One of the few pieces of practical legal training I got at law school in the 1970s (as opposed to the mass of academic legal education) was from dear Olive Wood, my lecturer in succession. “There is nothing so ferocious as when families fight over a deceased loved one’s estate,” she used to say. Legislation in all states allows people who believe they have not been adequately dealt with in a deceased person’s will to challenge the deceased’s wishes in the will and request the court to give them a greater share of the estate. In New South Wales a new act, the Succession Act, will shortly deal with this area.
And there is no shortage of such challenges, especially now some members of the legal profession are making such cases a specialty area. I am often asked by outraged clients why such laws exist; why the state has the temerity to purport to allow the testamentary wishes of its citizens to be overruled by the court. Originally the reason related to the interest of the state in ensuring its citizens were properly cared for by their family in order to avoid becoming a burden on the state through social services. That reason is less and less the basis for modern decisions where often financially comfortable potential beneficiaries will sue for a larger share of a deceased’s estate simply out of greed or the hurt at having been minimised by the deceased.
It may not be the role of the financial planner to advise a client on how to make their estate ‘challenge-proof’, if that is indeed at all possible. But as one of their client’s most trusted advisers, the financial planner should at least know such things are theoretically possible and be prepared to counsel their client to seek the appropriate advice as early as possible as part of a proper estate planning process. Perhaps the only way a person can ensure there is no challenge to their will is for them to leave no assets, including assets that are generally called ‘notional assets’ – assets outside the will but which can be taken into account by a court when making determinations about challenges. Leaving no assets at all may be impractical for most people, so here are some other options to consider to protect an estate from a challenge.
A deed of family arrangement is a deed signed during the life of the person making the will (called the testator) by everyone who would potentially have a claim on that person’s estate. The deed would set out everyone’s entitlements and that they would not challenge the estate. The deed can be given even more weight by having it approved by the courts. A discretionary family trust is a common device used to hold a family’s assets, designed to limit access by creditors and, in some cases, to allow income splitting. In some cases the courts have refused to hold that assets in a trust were notional assets of the person’s estate and therefore accessible to a challenger.
A discretionary testamentary trust is a trust set up by the will itself. Again, while not foolproof, if it is properly drafted, such a trust can be used to minimise the likelihood of challenge by an unhappy beneficiary. Superannuation can be part of a deceased’s notional estate, but payments to a preferred beneficiary’s superannuation may very well be quarantined from claim, especially with the abolition of reasonable benefit limits. Life estates and/or rights of occupation, though unfashionable among lawyers, may provide a benefit to a surviving spouse that will appease them enough to prevent further claim on the estate, especially where they have some control over the property during the life estate and possibly the power to change residences. The other beneficiaries entitled to receive the property after the life estate ends may also be content with such provisions.
Interest-free loans to the preferred beneficiary during the life of the person making the will could enable that preferred beneficiary to purchase property that will not be available to the deceased’s other beneficiaries even though the loan will have to be repaid following the deceased’s death. If the preferred beneficiary has to sell the property to repay the loan, well at least there’s the capital gain which is theirs to keep. Life insurance is a useful tool in this context as the preferred beneficiary could be the owner of a policy over the life of the person making the will (the testator) and the premiums on the policy could be paid for by the preferred beneficiary from money gifted by the testator during their lifetime.
Explanatory documents provided by the testator to explain the reasons for the way in which the testator has disposed of their assets and the reasons for specific powers given to their executor are an important tool in perhaps avoiding, or at least defending, a challenge to the estate. It is sometimes forgotten that generally evidence from the most important person in any estate challenge, the testator, is, by definition, unavailable. Explanatory documents in the right form can make that evidence available. Ideally a testator should convey their intentions to potential challengers during the testator’s lifetime so any issues can be addressed at that time. However, most testators don’t do that, so setting out those reasons in the will itself and/or in a separate sworn document will assist the courts in their deliberations and may even head off a challenge before it starts. There is no panacea for a challenge to a client’s estate, but careful consideration of these and possibly other strategies may limit the prospects of the challenge being launched or its eventual success.
