A novel multiscale method for multiphase flow in heterogeneous fractured porous media is devised. The discrete fine-scale system is described using an embedded fracture modeling approach, in which the heterogeneous rock (matrix) and highly-conductive fractures are represented on independent grids. Given this fine-scale discrete system, the method first partitions the fine-scale volumetric grid representing the matrix and the lower-dimensional grids representing fractures into independent coarse grids. Then, basis functions for matrix and fractures are constructed by restricted smoothing, which gives a flexible and robust treatment of complex geometrical features and heterogeneous coefficients. From the basis functions one constructs a prolongation operator that maps between the coarse- and fine-scale systems. The resulting method allows for general coupling of matrix and fracture basis functions, giving efficient treatment of a large variety of fracture conductivities. In addition, basis functions can be adaptively updated using efficient global smoothing strategies to account for multiphase flow effects. The method is conservative and because it is described and implemented in algebraic form, it is straightforward to employ it to both rectilinear and unstructured grids. Through a series of challenging test cases for single and multiphase flow, in which synthetic and realistic fracture maps are combined with heterogeneous petrophysical matrix properties, we validate the method and conclude that it is an efficient and accurate approach for simulating flow in complex, large-scale, fractured media.