Protect Your Inheritance and Avoid Family Provision Claims

BY MICHAEL CLOHESY & ELIZA CAMPAIN

Avoiding family provision claims against your estate

I’m often asked how to avoid claims against a deceased estate, particularly by people with estranged children. The only truly effective way I suggest is to spend everything before you go. Unfortunately, that is often not a realistic solution, and elderly people struggle with the idea that their disrespectful and absent adult child (who may have caused them great personal suffering) could get a share of their hard-earned money after they pass. Parents often wish to reward their ‘good child’ who has spent time and energy supporting, loving and caring for their parents in their twilight years.

Unfortunately, parents need to be mindful that a claim may be made against their estate if there is an uneven distribution in their will to their adult children or if they completely exclude a child as a beneficiary in their will.

These types of claims are known variously throughout Australia as ‘Family Provision Claims’. A claim of this nature allows a disgruntled adult child who has not been provided with ‘adequate provision’ from their late parent’s estate to contest the terms of the will.

Unfortunately, these claims are becoming more common. In the Victorian Supreme Court alone, there were 406 of these claims filed last financial year.

Family Provision claims are litigious in nature, lengthy in duration and drain significant funds from the deceased estate. In other words, such a claim should be avoided at all costs.

Several different strategies outlined below can help you minimise the likelihood of a claim being made against your estate after you pass. A professional estate planning lawyer will turn their mind to these strategies when drafting your will.

Family Provision claims are litigious in nature, lengthy in duration and drain significant funds from the deceased estate

To reduce the possibility of your Will being contested, consider the following:

1. MAKE A ‘FAIR’ WILL

Let’s say you have two children, and you leave 50% of your assets to one child and 50% to the other child. This scenario will definitely reduce the risk of one child contesting the will as there has been an ‘even’ distribution. From experience, children seek equality more than anything else.

Yet, a ‘fair’ will does not mean the assets need to be distributed evenly amongst children or other beneficiaries. A ‘fair’ will often requires a judgement of the potential beneficiaries who may have a claim against your estate and an evaluation of whether your intended distribution provides for their proper maintenance and support.

2. SPEND OR GIFT YOUR ASSETS BEFORE YOU DIE

A simple tactic is to spend your assets or gift them to others before your death. By doing so, there are minimal assets left in the estate for children or family members to quarrel over. A person can provide a gift to a specific individual upon contemplation of their death (the legal term is donation mortis causa). This type of gift no longer forms part of their estate as the donor does not legally own the asset anymore.

Be careful, however. New South Wales has special laws that allow for ‘notional estate claims’ against deceased estates. A notional estate claim is an application to the court by a claimant to reacquire assets that were distributed before the death of the willmaker back into the deceased estate.

The strategy of gifting assets before a person dies may sound smooth sailing. However, it may not be practical as it could impair the availability of future or unforeseen expenses such as an accommodation bond for a nursing home. There is also the possibility that disgruntled family members can challenge a gift made before a person’s death based on undue influence or lack of mental capacity.

3. MAINTAINING A RIGHT OR INTEREST IN YOUR GIFTED ASSETS

A downfall to gifting assets before a person’s death is that the person is depriving them of the asset. However, a person can reserve some right or interest in the asset before gifting it to a loved one.

For example, an asset (like the family home) can be gifted to a relative with the condition that the relative pays a rent charge or provides an annuity. In this scenario, the person still receives a benefit from the asset in the form of income. This income can support the person for the remainder of their life. Once the asset is gifted, the legal title will pass to the relative, meaning the asset does not form part of the estate and is not susceptible to a claim.

4. PLACING YOUR ASSETS IN A FAMILY TRUST

A family trust is a valuable mechanism to remove assets from a person’s estate. A family trust arises when a person or company holds assets for other people’s benefit, usually their family members. It is possible to still maintain control of the assets by acting as trustee for the trust. However, a possible downside is the transaction costs associated with placing any real property or shares into the trust.

5. HOLDING YOUR PROPERTY IN A JOINT TENANCY

A simple technique to reduce the chance of a claim against an estate is to transfer property into joint ownership. Holding property in a joint tenancy is typical for married couples or couples who live together on a genuine domestic basis.

For example, let’s say that mum and dad own their family home as ‘joint tenants’. (Check your Certificate of Title to see if this is the case). Upon Mum’s death, Dad will automatically become the sole owner of the property. The property will not pass through Mum’s estate, meaning that the house is protected against a claim.

Joint ownership can also be used by a parent who wishes to give property to a child on the expectation that the parent will die first. Notably, joint tenancy is different to property held as a ‘tenancy in common’. For a tenancy in common, the deceased’s share will form part of their estate. Again, have a look at your Certificate of Title to see which one it is.

6. BINDING DEATH BENEFIT NOMINATION FOR SUPERANNUATION

These days, a large portion of people’s wealth sits in their superannuation accounts. Since superannuation funds are technically not ‘personal assets’, they do not fall within a deceased person’s estate. For this reason, people should turn their minds to where those proceeds will go after their death. It is possible to direct your superannuation proceeds to selected individuals through a Binding Death Benefit Nomination. The Nomination form will often lapse after three years, meaning it requires continual upkeep. You can often find these forms via a simple online search.

7. LIFE INSURANCE POLICY

If you own a life insurance policy, you may direct any payment to another person upon your death. This payment will not become part of a deceased person’s estate. However, a person must be cautious if their policy is ‘self-owned’. In that case, the proceeds may be paid to the estate and therefore are susceptible to a claim.

This article is merely a general summary of several strategies to minimise a family provision claim. As each person’s situation is unique, it is recommended that legal advice is sought to develop a tailored strategy for your estate planning.

Michael Clohesy is the National Head of Legal Services at Gathered Here. Michael can be emailed at michael@gatheredhere.com.au