Yours, Mine and Ours – Effective Estate Planning for Blended Families

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You're listening to Explain That by Velocity Legal, the podcast that keeps business owners and professional advisers ahead of the curve in an ever-changing legal landscape.

Blended families are a common family structure in Australia.

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They bring a set of unique legal challenges when it comes to estate planning.

In this episode, we will dive into the complexities of ensuring that your estate plan reflects your wishes while balancing the needs of the whole blended family.

Today I'm joined by Director Jennifer Maher from our Trusts & Estates team and Elisha Raucci from our Trusts & Estates team, who's a Senior Associate.

0:40
Firstly, welcome to the podcast.

It's our first Trusts & Estates episode. One of many to come.

Andrew, thank you for having us.

Yes. And firstly, before we get into it, it's timely because I wanted to congratulate the team on the Doyle's Guide recognitions for estate planning and estate litigation.

0:58
That must be huge.

It's a very proud time for our team. We're very humbled. It's peer voted, so that means we're recognised within our field as doing a good job, and we hope that translates to clients and our client service.

Fantastic.

All right. Well, today we're talking about blended families.

1:15
Now, when I was sort of thinking about this, I don't know, people throw up the Brady Bunch. This is going back a long time, well before any of us were alive.

But, you know, that was a very unique situation where you've got kids from two different marriages and they come together into a family.

1:32
But that's very common these days, isn't it?

It's more common than not. It's very rare, I would say these days, in the estate planning context, that we see a vanilla mum and dad who have stayed together for 30 or 40 years, assets are jointly held and there's, you know, there might be complications with the children.

1:50
But in terms of that blended environment, the multiple entities, the varying degrees of complexity that we need to deal with and that balancing act, it's really more common than not.

Yeah. Well, before we get into the nitty gritty of the blended families pressures, I guess Elisha, maybe we'll just start with, I guess, what's your conventional 101 nuclear family kind of approach?

2:14
The main normal issue in terms of blended families is usually not understanding how the asset ownership can impact where that goes and what happens, and then potentially not passing in the way that they intended or what they would like to protect for children of a previous relationship.

2:31
I think that tends to be the biggest starting issue that we come across.

Because I guess in your nuclear kind of family, the non-blended family, it's a bit simpler because it's typically, unless, as you said, there still could be considerations.

But unless there's something out of the ordinary, it's usually sort of to the spouse and everything to the children all jointly, correct?

2:53
But how do you deal with that when you're balancing on one hand, different children, and maybe some of them are adults, some of them are children, and then a spouse as well?

Yeah. And often with some of the blended families that we see, there is this significant age gap between adult children of the first relationship or the second relationship, and what that might look like with that third or fourth spouse.

3:14
There's no timeframes on how many times you can actually re-enter, re-partner and have children.

And so sometimes that age gap, I had a matter where there were six kids and there were adults, one was a lawyer practicing, so 45 down to six.

3:30
And so it's a very difficult situation to say, well, what is the asset pool that we have available to us?

What are the risks in terms of who might challenge?

What are the family dynamics?

And how do we carve out potentially insurances or super to quarantine those to the bloodline children and not sort of put it into a pot which might be exposed to a family provision claim?

3:49
And I was going to ask, how do you sort of start those conversations?

So say a client comes to you, they've got a blended family. How do you start those conversations?

It can be awkward. Sometimes they haven't had the discussion pre-meeting, but usually the first question is what's your overall objective? What is your intention? What would you like to see happen?

4:10
That normally then frames the basis for the advice that follows after that.

So generally touched on it, whether we're segregating certain assets for certain children.

Yeah. And I guess once you take those sort of instructions on roughly what they'll actually want to do, it's assessing, I guess, the legal risk of those actions and how to avoid those risks.

4:29
I usually start with a family tree, to be honest. Put it on paper. It's a visual sort of cue, and it helps you then, when you've got the assets, to say, well, that's going to go that way and that's going to go that way, and how do we make it work?

It just helps that thought process because often it is, you know, the primary concern, and sometimes there is a conflict that we have to say.

4:46
We can't advise both parties because sometimes that concern is, the discussion they've had is just in relation to their current spouse, but there are really significant competing needs with the first spouse, whether it's an unresolved family law issue, which again happens.

There's no issues with timing.

5:02
You can re-partner at any time, and sometimes people do in that divorce situation, and they've already been partnered.

And so there is then again another layer of concern and litigation that we need to factor in.

And so from that perspective, sometimes that mud map is good.

