In the event of a successful challenge to a client's estate, traditional strategies preventing assets falling into the estate and being distributed against the client's wishes may no longer be valid, says Damian Hearn.
Traditionally, advisers have used joint assets, superannuation binding nominations, insurance bonds or life insurance policies to help clients achieve certainty in the distribution of assets in the event of their death.
However, in NSW the concept of notional estate can capture these non-estate assets if a successful challenge is made to a deceased client’s Will under the Family Provision Rules (FPR).
The FPR are designed to ensure adequate provision is made for certain eligible person(s) regardless of whether or not they’re mentioned in the Will.
While a client is free to prepare a Will that reflects their wishes, this may lead to outcomes that are considered unfair and unreasonable for eligible persons (such as a spouse, de-facto spouse or child of the deceased).
A Will can be challenged in any state or territory via the courts if an eligible person's maintenance, education or advancement in life has not been properly provided for.
When challenging a Will, the eligible person will seek to have non-estate assets included in the notional estate to be distributed to beneficiaries/eligible persons.
Peter Hewish, senior estate planner at Australian Executor Trustees, says many assets that are readily excluded from a client’s estate using traditional strategies can potentially be considered part of the client’s notional estate and classified as a relevant property transaction.
Hewish states the NSW Supreme Court (‘the Court’) will designate whether property or assets form part of the deceased’s notional estate.
The court will determine whether the disposal of an asset can be classified as a relevant property transaction and whether it falls within the specified time limits.
If appropriate, the court will decide (based on the circumstances of the case) whether to make an order to:
- overturn the relevant property transaction and claw back the asset into the estate; and/or
- rewrite the Will after taking all relevant matters into account and distributing the proceeds to the beneficiaries/eligible persons.
1. Relevant property transactions
A relevant property transaction can include:
- a benefit to a spouse or one particular child over another using a binding nomination for superannuation or beneficiary for a life insurance policy;
- owning property as a joint tenant and upon death, by operation of the right of survivorship, the other joint tenant attains full ownership; or
- gifting to a charity or family while still alive.
According to Hewish, a binding death benefit nomination that a client uses to have their superannuation paid to their spouse or a particular child upon their death can be classified as a relevant property transaction.
On the other hand, purchasing a property as joint tenants to use the right of survivorship upon death can also be captured.
Hewish states financial advisers may be surprised to know the right of survivorship can be overturned and a binding death benefit nomination can be challenged, all via the court, using the FPR.
2. Specified time limits
Challenging a Will must be done within 12 months of the date of death. The court has the power to take into account relevant property transactions within the client’s notional estate that have occurred:
- within three years before the client’s death, if done with the intention of denying or limiting an eligible person provision from the estate;
- within a year before the client’s death, if at that time the person had a moral obligation to make proper provision for the eligible person; or
- on or after the client’s death.
The concept of notional estate is limited to NSW law and may impact clients who are domiciled or own property in NSW.
Achieving the desired estate planning outcomes
Not all challenges can be foreseen but including preventive measures within your clients’ financial plan can help them to lessen the risk in consultation with their solicitor.
Hewish mentions there are no guarantees when it comes to challenges to estates. Since traditional strategies are unlikely to be effective in isolation, advisers should also consider:
- planning further ahead so that transactions intended to achieve the desired estate outcomes are completed outside of the specified time limits; and
- making a statement of testamentary intentions to explain why the benefits of their client’s estate have been limited or denied to certain parties.
Are trust structures a valid alternative?
Using a discretionary family trust can be a valid safe haven for your clients to ward off a potential estate challenge under the FPR.
However, if your client has control over a discretionary family trust, the court can still classify the assets within the discretionary family trust as a relevant property transaction. This may be due to the fact the client did not dispose of assets held within the trust to become part of their estate.
Hewish also states an alternative strategy may be gifting into a family trust outside the three-year time limit and having no control over the trust. Generally, this may be an effective strategy, but clients need to seek specialist legal advice.
The complexities involved with the concept of notional estate within NSW law can make it difficult for clients to achieve their estate planning goals.
Traditional strategies may not prevent assets being included in their estate and distributed against clients’ wishes. Not all estate challenges are successful, but advising clients of these changes and how they may impact their estate planning goals is important.
Damian Hearn is technical services manager at IOOF.
