A specialist law firm has recommended a mutual wills agreement as one potential solution for clients that have step-family estate planning circumstances.
According to Townsends Business & Corporate Lawyers superannuation and estate planning special counsel Brian Hor, step-families posed interesting issues for estate planning and there was sometimes temptation for the surviving spouse to change the will.
Those clients therefore required a way to prevent departures from the original intent of the couple, Hor said.
“One solution may be to put in place a mutual wills agreement, which is a separate written agreement often in the form of a deed, that says that the survivor of a couple cannot change their will after the first of the couple dies,” he noted.
“If the survivor of them breaks the agreement and makes a new will that distributes the couple’s combined estate contrary to what they had originally agreed together, then when the surviving spouse dies, their estate will be held to honour the distribution originally agreed to by the couple under their mutual wills agreement – and this can be enforced by the beneficiaries under the original will.”
He added it was important in drafting the mutual wills agreement to anticipate issues that might reduce the effectiveness of the agreement or unfairly disadvantage the surviving spouse in the future.
“For instance, the surviving spouse may deliberately attempt to frustrate the operation of the agreement by depleting estate assets during their life or changing the way they are owned,” he revealed.
“On the other hand, the surviving spouse’s circumstances may significantly change over the years.
“If the agreement says that the survivor cannot sell or mortgage real property assets, to prevent the surviving spouse from finding a ‘backdoor method’ of getting around the mutual wills agreement, this may mean that the surviving spouse cannot downsize the family home to a more manageable dwelling and release some necessary funds to live on, especially if the family home is the major asset.”
Addressing the couple’s superannuation death benefits, he said the big issue here was that usually they could be received tax-free by a surviving spouse of the deceased member, but tax would be payable if it went to adult non-dependent children of the deceased member.
“So if the couple want to give some of their super death benefit to each other and the rest to their own respective adult children, they may decide to nominate each other to receive 100 per cent of their death benefit on the understanding that the survivor of them will after receiving the whole death benefit tax-free then gives part of it to the children of the deceased,” he said.
“But how do you enforce this?
“They might decide to enter into a separate deed – effectively a mutual death benefits agreement that says the survivor will give part of the death benefits to the deceased’s children after they receive it from the relevant super fund.”
That might be able to be enforced, especially if the deceased children were made aware of it, he noted.
However, if the ATO found out about it, arguably it could consider the arrangement to be a tax avoidance scheme under Part IVA of the Income Tax Assessment Act and seek to recover tax and penalties, he added.