And then sometimes it is that difficult conversation to say, okay, well, you two might have been on this page, but now I actually have to introduce a new concept.

5:23
Yes.

And that's sometimes a little bit awkward.

Yes, where you say no judgement, but you know that your children and this child, they should not be treated equally. You can't dismiss that. There are other children in this family tree.

5:39
I guess sometimes people, you know, sometimes people don't even do estate planning. And of course, that would be shock horror, but it's a reality.

I wanted to ask sort of at a very high level, what would happen in a blended family type situation, Elisha, if someone was to pass away just without anything done?

5:57
Yeah. So if we presume potentially assets are jointly held, it would automatically pass to the surviving spouse. So children would miss out at that point.

With sole personal owned assets, the legislation sets out who benefits.

So the spouse in effect would get majority, and then there would be some provision for the children of the previous relationship.

6:16
But sometimes that split or the type of asset passing in that manner is just not what they would have wanted to have happened.

And I think to bear in mind, the legislation does provide for the fact that you can have a spouse and another partner.

So multiple spouses at the one time.

Okay.

And so just flagging it because people do live that way.

6:36
And so then it's a delicate decision and talking through to say, well, you actually do have two spouses at this point in time.

Yeah.

And you do have children, and sometimes they're not children of those relationships.

And you do have that sort of then assessment of, wow, this is a really serious situation.

6:52
What do we do with that?

And from the legislation perspective, if there is no will, you have competing claims on foot to who should administer the estate, which will then indirectly potentially impact upon who will receive and who will challenge.

7:07
And then it becomes more costly because the risk is higher. It normally becomes litigious, so it becomes far more costly from an estate perspective than just having it all sorted.

Yeah. That's a lifetime.

So I mean, not only is it sort of taken out of your hands in terms of who gets what and based on legislation that may be completely different to what you want.

7:24
But in addition, what you said, Elisha, is that, well, who's actually going to be the person who's the executor? And there might be a fight over that.

I guess maybe let's just touch on briefly when things go wrong. I mean, I won't hold you to figures and things like that, but how bad can it get?

7:42
It can get bad.

I mean, Jen, you've probably had a lot that have probably hit the hundreds of thousands when it gets really bad.

Yeah. I think in general, you're looking at at least, let's just say, $60,000 alone with legal fees, and you've got barrister fees.

7:59
Then you've got the other side. Potentially the estate may need to pay all of it.

So it does get expensive. And also the strain on other relationships between everyone as well is not something to completely disregard.

Yeah.

It's exhausting.

8:14
Unquantifiable, yeah.

Yeah, for the sake of getting it right upfront.

And I guess you would often ask those sort of hard questions of clients and say, I don't know, well, how does this play out? What about this?

8:29
Yeah. And particularly where you do have, and I've had this situation, I'm sure you have too, where you've got a younger couple, but it is a second couple and they all have young children.

And so the husband, to me, just for the purpose of the example, has four children from the current relationship, two from the former relationship too.

8:49
They're all under 10. Generally, you've got serious competing needs. They still need to be educated. So do your current children.

And the spouses might not all get along.

I mean, I've had some beautiful success stories where they've really worked collaboratively.

Probably they are the Brady Bunch.

Yeah. And it is lovely.

9:05
They all go to the weddings and the birthdays.

And I say credit to you for being able to navigate that and achieve that.

But where you do have those sort of serious competing issues, the strain on the relationship if that middleman is gone, so to speak, between the two spouses and then the children, everyone's grieving, and everyone needs funds because sometimes that middleman is the person who is the primary income earner because they've got young children.

9:32
And so it's a very difficult task to say, well, how do we work this out?

And if you don't have a will saying here's what's going to happen, it can get very hostile.

Yeah. Well, let's maybe delve into, I guess, some of the mechanisms that you might sort of look at and chat with clients in those blended family situations.

9:53
My very basic knowledge, I know sometimes it will be, you know, the spouse will get the family home and then other things will go to the kids split evenly.

Is that pretty common that you'd start with? And would it be a life interest? What are the issues there?

10:11
Life interests I find are useful for a limited purpose, and I'm probably the exception of the rule, and I think Elisha is the same in terms of our views with estate planning.

They were quite common historically to use, but again, the differences in the ages between the relationships and then the adult children.

There's no point having a life interest for a second spouse when she's almost the same age, slightly older than the adult children.

10:34
Potentially the adult children will never receive a benefit because she will live for as long as those adult children.

Yeah.

And so I think it does require more of an analysis around what do we need to achieve now.

