Relationships: New partners and the great wealth transfer

Settling down with a new partner after a relationship breakdown can bring joy and happiness. But it can also trigger family discord when it comes to estate planning. This is the final instalment of our three-part series on relationships and money. 

Stage 5: Setting up an inheritance 

For adult children watching their parents re-partner, it can be easy to think "there goes the inheritance". And there can be a certain amount of truth to this.

One of the challenges of second and subsequent relationships lies in providing for children from a previous relationship.

It's an area that can be fraught with peril. For blended families, having an up-to-date will may not be enough.

Wills can be - and often are - subject to legal disputes.

This is not a 'lifestyles of the rich and famous' issue. One Australian study found that 60% of contested estates are valued below $1 million and just over half are worth less than $500,000.

Fortunately, there can be solutions.

Elise Fordham, principal lawyer at Australian Family Lawyers, says these include having a binding financial agreement (BFA) with your new partner, which sets out who keeps what if you separate, or a "well thought-out estate plan, which would include a will and placing your assets in a testamentary trust".

Another possibility is nominating dependent children in a binding death nomination for your superannuation or through a life insurance policy that lists your children as the beneficiaries."

Even so, Lindzi Caputo, wealth management director at HLB Mann Judd, says the division of assets can be complex in blended families, especially where there are children from previous relationships plus children from the current relationship.

"It's important that each partner considers how they would like their share of the family wealth distributed - firstly if their partner survives them, and then also upon the passing of the surviving spouse," says Caputo.

It can be complex stuff.

Just to add to the mix, Caputo says: "Consider the portion of the estate you'd wish to be distributed to children. For instance, are you happy for all children of the family to receive an equal share of the family assets? Or would you prefer each partner's share to be split among their own biological children?"

As every family is different, Fordham says: "Your options are best discussed in unison with a specialist family lawyer and a specialist wills and estates lawyer to cover off all bases."

Where to from here

Love may be blind but no one should walk blindly into a relationship hoping it will all work out. If it doesn't, the toll on your financial wellbeing can be devastating.

As a family law expert who has seen just how badly things can go wrong, Elise Fordham has an overarching piece of advice:

"Don't wait until it is serious. Plan ahead, get great advice and bring up issues early. Some discomfort early on can truly save you a huge headache later."

And no matter how seductive it may be to hand the reins of financial control to your partner, always stay engaged.

As Glen Hare puts it: "Both partners don't have to be equally involved in day-to-day money management. In my own relationship, I manage most of the finances, but I make sure my partner knows the 'why' behind the financial decisions I make."

Stage 6: Managing the great wealth transfer

In our ageing - and increasingly wealthy - population, the so-called great wealth transfer is expected to see baby boomers leave significant wealth to their heirs - an estimated $224 billion in inheritances each year by 2050.

Yet it's something few people plan for.

Research by Generation Life confirms that close to seven out of 10 Australians want to leave a legacy for future generations, but only one in seven (14%) have a plan in place to do so.

Felipe Araujo, chief executive officer at Generation Life, says 34% of Australians use their superannuation to leave a legacy.

However, super was never designed to be a vehicle for estate planning, and a solid chunk of a super death benefit, up to 32%, can be lost to tax.

Moreover, as a non-estate asset, the fund trustee has discretion over who inherits super even when a binding nomination is in place.

Adding to these complexities, Australians are living longer. Around 70% of inheritances go to people aged in their 50s and 60s, by which stage many beneficiaries have already amassed their own wealth.

Araujo says all these factors are driving change.

One in five (21%) Australians wants to skip adult children and pass their legacy to grandkids, according to Generation Life.

"We are seeing growing interest among grandparents to give their grandchildren a healthy financial start in life, for example, by bequeathing the funds to buy a first home," says Araujo.

"Others want to provide for family members with special needs, or make provisions for complex circumstances such as blended families, to ensure a bequest will make a lasting difference."

It's not just about giving younger generations a financial head start.

"People can be concerned about the potential for relationship breakdowns among their adult children. Or they may be looking at the impact of a blended family," says Araujo.

Estate planning tools such as testamentary trusts can be used to address these issues. But products such as investment bonds can tick several boxes for modern estate plans.

Investment bonds work a bit like a managed fund. A lump sum is invested and can be added to over time. From an estate planning perspective, investment bonds offer several advantages.

To begin with, funds held within an investment bond do not form part of an estate and are, therefore, not subject to the same challenges as a will.

The money can be paid direct to a beneficiary in a lump sum, a regular income stream or a combination of both.

This makes investment bonds ideal for beneficiaries with special needs, young children (think grandchildren) or those who may lack experience managing large sums of money.

Moreover, as investment bonds sit outside of probate, the proceeds can be paid confidentially, reducing the risk of fuelling family disputes.

Investment bonds are particularly tax effective as the investment bond provider pays tax on investment returns at the company rate of 30%.

The  investment bond holder doesn't even have to include the investment earnings in their tax returns.

After 10 years, the investment bond can be redeemed tax-free. So, no tax is paid by the beneficiary of an investment bond - even if the money is pledged to a minor.

Unlike other complex estate planning tools, which can be costly, investment bonds can have an initial minimum investment of just $1000, making them widely accessible.

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