Blended families, estate planning and SMSFs

Mum and dad, for the second, third, fourth or who knows how many times are again married and living happily ever after. Some "gun shy" divorced couples don't remarry but live in unwedded bliss as de factos. Regularly, both lots of "candidates" have children from a previous marriage or relationship. They may even have their own child or children to complement their Brady Bunch. 

Advisers today are, as they should, due to the tax and retirement funding benefits, encouraging their clients to invest in superannuation. This, however, presents a massive challenge for the blended family today. Take, for example, the payment of superannuation death benefits. 

Regularly, blended family principals either have their own individual self-managed superannuation funds (SMSFs) or they may establish one together.

Each member of the SMSF has their own "superannuation interest" when either in accumulation or when paying an income stream or pension.

At the time of the death of a member, their superannuation interest ceases. It is then taxed. This is the case unless it can pass to a bona fide "tax dependent" without tax impost. Therefore on many occasions the "blended family principals" decide to pay it to each other at the time of death. They assume that the survivor will "do the right thing" and leave it to the first deceased's children. Unless suitable documentation has been provided - what is to occur? There are no guarantees even then. 

At the death of a superannuant their superannuation interest comes to an end. When it paid to a surviving dependent it then becomes the surviving dependent's superannuation interest. They can then do with it as they wish. It can be then passed on to their children or other parties via their estate.

Expansive pension documentation providing conditions as to the payment of reversionary or other pensions in a blended family environment may be the answer. However, this will require careful drafting of both the provisions of the trust deed of the SMSF, and the pension documents themselves. Other members of each of the blended family principals may have to be involved in the administration of the applicable SMSF.

If the superannuation death benefits are not paid to the surviving blended family principal, the tax benefits are lost. To pay them to the surviving blended family principal may cause the children of the deceased member to be disenfranchised in relation to the parent's superannuation capital. 

The initial intentions of the blended family principals in terms of their superannuation death benefit payments may have been incomparable. However the end result may be a massive fight. Issues of Powers of Attorney, erosion of superannuation death benefits, amending death benefit nominations, commutation of capital and other factors can easily defeat the best of intentions.

The only definitive way in which to harbour a surviving blended family principal's superannuation death benefits capital is to pay it to the deceased's estate. Provision can then be made in the deceased's will to pay the surviving spouse or partner an income stream for life via a capital protective trust using the blended family principal's superannuation death benefits capital.

The terms and conditions of the capital protective trust are determined in the will: how much income is to be paid, inability of lump sum payments and other requirements. These can be in accordance with the wishes of the testator and can be as wide and varied as required. Extremely important issues in these circumstances would be the choice of the trustee of the capital protective trust. 

This article has only scratched the surface of the problems and the conundrums of the estate planning issues confronting blended families. The task of the adviser is to bring to their clients' attention what are the often unique circumstances confronting those clients. 

Don't encourage clients to leave a problem. Make sure they leave a comprehensive estate plan. Make sure it is regularly reviewed. Circumstances regularly change. Clients should be encouraged to leave their wealth to the next generation in the manner that they choose and not the way lawyers or a court may determine.

However, the following needs to be noted. Not all lawyers have the knowledge and expertise to prepare comprehensive estate plans. Find your clients the right one. Find an expert in the field. They must know superannuation intimately.

There may be an elephant in the room, but with the right advice, planning and a bit of hard work it will disappear instantaneously. It may take a while and cost something, but compare it with a client's total wealth. The benefit of knowing that all will be right when you are no longer alive is worth the time, cost and effort. 

Ian Glenister is the co-founder of the SMSF Academy.