Notional estate - The long arm of family provision law

Wills and estates can be a highly emotive area and is fraught with disputes involving family members and various other claimants.  Worse, some costly, time-consuming and stressful disputes between the bereaved could have been avoided if the deceased had received and acted on good advice.

The Succession Act 2006 (NSW) (Act) allows the NSW Supreme Court (Court) to make a family provision order in relation to a deceased’s estate if it is satisfied that the deceased did not make adequate provision for the applicant’s “proper maintenance, education or advancement in life”.  Not only can the Court make an order in relation to assets in the estate, the Act allows the Court to make an order in relation to assets outside of the estate.

A common misconception is that if the willmaker transfers assets out of his or her estate before death (such as transferring a property to another party) the prospect of a family provision claim by a disappointed claimant can be avoided.  In fact, if there are no estate assets or if the estate assets are insufficient for the family provision order, the Act allows the Court to make a notional estate order affecting assets that didn’t directly belong to the deceased at his or her date of death.

Property that may be the subject of a notional estate order

Property that may be affected if the Court makes an order designating assets as notional estate include assets that were:

• transferred to the beneficiaries during the ordinary course of the estate administration; or
• not owned directly by the deceased but over which the deceased exercised some form of control, such as assets in a superannuation fund or a family trust.

The effect of this is to substantially broaden the range of assets that could be the subject of a family provision order.

Clawback provisions

The Court can designate property as notional estate by nullifying any transfer of assets made by the deceased with the intention of defeating a family provision claim.  The Court’s power over notional estate is so wide that it can even make orders because the deceased failed to transfer assets.  Examples of an act or a failure to act include:

• failing to sever a joint tenancy;
• nominating someone other than the executor/administrator to receive a life insurance payment;
• nominating someone other than the executor/administrator to receive a superannuation death benefit.  This can even include failing to amend a superannuation fund deed so that the death benefit could have been paid to the applicant;
• transferring of assets for less than market value or entering into a contract to dispose of estate assets on or prior to death for less than market value; and
• failing to exercise a power of appointment in a trust deed.

Timing of transfers

These types of transfers are subject to time limits and must have taken place:

• within three years prior to the date of death with the intention of denying or limiting the provision that could be made for the applicant;
• within one year prior to the date of death at a time when the deceased had a moral obligation to make provision for the applicant which was substantially greater than the moral obligation to enter into the transaction; or
• on the deceased’s date of death or after the deceased’s date of death by the executor/administrator.

Restrictions on making notional estate orders

The Court’s authority to make a notional estate order is restricted, even if the Court considers that an order for provision is warranted.  In particular:

• the actual estate property must be insufficient to meet the family provision order;
• the Court must not interfere with reasonable expectations in relation to property (ie. the possibility of breaking up a farming property into smaller, unviable sections); and
• the Court must consider the substantial justice and merits involved as well as any other matter the Court considers relevant.

Preventing a family provision claim

Provided a person meets the eligibility criteria under the Act and can demonstrate a need for provision, there is a possibility that he or she will be able to make a successful claim.

The likelihood or prospects of success of a person making a claim against the estate can be reduced by the willmaker:

• making adequate and proper provision for the person (even if the willmaker does this with great reluctance);
• making a separate statement setting out the objective facts as to why provision has not been made or is not as generous;
• having the potential applicant sign a release of rights to apply for a family provision order (these are generally only used in family law agreements); or
• divesting ownership or control of assets more than three years before the date of death (which will always be a risk because in many cases death is unexpected).  This is a drastic measure as apart from the loss of control by the willmaker, the estate will lose the usual capital gains tax and stamp duty concessions available on death.

Summary

Willmakers should be aware that assets under their control but outside of their estate may not be beyond the reach of the Court if an eligible person wants to make a claim for some or further provision.  Good estate planning may help address concerns about people who will potentially be disappointed with the terms of the will.

The potential threat of someone making a claim for provision from a deceased estate should not be ignored.  It is preferable for the willmaker to plan for all contingencies than to leave the executor or administrator to respond to family provision litigation on behalf of the estate.

Author: Philip Davis