by Leanne Matthewson & Rebecca Burness
If you are in a blended family, have a child who is a “black sheep” or have a large estate that your children might fight over after your death, you may be concerned that a claim could be brought against your estate on your death.
In all states and territories in Australia there is similar legislation which allows certain family members (including a spouse or a child) or dependants to bring a claim against the estate if they can establish that they have not been adequately provided for in the deceased person’s estate.
Whilst it is difficult to effectively prevent a claim, particularly if the motivation of the family member is to cause as much stress and disruption as possible, there are strategies that can be implemented to minimise the risk. Most of these strategies result in minimising the size of the estate. If the estate is relatively small, bringing a claim becomes a futile exercise. Set out below are some possible strategies.
- Holding assets as joint tenants
Assets you own as joint tenants with another person/s do not form part of your estate on your death. Such assets will pass automatically by survivorship to the other joint owner/s. A joint tenancy can apply to any real or personal property, such as your home or bank accounts. For example, you may choose to set up a joint bank account with a second spouse so that if you predecease your spouse, the funds in that account will automatically pass to your spouse outside the estate, free from any potential claim by the children of your first marriage.
You may be able to direct the trustee of your superannuation fund to pay your death benefit entitlements (including any life insurance held within the fund) directly to an intended beneficiary, keeping the funds outside the estate, by completing a binding death benefit nomination. Care needs to be taken to ensure that the form is completed and executed correctly and that a valid beneficiary has been nominated.
- Life Insurance
Likewise, many life insurance policies owned personally will allow a beneficiary to be nominated to receive the funds on your death. Where there is a risk of a claim being brought against your estate, it may be more appropriate to direct the funds to the intended beneficiary outside the estate.
- Gift assets during your lifetime
Gifting an asset during your lifetime means that the asset will not be legally owned by you on your death and therefore does not form part of your estate. In order to avoid squabbling over expensive pieces of jewellery and artwork, it may be worth considering a gift to the intended beneficiary prior to death.
Obviously, care needs to be taken to ensure that assets that may be needed during your lifetime are not gifted – the person receiving the gift may not be prepared to give it back! In some circumstances where the gift is of a substantial asset, such as the home, it may be appropriate to enter into an agreement whereby the beneficiary must pay you rent for the remainder of your life to provide an income stream to cover day to day expenses.
- Family Discretionary Trust
Transferring assets to a family discretionary trust (or to a company with the shares owned by a family discretionary trust) means the asset does not form part of your estate on death. You can still maintain control as a trustee during your lifetime but the succession of control can be hardwired into the trust deed so that the intended beneficiary takes control on your death.
- Implementing an equity transfer strategy
In this scenario, a family discretionary trust is established, as discussed above, but instead of transferring an asset to the trust (perhaps with taxation consequences), the available equity in a substantial asset such as the family home is gifted to the trust which then lends the funds back to you personally. The loan may be secured by registering a mortgage against the family home.
Again, you can still maintain control of the trust as trustee during your lifetime with the succession of control addressed in the terms of the trust deed. On your death, the loan may need to be repaid to the trust, leaving limited value in your estate.
- Get proper advice in relation to making your Will
Making a “fair” Will does not necessarily mean dividing your estate equally among your children. If you are concerned about a claim, obtaining legal advice about who has a proper claim against your estate, considering what may be reasonable provision for that person and drafting your Will accordingly may make the person think very carefully before bringing a claim. Obtaining specialist legal advice is key here.
Care must be taken when implementing these strategies. In New South Wales there are notional estate provisions which effectively “claw back” assets that are outside the estate in certain circumstances and so the suitability of these strategies in relation to assets held in New South Wales would need to be carefully considered. Any taxation or pension implications would also need to be considered before transferring or gifting assets. Where gifting or transferring assets to family members, it is imperative that legal advice be sought to ensure that the transaction is properly documented and issues such as capacity, undue influence and the need for independent legal advice have been addressed.
In conclusion, if you have concerns about a claim being brought against your estate, it is important to obtain legal advice about the risks and possible strategies to minimise those risks. Putting in place a considered estate plan may save you and your family significant anxiety, time and legal expenses after your death.