Yeah. And stepchildren as well can sort of contest a will. So it's again moderating that sort of environment and that dynamic.

10:50
It's around looking at, you know, we're not family lawyers, we don't make an assessment of contributions, but we do need to recognise that, I think, and advise our clients.

Well, if it is a blended family situation and there are these contributions from this person and contributions from that person, do they respectively go back down that line?

11:10
And so exactly, sometimes it's.

I don't even know if I answered your question.

Well, to touch on that point, it was a good answer.

To touch on that point, stepchildren, are they eligible to make claims if someone passes away?

They are, yes.

11:26
It's a short answer, yeah.

It's tougher if, or it's not tougher, it's more difficult for an adult stepchild to challenge because they have to essentially be able to persuade the court that they can't provide for their own reasonable means, that there was some element of financial dependency.

And so they need to have that continuum of the relationship with that step-parent on the death of their biological parent.

11:50
All of those factors are directly relevant.

But if that sort of, you know, if we use the sort of situation of everything goes from one to the other and then that sort of biological family misses out, there's a significant argument to say that there were assets contributed to that estate and they should have come back out.

12:06
And so sometimes, you know, we do have that concept of the mutual will agreement, which I don't particularly use that often because I find now the mutual agreements are going to become more and more like a financial agreement in the family law perspective.

12:21
They are a contract that you cannot change your estates, but they need to be very well drafted because they are a contract.

And so they can be quite restrictive because you can't divest your assets. We're restricted in how we can use them as a surviving spouse.

And that's why in terms of the analysis of doing a mutual agreement, they are useful and successful.

12:40
Useful, yeah, to a limited extent because you can try and capture as much as you want.

So I'll use superannuation as an example.

There can be a strong argument of, well, was the intention that superannuation was meant to form part of the mutual agreement?

But if it doesn't specifically provide for it, and then you're trying to balance that with, well, the surviving spouse will have needs, medical expenses, might need to rehome.

13:03
So how much do you restrict it?

So they do need to be drafted extremely carefully, but at the end of the day, it's creating an enforceable contract for the children to say, well, you breached that.

But it still needs to achieve a purpose and be within reason. So I don't use them that often.

13:21
And correct me if I'm wrong, a mutual will is essentially the two spouses will sit down and do essentially sort of like mirror wills, but have this sort of contractual agreement that one won't change it, which is, I always thought it was interesting because the normal principle is you can change your will at any time.

13:40
Still can.

So they still can technically create a new will, and as long as it's executed correctly, it's still a valid will.

You're creating a contract that potentially the children, that spouse, surviving spouse removes.

13:57
They then say, well, you signed this and you've circumvented it.

It's contractual rights and obligations, but you can still create as many wills as you want after date of death and they will still be valid.

Really interesting.

And I think that's where the point of sort of the financial agreements and a family law perspective require independent legal advice.

14:16
And I do think in the next five to 10 years with the complications in blended families, the different entity structures, we will have that situation where if we do do a mutual agreement, I would be saying to the other spouse, go get independent legal advice just to make sure it's valid and binding.

14:33
Well, you've just touched on two different things that I want to explore now, other entities and superannuation.

Let's start with family trusts and talk about those a little bit.

I guess what are the considerations for blended family situations with family trusts?

14:50
It depends on the purpose of the trust and why it was established as well.

So what we see often is that the trust will be an older trust that was potentially created during the previous relationship, and there was a clear intention that it benefits the children of that relationship.

So the assets remain in that trust and don't pass via that person's will.

15:11
So what we're normally looking at is what's the overall intention? Who did you intend for that trust to benefit? And continue it on that basis and not do too much to change that, but come up with other avenues potentially if that was your new trust.

15:28
So blended family set up.

Oh yeah. So trust set up a long time ago for the children from the first marriage, let's say.

And you're saying, well, should that be kept as is essentially, not disturbed too much?

You know, and I think it does, again, the devil's in the detail.

You need to make sure that the beneficiary classes are who you intend, but also the control of that is really important because there's no point quarantining out that trust for the benefit of the biological children.

15:54
If you're then potentially going to put in the second spouse accidentally or unintentionally in control of that trust, because again, you've got a dynamic where you're going to have a potential risk of conflict.

And if the children do fall within the class of beneficiaries, you might have a situation of that second spouse preferring their own children opposed to the intended children of that trust when it was established.

16:17
And there's a potential for the spouse to automatically step in and control the trust if the deed's not looked at and reviewed as part of the estate planning process.

