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Estate equalisation by courts not so straightforward

Brian Hor  |  18 May 2017Text size  Decrease  Increase  |  

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It seems that "fair" and "equal" have different meanings in the eyes of the law, according to SUPERCentral's Brian Hor.

 

In a 2015 court case, a claim by the daughters of the deceased for an equal share of his estate was dismissed. It was taken that the daughters had been fairly treated even though their brother inherited significantly more.

This sounds like a legal decision from another century but it seems that "fair" and "equal" have different meanings in the eyes of the law, as shown in this court case.

Most people think that when making a Will they have to treat their children "equally"--and that if they don't treat them all equally, then not only is that morally unfair but they're also setting themselves up for a challenge to their Will.

In fact, a lot of lawyers think the same thing--to the extent that much has been made of the mantra of "estate equalisation" (that's where you try to find ways to "even things up" between your children when you want to give a big asset to one child but as a result there's not enough left to give each of your other children assets to the same value).

There are even special clauses that lawyers typically insert into Wills almost as a matter of course that seek to give the executors the power and discretion to adjust estate entitlements so as to even things up between the intended beneficiaries--the so-called "hotchpot clause" (not to be confused with a "hotchpotch", which is a mutton stew with mixed vegetables).

A classic example is the farming client couple who have a son and two daughters. The farm is the major asset of the estate, and the son has worked with his parents tirelessly to build the farming business since he left school at an early age, while the two daughters decided to go for the city life and went to college and found jobs (and boyfriends) in the city.

The clients want to give the farm to their son when they are both gone (after all, he contributed much to its value), but if they do this they don't have enough other assets in their estate to give each of their daughters an inheritance of equal value. What to do?

Often the discussion revolves around "equalisation strategies" such as putting in place life insurance policies to fund gifts to the daughters, or perhaps making the gift of the farm to the son subject to a condition that if he sells it he has to give a portion to each of his sisters so that ultimately they all end up equal.

But wait a minute--just because it ends up "equal" does not necessarily mean it ends up being "fair," does it? Especially if the daughters flew the coop early and contributed nothing to the value of the farm.

Here's another example where "equal" does not necessarily mean "fair". Suppose the clients are city folk, and the son is aged 25 while his sisters are aged 15 and 5, respectively. The son has been through the best private schools that money can buy, and has completed a double degree in commerce and law at a top university, with his HECS debt paid off upfront for that special one-off discount.

In the meantime, one girl is still in high school and the other in primary school. The clients' Wills say that they give everything to each other, but if they are both gone then everything gets split between the children equally, because that's fair. But is it really?

If the children inherit everything equally, that doesn't take into account the fact the son has to date already received much greater benefits (at least in monetary value terms) than his sisters have, simply by virtue of being older than his sisters.

But before everyone starts wringing their hands and gnashing their teeth wondering what to do and how to fix "the problem," it should be noted that the courts have long recognised that "equal" and "fair" are not necessarily the same things, and in fact there is no legal requirement for all children to be treated equally under a Will.

Here's a case in point. In Beatrice McCleary v Metlik Investments Pty Limited Beatrice McCleary v Benedict Chan; Clement Chan v Benedict Chan [2015] NSWSC 1043, a father was survived by two sons and four daughters. His estate was stated to be worth $9.36 million, but was suggested by counsel to actually be worth $15 million to $16 million.

In his Will the father gave an unencumbered house in Gordon, NSW (worth about $1.7 million to $1.9 million) and $50,000 to one son, and the rest of his estate to the other son. He left nothing at all in his Will to his four daughters, because (in the words of the father under his Will), "I have been instrumental in them being well provided for in my lifetime even to the extent of three home units each in the year 2006."

In fact, the father did "give" each daughter three unencumbered home units in Dee Why, NSW each--not out of his own personal estate, but out of a family discretionary trust which he indirectly controlled as a director of the trustee.

But their value (about $470,000 per home unit) was clearly much less than the inheritance of the son who received the multi-million-dollar balance of the father's estate. So, two of the daughters made a family provision claim under s 59(1) of the Succession Act 2006 (NSW)--and they lost!

In coming to its decision, the court made note of the following principles in relation to a claim by an adult child:

• The relationship between parent and child changes when the child leaves home. However, a child does not cease to be a natural recipient of parental ties, affection, or support, as the bonds of childhood are relaxed.

• Ordinarily, the community expects parents to raise, and educate their children to the very best of their ability while they remain children; probably to assist them with a tertiary education, where that is feasible; where funds allow, to provide them with a start in life--such as a deposit on a home, although it might well take a different form.

• However, the community does not expect a parent, in ordinary circumstances, to provide an unencumbered house, or to set his or her children up in a position where they can acquire a house unencumbered.
• Generally, also, the community does not expect a parent to look after his, or her, child for the rest of the child's life and into retirement, especially when there is someone else, such as a spouse, who has a primary obligation to do so.

• Where a child, even an adult child, falls on hard times, and where there are assets available, then the community may expect a parent to provide a buffer against contingencies; and where a child has been unable to accumulate superannuation or make other provision for their retirement, something to assist in retirement where otherwise they would be left destitute.

• Although some may hold the view that equality between children does not discriminate between children according to gender, character, conduct, or financial and material circumstances, the Act is not consistent with that view. To the contrary, the Act specifically identifies, as matters that may be taken into consideration, individual conduct, circumstances, financial resources, including earning capacity, and financial needs, in the court's determination of an applicant's case.

In dismissing the daughters' claims, the court held that it was not satisfied that adequate provision for the proper maintenance, education, or advancement in life of the daughters had not been made by the Will of their father.

In other words, the LACK of provision in the Will for the daughters was NOT inadequate for their proper maintenance, education, or advancement in life.

Further, notwithstanding the large size of the estate, the court did not think that fair and reasonable members of the community would conclude that, in all the circumstances, the father's Will did not make adequate provision for his daughters' proper maintenance, education, or advancement in life.

Such circumstances included that the father did provide significantly for his daughters during his life, in terms of their private schooling, assisting with education expenses for their own children, assisting with loans to acquire their own properties and so forth.

So, getting back to our farming client couple example, provided that the clients have adequately provided for their daughters during their lives (even out of resources other than their own estate, such as from a family trust they control), it may not be necessary for them to provide an inheritance equal in value to the son's inheritance--in fact, depending on the circumstances, they might not even need to provide for their daughters under their Will at all!

Having said that, it would definitely be very prudent for them to state the reasons why they chose not to provide an equivalent gift for their daughters--possibly by stating so in the Will, but preferably in a separate statement or affidavit (especially if the reasons could be interpreted as being inflammatory!)

In such cases, perhaps the whole issue of estate equalisation really is just a "storm in a hotchpot"!

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Brian Hor is special counsel, superannuation & estate planning, at SUPERCentral, a provider of online SMSF services to accountants, financial advisers, and SMSF administrators. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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