Marriage and estate planning go hand in hand
Alena Miles explains why marriage should prompt advisers to re-visit clients' estate planning.
Marriage should be an immediate trigger to review clients' estate planning.
Given that many people get married later in life, and marriages often involve children from previous relationships, estate planning issues around this can be particularly complex.
Estate assets
Property owned by the deceased at the time of their death, and property that is specifically directed into the estate, are known as ‘estate assets'.
Estate assets are dealt with in a will.
In many states, marriage invalidates a will, unless the will is made in contemplation of the marriage.
In some states and territories, the gift to the person who subsequently becomes the will maker's spouse is not revoked as a result of marriage.
However the remainder of the will is invalidated. This means partial intestacy can occur in respect of gifts to non-spouse beneficiaries (e.g. adult children from the previous relationship).
Case study
John and Alicia (in their late 50s) have been married for four years. John has two adult children from his previous marriage.
Both children work full-time and live with their respective de facto partners.
John updated his will after his divorce but before he met Alicia and left all of his estate equally to his children.
John and Alicia decided to keep their financial affairs separate as they had both entered into the relationship with significant assets.
Alicia's recently updated will leaves her assets to her nieces and nephews. John was unaware of the effect that his marriage to Alicia had on his will and therefore did not review it following their wedding.
John's assets are shown in the table below.
|
Asset |
Value |
Comments |
|
Family home (John’s name only) |
$700,000 |
John and Alicia reside there |
|
Retail super fund
|
$400,000 |
Binding nomination to John’s children. The nomination lapsed two years ago. |
John dies unexpectedly. As the binding nomination on his superannuation has lapsed, the trustee of the fund, as per the trust deed, pays his death benefit to his estate.
John's will was invalidated by his marriage to Alicia, so intestacy rules apply to his estate assets.
Under the intestacy formula in New South Wales, Alicia receives and decides to keep $725,000.
Zack and Grace share only the remainder of the estate (roughly $375,000) - a very different distribution to what John intended.
If John had spoken to a financial adviser he would have been advised of the effect his marriage to Alicia had on his estate plan.
John would then have had the opportunity to review his estate planning, including updating his will and his binding nomination.
He may have also considered seeking legal advice about asset protection and the tax effectiveness of his estate plan.
Non-estate assets
Marriage does not typically invalidate an existing binding nomination on superannuation.
Where there is a non-binding nomination in place and the trustee exercises its discretion to determine who the death benefits should be paid to, the spouse will be considered as a highly ranked potential beneficiary.
In light of these considerations, clients need to review their nominations to ensure they reflect their wishes and result in the optimal distribution of their wealth after death.
Given that a spouse is a dependant under tax law, a client may, for example, decide to direct their superannuation death benefits to their spouse and to direct other assets to the adult children from their previous relationship.
Self-managed super funds introduce additional complexity in this scenario and specialist advice needs to be sought.
Clients who own assets as joint tenants with their new partner (e.g. family home) need to be aware that upon the death of one of them, the ownership of the asset automatically passes to the surviving partner.
If this is contrary to the client's wishes, they should consider purchasing the asset as tenants in common.
This allows each tenant to:
- Leave their respective share in the property to their intended beneficiaries (e.g. children from the previous relationship) through their will; and/or
- Consider other strategies (e.g. setting up a testamentary trust over their share and granting the surviving partner a right to reside in the property with the capital beneficiaries being the adult children).
Other issues
Many couples bring children from previous relationships into new partnerships.
Unless adopted, step-children are generally not entitled to a distribution under state-based intestacy formulae.
Clients need to review their nominations to ensure they reflect their wishes and result in the optimal distribution of their wealth after death.
However, under some state-based succession laws, stepchildren are eligible to make a claim against the stepparent's estate, particularly if:
- They live with the deceased; and/or
- They are financially dependent on them at the time of death.
In contrast, under superannuation law, a stepchild is automatically considered a SIS dependant.
This means that the child (even a non-dependent adult) of the client's spouse is:
- Eligible to receive death benefits from superannuation directly; and
- Considered as a potential beneficiary when the trustee exercises its discretion to determine who the benefits should be paid to.
Clients also need to review their enduring powers of attorney and enduring guardianship, and specifically, consider:
- Whether their current nomination is still appropriate; e.g. is there likely to be a dispute between their appointed attorney and the new partner?
- Whether the new partner should be nominated as the sole or one of the attorneys/guardians.
Clients seeking certainty that their assets will end up with their intended beneficiaries may decide to consider other strategies such as mutual wills and binding financial agreements.
Both of these tools can provide additional certainty. However, both have limitations, and specific legal advice needs to be sought to determine whether they are appropriate for the client.
What's the adviser's role?
Due to the ongoing relationship advisers have with clients and the regular reviews they conduct, they are ideally positioned to assist clients with their estate planning.
A financial adviser is often the first professional to identify an estate planning issue and to engage clients in the estate planning discussion.
Once clients understand the importance of getting specialist advice, advisers can work together with other professionals, including lawyers and accountants, to deliver and implement a comprehensive estate plan.
Alena Miles is the technical services manager at AMP TapIn.
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