Everyone remembers the TV show The Brady Bunch, where two blended families lived happily ever after. While it’s a lovely idea, it can be difficult to achieve. This is despite families like this being increasingly common, with at least 12 per cent of couple families with dependant children were  classified as step or blended, according to the Australian Bureau of Statistics.

Research has seen a high proportion of estates with successfully challenged family provision claims.¹ Consequently, more families are exploring how to transfer some of their wealth to their beneficiaries while they are alive, with research by Generation Life and CoreData indicating over 60 per cent² of high net worth individuals intend to take this approach. Alternative financial solutions are often the way to mitigate these risks.

Managing a blended family can be challenging on many levels, especially when it comes to estate or succession planning. But, with some foresight and good planning, the right outcomes can be achieved. What’s key is to think through all the available options and their consequences, as well as how to involve family members while avoiding unnecessary disputes and, at the same time, preserve the estate.

Felipe Araujo, CEO of Generation Life.

Alternative structures such as investment bonds are a popular choice among those negotiating the financial complexities of a blended family. These investment solutions can help ensure assets are transferred in accordance with a person’s wishes, including making sure any restrictions on how the assets are distributed are observed.

Governed by the Life Insurance Act (1995), investment bonds are tax-effective vehicles held in an individual’s name which can be used to pass on inheritances, through which earnings can continue to be accumulated.

“An increasing number of Australian families are turning to investment bonds as a trusted structure to help them become custodians of the assets and protect wealth for generations to come,” says Araujo.

Investment bonds can be structured as a non-estate asset and you can choose who inherits them, either as a lump sum payment to nominated beneficiaries or through a seamless transfer of ownership. If you don't have a nominated beneficiary, the investment bonds will be paid to your estate. If you structure the investment bond as a non-estate asset, it means that the division of assets can bypass the seemingly lengthy and public process associated with obtaining probate. Investment bonds are often a way for grandparents to safely leave money to grandchildren.

“That discrete transfer of wealth can help avoid any family conflict, perceived or not,” says Araujo.

A number of practical features make investment bonds a useful tool for blended families.

Felipe Araujo, CEO of Generation Life.

Investment bonds also play a different role in the asset stack compared to other vehicles such as superannuation, for instance, which is designed to provide for Australians in their retirement. Investment bonds allow for assets to be apportioned unequally  among family members and to date have been less likely to be formally disputed.

“There are all sorts of reasons why this happens, for instance if some family members have had additional caring responsibilities,” says Araujo.

Aside from being a smart way to transfer assets, investment bonds can give the next generation a meaningful financial head start in a highly tax-effective way, easing the pressures of future cost of living threats. The receipt of the investment bond inheritance occurs without triggering a tax event or liability, and avoiding the potential impost of a death tax - something that those looking to use super for as a wealth transfer mechanism should consider.

“The rising cost of living is a growing problem that's going to impact many generations to come. If you're in a position where you can make a difference to your family’s financial future, investment bonds are a perfect vehicle to do that,” says Araujo.

Honesty and clear communication, is often the best policy when it comes to discussing blended family finances. The idea is to be open and upfront from the start.

“When you create a blended family it’s important not to mask any of your financial commitments. It's very similar to entering into a financial romantic relationship. You'll often talk about the nice stuff, like how much you earn, the fact you have a great job and that you are career driven. But sometimes, you don't talk about the messier stuff, like the fact you have been bankrupt,” says Acuity Wealth associate director and senior financial advisor, Rob Chertok.

Coming from a positive perspective also helps provide for a good financial outcome.

Rob Chertok, Acuity Wealth associate director and senior financial advisor.

Investment bonds are unique compared to other structures because they can be structured as a non- estate asset and they can support positive tax outcomes. Plus, they are a popular way of making sure children from a previous relationship are accounted for when a new family structure is formed.

While everyone’s situation is unique, investment bonds are becoming an increasingly popular option for more complex families looking to make sure all members are looked after and the estate is preserved through time.

¹ Based on sample estates and subject to claims not started. Source: UNSW Law Journal, Estate Contestation in Australia: An Empirical Study of A Year Of Case Law 2015.

² Generation Life and CoreData - Funding a dignified retirement and leaving a legacy research summary August 2023