There are significant financial planning issues that clients should address once they separate. The risk of death is one of them.
Lawyers as well as financial advisers could be at risk of negligence claims, not only from their clients, but from disappointed would-be beneficiaries if the client dies while the family law matter remains unresolved. And often, the financial planner is the first to know of the divorce, sometimes even before their client’s partner.
In one recent case, in typical combatant style, my firm was instructed by the wife, while the husband had his own solicitor. They separated in November 2002, but did not divorce. So under the law they were still married.
At the date of separation, the family home was in joint names. Their 1989 wills gave everything to each other. The husband’s super death nomination was to his estate.
In the middle of the family law property settlement the husband died.
The joint tenancy of the home meant the wife, who was living in it, took the title. The will was still active, so she was his sole beneficiary. The super trustee, in light of the nomination, the will and no claim from the children, gave the wife the lot.
Did the deceased husband intend this? Probably not. He was in the Family Court because he wanted a financial separation from his wife.
Did the lawyer for the husband or, for that matter, his financial adviser breach any duties to him?
Should they have told him that death meant the person he was trying to secure assets from would inherit everything, but a few small steps could have avoided this?
Australia’s High Court would seem to think so.
In its 1997 decision of Hill & Associates v Van Erp, it said the professional was liable for the loss of the beneficiary of the estate who missed out because of a will failure.
In that case, Olive Eileen Currie wished to change her will to give to her neighbour and good friend, Lorna Van Erp, 50 per cent of her home in Brisbane and some other items.
After drafting the will, the solicitor and the nearest available person witnessed it. Unfortunately, it was Lorna’s husband.
After Currie died, it became apparent that because Van Erp’s husband witnessed the will, Section 15(1) of the Succession Act 1981 (Qld) meant the gift to her failed. She then sued the solicitor, all the way to the High Court.
The solicitor argued that as her service contract was with Currie, she had no responsibility to Van Erp. Under this reasoning, the only person who could sue the solicitor would be Currie (who was already dead) and her estate, but her estate did not suffer any loss.
The judgement of the High Court found the solicitor negligent and liable. Van Erp was compensated for the loss she suffered as an intended but disappointed beneficiary.
Chief Justice Brennan said the law must provide a remedy for this kind of situation, otherwise there will be a “lacuna in the law which for reasons of justice ought to be filled”.
Why did the High Court decide this way? Because it was reasonably foreseeable that the solicitor’s carelessness makes her liable to anyone whom it could reasonably have been expected might be injured as a result of her negligence.
To the High Court the solicitor owed such a person a duty of care quite independently of her contract with Currie.
Chief Justice Brennan put the issue simply this: “…. the claim can be made only by an intended but disappointed beneficiary in respect of an intended testamentary gift and the duty of care owed by the solicitor to the intended but disappointed beneficiary is in the performance of the work in which it owes a corresponding duty — albeit contractually — to the testator. It is immaterial of course, that the negligent act or omission which causes the loss occurs during the lifetime of the testator and the plaintiff’s loss is suffered on or after the testator’s death.”
Lawyers and financial advisers are at risk of negligence claims for loss from “intended but disappointed beneficiaries”. This applies not only in respect of a spouse who dies during the course of family law proceedings but also for failed superannuation nominations. The adviser must not fail to advise the client about changing their will, severing the joint tenancy and changing their superannuation death benefit nominations.
Whose responsibility is it, the financial adviser or the solicitor? Because of the 12 month separation rule, the solicitor is often the last person the couple turn to.
By contrast, in today’s full service relationship, the financial adviser is often the first person to find out about the impending divorce.
Financial advisers who become aware that their client has separated from their spouse owe a (High Court) duty to their clients to advise them about the risk of death and their assets going to the (former) spouse.
Is there an easy way to shift the liability? Yes, send the client to their family law solicitor quickly, but make sure they are aware that they need to put the death risk protection into place immediately.
A client who approaches a family law lawyer expects that lawyer to provide them with comprehensive advice about the consequences of the separation. This includes advising about the fact that if the client dies leaving behind a jointly held asset, then that asset will be retained by the other spouse based on the rule of survivorship. The lawyer must be able to reasonably foresee that a client (and in particular a client who is advanced in years) may die during the course of the proceedings or the negotiations and that the jointly held asset will go to the other surviving spouse.
But this probably will not help with the superannuation death risk.
Take the Western Australian case of the superannuation member who wanted his super to go to his sister. The financial adviser helped him complete the nominated beneficiary form, but did not mention that it was non-binding and that the sister was not a dependent.
He died and the trustee paid the death benefit to his estate where, according to his 15-year- old will, it all went to his father.
The sister got no part of the superannuation death benefit, until she complained and showed the clear evidence of what the deceased had wanted to happen to his superannuation. The failed nomination form that was completed in the financial adviser’s office was proof enough.
What happened in the family law case mentioned at the beginning of this article? The intended beneficiaries were his adult children. Their loss was upwards of $500,000, which is the potential claim they have against their father’s lawyer and financial adviser.
This case is a timely reminder that advisers (as well as lawyers) should be mindful of the traps and the opportunities for their clients on marital separation.
The opportunity available for you as the adviser is to avoid a negligence claim that will cost your insurer hundreds of thousands or perhaps millions of dollars and increase your PI cover.
In addition, if your deceased client’s estate is preserved rather than taken by their former spouse, you may remain as the adviser for the beneficiaries or some of them and continue to generate fees in respect of the assets retained.
While divorce is hard for any client, death is harder for you and your client’s loved ones when the assets are gobbled by their former spouses because of a lack of simple and effective financial planning and estate planning.
Nabil Wahhab is an Associate with The Argyle Partnership Lawyers , Sydney. He is an accredited specialist in family law.
