SMSFs in blended families face new approaches to deal with legal uncertainties
SMSFs that find themselves in blended families situations are seeing increasing legal complexity that can lay waste to the estate plan, requiring a need to change up the approach to counter the legal implications.
SUPERCentral special counsel Brian Hor said that while many lawyers talk about “blended families” as if they are all pretty much the same, the different types of situations often have a flow-on effect when it comes to legal headwinds facing the estate plan and the objectives of the will.
For SMSFs, they may be involved in the classic style of blended families where two persons (who may be widows/widowers and/or divorcees) come together, bringing with them one or more children from their previous relationship. Or it could be that only one person brings children from a previous relationship.
In either of the above situations, the couple may also end up having one or more children together, who may be significantly younger than the other children from their respective previous relationships.
“It could be that the couple are similar in age, or it may be that there is a significant age difference between them (particularly in the case where the older person has children of a previous relationship and the younger of them does not). Sometimes the younger spouse is also younger than the children of their partner,” Mr Hor said.
“Each of the above situations can be further complicated by issues such as children being adopted, or not being adopted, particularly in a ‘step’ relationship. Or a previous relationship having ended due to divorce rather than by the passing of the previous spouse or the previous and/or current relationship being legal or de facto.”
There also needs to be consideration with assets being held in structures such as family trusts and the state or territory in which the parties are domiciled, according to Mr Hor. The types and locations of the assets in the estate of the willmaker will determine which laws of which state or territory will apply in the event of a challenge to the will.
Redefining the estate planning approach
In each of the various scenarios for blended families, the objectives and obligations of the person who is the willmaker in relation to their spouse and the children of either and/or both of them may differ enormously, according to Mr Hor.
This includes how close or otherwise the new spouse is to the children of the willmaker, the length of any spousal relationship and whether or not a new spouse made any significant financial or non-monetary contributions towards their living arrangements and capital assets. The legal ownership of assets and promises made by one spouse to the other must also be factored in.
“When someone is in a blended family, their will needs to reflect the complexity and fullness of their individual situation, especially where it comes to dividing up that person’s estate among their intended beneficiaries and working out what happens when certain persons pass and in what order (such as assuming that the children will survive the spouse, and that grandchildren will survive the children, and so forth),” Mr Hor said.
“In other words, how will the assets of the willmaker ‘cascade’ down the generations and what if someone who is expected to survive another person passes before they do instead, causing the assets (or a significant portion of them) to ‘flow’ in a different and unexpected direction. This is especially possible in a blended family situation.”
An example of this would be to apply the standard will approach to a classic blended family situation.
“Suppose each parent made a will that simply said that when I die, everything goes to my spouse, but if they do not survive me then everything goes to my children in equal shares,” Mr Hor said.
“If the father dies first, the wife inherits all of his assets, then when she passes, all of her assets (which also includes her husband’s assets) will flow to her own children on her death and none of the husband’s assets would flow to his own children.
“A similar and equally unfair result occurs if the wife dies first, because when her husband dies then her own children all miss out on the flow of inheritance. Clearly, a more sophisticated approach is needed here to bring a more equitable result for all the children once both parents have passed.”
There are also different legal implications arising from the different types of beneficiaries in the blended family, which can vary greatly depending on the state or territory in which the willmaker is domiciled, according to Mr Hor.
In particular, he noted this refers to the so-called “notional estate” rules under the NSW Succession Act 2006 which can easily lay waste to many strategies that might work in other states and territories to protect the willmaker’s assets from a claim against their estate.
For instance, consider the willmaker and the family home are located in Queensland. If the willmaker wishes to ensure that their surviving spouse receives the family home without fear of it becoming exposed to a family provision claim by one of their children from a prior relationship:
“An effective strategy to prevent the family home from forming part of the willmaker’s estate (and therefore potentially exposed to a successful claim under family provision laws) is for the willmaker to hold it as joint tenants with their spouse,” Mr Hor explained.
“On the death of the willmaker, the family home will not form part of their estate but will instead pass by right of survivorship to their spouse, and not be subject to any potential claim made against the deceased estate.
“However, if the willmaker and the family home are located in (or sufficiently connected to) New South Wales, it may be possible in the course of a family provision claim against the estate for the court to utilise the ‘notional estate’ provisions to ‘claw back’ the interest of the deceased in the family home from the surviving joint tenant and into the estate so as to be able to satisfy a successful claim.
“So, when considering estate planning for a blended family, just remember that each blended family situation is as individual as the willmaker themselves, and that if you’ve seen one blended family, you’ve only seen one blended family.”
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.