So a question I wanted to ask, Jen, how often have you seen a will try to deal with trust assets as part of the estate?

16:33
Unfortunately too often is the shortest, yes.

I don't recommend it.

Yes, I must say, and I think just touching back on the trust issues as well with the beneficiaries, read the deed is always the mantra with any family trust situation.

16:50
You know, I had a blended family situation where she was the third spouse and had the youngest of the six children, and as a widow, she inherited control of the family trust, but she was an excluded class because widows were excluded.

17:06
So she couldn't even benefit or pay a benefit to herself in that situation.

And had someone read the deed when they were doing the estate planning, they might have realised that.

And so my client came to me saying a lot of the money is in this family trust.

And I said, you can't. You can't pay yourself. I'm really sorry.

17:23
So thorough review.

Read the deed.

Entirely.

Yeah. Let's turn to this super topic.

And Elisha, I know you've got expertise in superannuation, so I'm going to direct the questions, start with you.

17:38
But I know there's been all sorts of cases and disputes in blended family situations about when the individual has passed away and the fund, and there's a dispute about basically where the super goes.

17:54
Can you sort of enlighten me a little bit beyond that basic knowledge of what the issue is here?

Yeah. So as a general principle, superannuation does not automatically form part of someone's estate.

It passes in accordance with the binding death benefit nomination.

So if your intention is that it's meant to form part of the pool of assets, you would normally direct that to the estate to be divided as needed.

18:18
If there's no nomination in place, you're allowing some discretion to be used about who benefits, generally the spouse because they are a tax dependent.

It's a tax effective manner of passing the superannuation.

So that's normally the decision that would be made.

And if I use externally managed funds as an example, you're relying on someone that you don't know to make a decision about who they intend to pass the superannuation to when you pass away.

18:43
And normally the box is being ticked that it's effective to pass it to the spouse.

They can confirm they're a spouse, which includes the de facto partner as well, and pay it to them, which may not be what the overall intention was with the division of the assets.

19:00
And then that can turn into a potential dispute surrounding the super.

With self-managed super funds, it's a little bit different. Normally the executor steps in to manage it.

But that's also important because if your executor is a surviving spouse who's your second husband or wife or third relationship, they're in effect exercising discretion to pay it to themselves.

19:24
And some of the cases surround that in effect acting in a conflict and misuse of that power, and not following what, you know, turning your mind to other beneficiaries and why minor children are tax dependants.

You know, you could make a decision.

19:40
It's a really interesting area because I think a lot of people would have thought super, sort of, there isn't that discretion there.

But as you said, if it's a public fund, unless there's a binding nomination, someone external has ultimately got that discretion on who to pay it to.

19:58
But then in a self-managed fund situation, someone probably who has a stake in it actually is the one making the decision.

Exactly.

It's really interesting, yeah.

How do you, what do you do normally? Is it normally like an education piece with clients on the superannuation side?

20:14
And getting them to understand the importance.

So if it's a self-managed super fund, reviewing the deed, seeing who's going to step in, making sure that's who you want to step in, and ensuring that any nomination that's prepared is in accordance with the trust deed and the terms and what it permits.

20:33
Ensuring that you can do a non-lapsing nomination so it doesn't inadvertently expire after three years, which is still common in a lot of deeds.

Yeah, so it's about getting to understand and a lot of wealth is in super. It's still there. It's generational.

So it's about ensuring that that is in effect protected to the extent of passing to who you want it to pass to.

20:56
And then I've got an example of an externally managed fund where his intention was that the superannuation passes to the estate because one child was not good at managing money, and we had trusts in the will.

So the intention was that the superannuation forms part of the trust, and they were well and truly adults as well.

21:13
The fund tried to push through the nomination as being invalid due to it not being initialled correctly.

So there was an error on the date and one of the witnesses didn't initial it.

Luckily, I had a letter from them confirming there was a valid nomination in place, and then they tried to backpedal after that.

21:31
So we got it through, but it would have completely unravelled the intention.

So the other important thing is, from an externally managed fund point of view, we do prefer to sign and witness the nomination in our office.

Yeah.

Send them off to the fund ourselves, and if there's any issues, we can follow up with the fund.

21:51
But it's about just making sure that it is in place validly.

And that's a great point, that the consequences are so high in this area if you'd stuffed something up.

And it's really interesting because a lot of areas of law, you know, there's DocuSign, there's electronic things, but estates are still.

22:07
Dinosaurs. We're dinosaurs.

We're the last bastion of a wet ink signature of most of our documents.

