Most people are aware that if they divide their estate unequally between their children (or on occasions leave a child out of a will), there could be a claim made on their estate.
Similarly on occasions people may be concerned that a relative (like a grandchild or sibling) might look to claim part of an estate.
These types of claims are called Family Provision Claims and unfortunately such claims have become more common in recent times.
In addition to the lengthy delays and the emotional stress that litigation can cause, significant costs can be incurred (potentially many tens of thousands of dollars) in defending these types of claims.
Accordingly, it is worthwhile considering the opportunities to protect an estate from such claims and preserve the intent and wishes of the Willmaker.
It should be noted that there may be other avenues for someone to dispute a will including undue influence, incapacity of the Willmaker, or arguing there is constructive trust, which will not be addressed in this article.
THE LAW REGARDING FAMILY PROVISION CLAIMS
Before discussing the opportunities to protect against a Family Provision Claim, it is important to understand what the law provides.
Under the law, in order to bring a successful claim against an estate, a person must:-
- Show that they are an “eligible applicant”.
Typically an eligible applicant will be the deceased’s spouse or child or anyone who was financially dependant on the Willmaker.
Brothers and sisters and grandchildren therefore cannot make a claim unless they satisfy the financial dependency provision.
- Demonstrate that they have a financial need.
If a person is financially well off, or has already received assistance from the Willmaker during their lifetime, their prospects of success are limited.
On the other hand, if they have health concerns, children to raise and debt to repay, they should be able to demonstrate a need.
- Demonstrate that the Willmaker should have made provision for the eligible person who has demonstrated a financial need.
The Court will take into account the size of the estate and the claims other beneficiaries may have on the estate in making this determination.
The Court may take into account the behaviour of the beneficiary and such other circumstances it feels relevant.
Sometimes it may not be possible to provide for everyone and often different awards will be made to each child depending on each of their circumstances.
So, technically just because you divide your estate equally between your children does not mean you will stop a claim.
Having said that, I am not aware of anyone who has ever made such a claim!
The circumstances at the time are death are what the Court will look at, so it is often difficult to predict what a Courts decision will be at the time of making a will.
Because of the potential costs involved in litigation and where a client wishes to ensure his or her wishes are carried out, it is often worthwhile structuring your estate plan to limit the prospects of success for such claims.
STRATEGIES TO PROTECT YOUR ESTATE
The fundamental issue to understand in developing strategies to protect against estate claims is that a claim can only be bought against the net value of your estate (i.e. personal) assets.
Accordingly, if you do not own an asset at the time of your death, or the net value of those assets after allowing for liabilities is nil, the claim should not be successful.
Accordingly, there are a number of strategies that can be implemented:-
- Own property as Joint Tenants
If property is owned by two people as joint tenants, the survivor will become the sole owner of the property on death of the first person and the deceased’s “half” interest will not form part of their estate.
Care needs to be taken on this approach as the “wrong” person could die first, resulting in the surviving person’s estate value (which is under the threat of a possible claim), increasing substantially.
- Own Assets in a Family Trust
Assets owned by a family trust do not form part of anyone’s estate (unless there is money owning to the person for loans or entitlements).
- Ownership of Life Insurance Policies
Clients should carefully review who is entitled to receive the proceeds of any life insurance policies.
If the policy is “self owned” the proceeds will be paid to the estate and therefore exposed to a claim.
- Binding Nominations for Superannuation
Superannuation is technically not a personal asset unless the funds are paid to your estate.
It is possible to pay superannuation proceeds direct to certain (limited) beneficiaries via a Binding Death Benefit Nomination and therefore the proceeds will not form part of the estate.
- Transfer Property to a Family Trust or to the intended beneficiaries before death
One option is to transfer personal assets out of a person’s name to a family trust or to the intended beneficiary prior to death.
There may however be significant stamp duty or capital tax costs.
- INCORPORATE A SPECIAL PROVISION TRUST IN THE WILL
If a person is looking to leave a child out of a Will because they have concerns about the child’s ability to manage money (for instance, if there is a gambling, drug or alcohol problem), it may be appropriate to sill leave an amount to that child, but in an way that they do not have actual control of the money (called a Special Provision Trust).
These types of Wills need to be carefully drafted otherwise a claim may still succeed.
- Equity Transfer Strategy
Murdochs has developed a specific strategy to protect assets against an estate claim which does not incur any stamp duty or CGT expense.
Whilst the strategy is somewhat involved, the effort and cost involved is likely to be insignificant compared to the pain, trauma and litigation costs that could be involved if nothing is done.
Before embarking upon any of the above strategies, it is important that an experienced Lawyer be engaged to firstly understand what you are looking to achieve and then deciding what strategy is best for you, as there are often other matters that need to be considered.
OTHER MATTERS TO CONSIDER
There are a number of matters that people should be aware of when deciding what options they should implement:
- It is common for people to believe that giving a person a nominal amount will stop a claim. This is not the case.
- Similarly putting a provision in a Will that should a beneficiary bring a claim against the estate, any inheritance will be withdrawn will not succeed.
- The law in New South Wales is a little different to the rest of the Australian states so if a person owns assets located in NSW, different strategies may have to be adopted.
- Some of the above strategies may impact on Centrelink entitlements’ if a Willmaker is likely to be receiving such payments in the future;
- They may also be issues if a Willmaker is looking to take advantage of CGT small business concessions if selling a business in the future;
- Whilst transferring assets before death may be an option, the impact of a beneficiary separating from their spouse needs to be considered as does potential future expenses such as paying for an accommodation bond in a nursing home;
- The opportunity to receive an inheritance via a Testamentary Trust will be lost if there are no assets in the estate.
Testamentary Trusts have many benefits including providing protection for the inheritance if a beneficiary divorces or becomes bankrupt.
They also provide significant tax planning opportunities for beneficiaries.
- Typically in litigation matters the losing party pays the costs of all parties, however in these types of matters, costs will be normally be paid out of the estate.
This means that applicants will often make a claim on the basis that they know their costs will be covered and therefore of no real financial consequence.
Putting into place a good strategy will either persuade them not to make a claim at all, or if they loose, they are likely to have to pay all costs as there may be no estate assets available to pay the costs.
Whilst the above is a general summary of a number of the strategies that might be adopted, each person’s situation needs to be carefully reviewed and their concerns understood before a plan is adopted.
Whilst some of these strategies can be expensive, when compared to the costs and emotional trauma involved in litigation, it is likely to be a worthwhile investment.
Murdoch Lawyers can assist you in reviewing your circumstances and what you are concerned about and then provide you with the appropriate strategies to protect your estate from potential claims.