Inheritance cash can be crunched by blended family battles

Blended families or second and third marriages can create an inheritance nightmare. Here’s how to prevent a family feud.

Second marriages, blended families, older divorces and more complex investments are all creating huge headaches when it comes to inheritances, prompting fresh warnings for people to plan for their death.

While rich billionaire family fights about assets and wealth grab headlines, everyday Australian families are also increasingly at war when a parent dies.

Disputes involving step-parents and stepchildren have grown as blended families increase, and it seems more adult children are becoming estranged from their parents.

The latest Australian Bureau of Statistics figures show there were 56,200 divorces in 2021, up 13.6 per cent on 2020, and the median age of divorcing couples continues to gradually climb.

Coote Family Lawyers partner and head of estate planning Suzanne Jones said big changes in assets and investment mixes, self-managed super funds and family trusts were making inheritances trickier, too.

“About 33 per cent of first marriages fail and 65 per cent of second marriages fail,” she said.

“Family dynamics are much more complex than they were. Children feel they should try and protect their parent and children are getting involved.”

Ms Jones said having a detailed estate plan was vital, and it should also cover assets that were held outside of a will – such as superannuation.

TALK THINGS OVER

Partners – especially those with blended families – should discuss what should happen to their assets when one of them died, and also what should happen if one became incapacitated, Ms Jones said.

Don’t involve the children in these initial talks, as it could get messy.

“If you involve too many parties in the conversation, everyone has got their own agenda,” Ms Jones said.

“In my experience that doesn’t work too well.”

“If it’s a significant estate, have a binding financial agreement as well as the wills and other estate planning documents. A family law agreement can be expressed to cover what happens to assets on separation and in the event of the death of a partner.”

Elise Fordham from Australian Family Lawyers. Picture: Justin Lloyd.

A mutual will agreement can prevent a partner from changing things if their partner dies and they want to send more wealth to their biological children at the expense of their step kids.

Australian Family Lawyers principal lawyer Elise Fordham said blended families, de facto relationships and second marriages were more common than they had ever been.

“Planning ahead doesn’t seem to be in the forefront of people’s minds unless they have had horrible separations in the past,” she said.

“We also have Google Lawyer now which means people can educate themselves about these issues from the comfort of home before taking the step of engaging a lawyer.”

HELPFUL TIPS

Ms Fordham’s top tips to help people protect inheritances for their children in complex family situations include:

• Plan ahead and plan early.

• Keep finances separate and avoid purchasing property together.

• Update all estate planning documents when entering a new relationship.

• Have a testamentary trust in your will to gift assets to your children.

• Use a binding death nomination for your superannuation accounts.

“You could enter into mutual wills with your partner so they are the same, and enter into a contract to not change the will without the agreement of the other,” Ms Fordham said.

“Where you have a house that your partner might want to live in after your death, have your estates lawyer provide them with a life estate which enables them to live in the property and be taken care of. But when they pass or move out the property is provided to your children.”

Experts say the most important move is to simply do something.

If you die without a will in place, the court has the power to decide what goes where, and you cannot expect that outcome will reflect your wishes.

CHECK THE RULES

Rules vary between states, so it’s wise to check what applies in your jurisdiction, but in many cases stepchildren are able to make a claim on your estate if they feel not adequately provided for, while boyfriends and girlfriends living with a blended family can also be a potential trap.

“Keep your binding death nomination and will up to date, and update it periodically to reflect your circumstances,” Ms Fordham said.

Money coach Karen Eley said ownership structures were often the key to protecting inheritances for children.

She said people could use assets that did not fall into the estate pool, such as investment bonds, while binding death benefit nominations in super legally enforced super fund trustees to hand over their nest eggs in accordance with the super fund member’s wishes.

Otherwise super fund trustees have discretion about where the money goes, which could open fresh legal issues.

“If possible, start wealth transfer to children before a death event through gifting or family loans,” Ms Eley said.

She said she had seen adult children missing out on money from mum or dad because of estranged relationships or long absences in their parents’ lives.

“In addition to the legal strategies, having open and honest communication, sharing the basis behind your decision making and conversations around what your intentions are for wealth succession, prior to an event, is extremely important,” she said.

“This way, there are no nasty surprises after death or in the future.”

LEGAL MINEFIELD

There are several grey areas in estate planning that make it worthwhile speaking with a lawyer or seeking other professional advice.

For example, de facto partners often have the same claims to assets as married partners, and in the absence of a will they must prove to a court their relationship based on their actions and intentions.

And it can be common for adult children to lose contact with their step parent once their biological parent passes away. What if the stepmother or stepfather remains in the family home?

Or, if a person is incapacitated, what if their second spouse uses power of attorney rules to sell assets that their partner planned to gift to their biological children?

Inheritances are an increasing nightmare for some families as divorces rise. Picture: iStock

It’s a minefield, and Ms Jones said she was dealing with more inheritance claims than she used to.

“In most jurisdictions stepchildren are eligible claimants on an estate,” she said.

In some states there are extra hurdles, and adult children who are independently wealthy may miss out because they have enough financial resources themselves while their blended family members do not.

It may be that a second spouse or stepchildren are awarded more wealth than children from a first marriage, simply because the court says they must be provided for. Using family provision claims, people can fight in the courts for more money than what they are given in a will.

“The court’s job is not to make it fair or equal – it’s just to make adequate provision,” Ms Jones said.

SAFE AS SPOUSES

It’s not just about protecting inheritances for adult children. Spouses must also be protected from losing everything if their wealthier partner dies. In a legal battle, the courts must consider a partner’s needs.

“There is always an obligation to make adequate provision for a surviving spouse,” Ms Jones said.

She said future problems could be prevented by communicating wishes early, and perhaps leaving a small inheritance first before a larger one later.

“If at all possible, they should make some sort of distribution to children on their death,” Ms Jones said.

Property is often a person’s largest asset, and there are different types of ownership structures that will impact inheritances. Couple typically own properties as joint tenants, where when one partner dies the other gets the property.

The other ownership structure is tenants in common, where each partner holds a percentage share of the property that will go to whoever they leave it to in their will.

“Have full disclosure of what the assets are and what each party’s expectations are, so there’s no nasty surprises when your partner dies,” Ms Jones said.

“Have an equalisation clause in your will, so if assets end up in different proportions it can be equalised.” For example, a share portfolio and property investment may be the same value when a parent writes their will, but 10 or 20 years later their values may be vastly different.

A don’t think a relatively small inheritance will stop family members from fighting over a slice of it.

“I hear the words ‘it’s the principle’ in estates less than $1 million, as people still feel strongly and are not prepared to walk away,” Ms Jones said.

Originally published as Inheritance cash can be crunched by blended family battles