Yeah, but the consequence of that will document is so high, and you don't want, you want it to be foolproof and bulletproof.

So the control, I get that. Yeah, yeah.

22:24
And I think touching on the super too, again in the blended family situation, which is usually on a higher rate for us than ordinary, is the power of attorney document.

Because the power of attorney document, if you take a default perspective, second spouse will be the financial controller and power of attorney.

22:42
Potentially they can renew or sign a different super nomination.

And so in our power of attorney document, again, it's that bigger picture situation of do we want to enable that power or not?

And so it might be carving out like, my attorney cannot change my super nomination.

22:59
Yeah, because we want it to be hardwired. We want it to flow the way it flows.

Yes.

Or we might say, depending on the superannuation provider, because they're all different, it might say they can renew but not make a new one.

Yeah.

So we're allowing it to be renewed.

Limit the power to follow it.

23:15
Absolutely. So it doesn't again undo the apple cart unintentionally.

The power of attorney are really important. We hadn't spoken about until now, but they are such a big piece of the puzzle as well, aren't they?

Because we talk about someone passing away, but the reality is that probably a lot of cases, people have a period of incapacity before death, and a will doesn't govern those type of situations.

23:40
No. And it's important if you're doing a life interest, for example, or providing, even if it's a child who's occupying a home owned by that donor, you want to make sure that their intentions are mirrored in the power of attorney document.

And I do think a power of attorney document is a very undervalued document as part of the estate planning tool.

23:59
Because what we don't also want to happen is that it's a piece of property, for example, that's going to be gifted to a beneficiary or that's going to be the subject of a life interest, is sold to fund an accommodation bond or something like that.

And then we've got a failure of a gift.

And so often, and I know you're the same, if there's anything specific of that nature, particularly in a blended family context, we will hardwire that in the power of attorney document.

24:25
Yeah, that's the importance of planning and getting sort of the holistic approach and understanding all the will, the powers of attorney, the trust, the superannuation and getting everything speaking to each other rather than piecemeal.

The domino has to fall the right way.

Yeah, as I describe it. I'm like, okay, the domino effect.

24:42
Yeah.

And that's why I do mud maps and I do draw diagrams for clients because it helps them go, oh, I can understand where it might fall over.

And so the value in the detail and our documents is realised by clients when you can talk to them and say, well, this is a great idea, but implementation will need to be able to make sure it stands.

25:06
Yeah. Well, I think you've both shown the value, and what we've been discussing is really the value that a legal professional who specialises in estates and trusts can really provide in these more complicated blended family situations, which aren't that uncommon.

25:24
And as you said, the dominoes, do they line up? Is it going to fall the right way? Asking the right questions. You've really shown the importance of that in those type of situations.

Let's say I'm an adviser or a potential client and I've got a family situation and I'm wanting to engage on that.

25:41
What's the sort of normal process look like?

First step is an initial meeting. We normally do get some information prior to the meeting from the client, but that initial meeting's key because we can sit down, discuss exactly what they would like and give some advice and recommendations in that first meeting.

25:57
So that's step one.

Number one is meet and discuss what they would like to do and what we can do and how we can assist.

And then you're putting in place a plan from there.

Yeah. And I think if it's come from an adviser or a referrer, we would like that adviser or referrer to be a part of that initial meeting too, because often they'll have the detail in terms of the financial aspects and positions, and even things like a member account balance.

26:27
They will have that at their touch point rather than the client being, honestly, I think there's about this much.

And so I think that's the first thing too, to say clients, and if they have an adviser and it's come through the adviser, more than welcome to come in.

We'll have that high-level discussion. It might be we need further documents, the detail to review the trust deed or the self-managed super fund, and we'll do a plan.

So it's the plain English version of the will because sometimes they will be more complicated.

26:46
The plan will be sent, circulated, that's our working document.

And then we'll do the detail and the final drafts.

And then the plan, I say to clients, every tax year, every time you do your tax, review your plan and make sure your estate planning is still appropriate.

You usually don't have to change it sort of every three years, maybe if there's a new child, a new relationship.

27:06
Potentially.

Or a separation.

Yeah, every tax time, do that legal health check for your estate plan.

Yeah, I think that's a good suggestion.

And having that sort of living document that's less in legalese and more in plain English is very important so that people can check and reflect on that.

27:27
I wanted to thank you both for being part of this episode, and I encourage any listeners if they have any trusts or estates questions to reach out to Elisha and Jen.

Thanks once again.

Thank you.