In a recent interview with The Australian, Senior Associate, Nicholas Parker unpacks how the Federal Budget’s new trust changes could reshape inheritance planning for blended families.

The family home is often the centrepiece of a lifetime of wealth creation, but for a growing number of Australians in blended families it is also becoming the battleground for some of the most bitter and costly legal disputes in the country.

Family lawyers are reporting a sharp rise in contested estates involving blended families, and say typically it is the stepparent who is in the box seat. They’re free to change their own will after their spouse dies, potentially leaving the spouse’s biological children empty-handed.

And for assets beyond the family home, parents trying to protect their biological children’s inheritance with a testamentary trust now face fresh hurdles from the government’s planned new 30 per cent tax on trusts, another unintended consequence of its far-reaching budget changes.

Inheritance trap

Surviving spouses can leave their own estate to their own biological children or a new partner.

It’s known as a sideways inheritance trap.

Coote Family Lawyers senior associate Nicholas Parker said Australia had more blended families with ageing partners, and people today were more aware of their legal rights and were likely to exercise them.

“Estates are larger, houses are more valuable, and most estates have a superannuation component, so people feel it’s worth the fight,” he said.

The Australian Institute of Family Studies says more than 12 per cent of couple families with dependent children are either stepfamilies, with at least one stepchild, or blended families, with at least one child and one stepchild.

That equates to more than 280,000 families today, nearly one million people, but does not include the countless blended families flowing from remarriages over the past 50 years who no longer have dependants.

Mr Parker said adult children often felt that estates should be divided based on what each spouse brought to the relationship, particularly if their biological parent had been the most asset-rich, but this was not necessarily how the court viewed it.

“It is also difficult when there is a significant disparity in age between spouses as this can mean that the children of a prior relationship have to wait a long time to inherit, which can cause inheritance anxiety,” he said.

Preventing conflict over wills

Effective estate planning strategies can reduce potential conflict.

Mr Parker said mutual will agreements were a useful tool in setting out a couple’s intentions, “where each spouse agrees they will not change the agreed distribution of the joint estate”.

“If the agreement is not honoured by the surviving spouse, there is a legal basis to bring a claim against their estate,” he said.

“Life interests are another way you can ultimately ensure assets pass to biological children. The surviving spouse has the right to use the assets and derive income from them for their life. On their death, the capital then passes to the biological children.”

Trusts hit by budget tax

Mr Parker said while testamentary discretionary trusts were commonly used by will-makers for tax and asset protection advantages, rather than preventing litigation, the budget would “create some concerns for blended families”

"However, there is no reason that the budget announcements would be more of a concern for blended families than nuclear families"

Read the full article in The Australian here.

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