Estate planning advice should be sort on your particular circumstances.
For expert advice or guidance regarding Estate Planning the Wills, Estate Planning and Structuring team at Moores are well equipped to ensure the interests of your family are protected.
Contact us
Please contact us for more detailed and tailored help.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.
1https://aifs.gov.au/research/facts-and-figures/families-and-family-composition