An estate succession plan may leave particular family members of the deceased feeling that they have not been sufficiently provided for under the deceased’s estate succession plan. A disgruntled family member may be able to use the often overlooked NSW Notional Estate provisions to bring a testator family maintenance claim (or the threat of such a claim) against the deceased estate. These Notional Estate provisions are wide reaching, have extraterritorial jurisdiction and can form a dangerous weapon with which claimants can dismantle an estate succession plan.
Laws in each state allow certain family members to challenge a deceased’s Will if the person was “short changed”. This is known as a testator family maintenance claim (“TFM claim”). A successful TFM claim will usually result in the court making an order in favour of the claimant, out of the assets of the deceased estate.
Whether a TFM claim is ultimately successful depends on a range of circumstances. Regardless of the outcome, such a process can be costly and emotionally debilitating for all of those involved. Further, a TFM claim has the potential to destroy the deceased’s legacy. For the executor of the estate, defending a TFM claim can result in significant legal costs. Even where a claim is successfully defended, the legal costs incurred are often not fully recoverable, thus eroding the resources of the estate, resources that might otherwise be distributed to the beneficiaries of the estate.
In most States, a TFM claim only ”attacks” property held by the deceased at the date of their death (ie property that forms part of their estate). This means that particular types of property are generally outside the realm of a TFM claim and not subject to such a challenge. These “outside assets” include those owned with a joint tenant, superannuation death benefits paid direct to a beneficiary (as opposed to via the estate) and assets held by a company or trust (albeit controlled by the deceased as director/trustee and or appointor when alive) where any shares or units are not owned by the deceased.
|Example 1 – Assets that form part of the deceased estate|
|Helen is domiciled in Victoria. Prior to death, Helen has the following property:|
|•||real property (as joint tenants with her husband);|
|•||superannuation with a binding death benefit nomination to her husband; and|
|Of the above, only the shares form part of Helen’s estate.|
The Succession Act (NSW) 2006 (the Act) enables a court to treat certain property transferred (within 3 years of death) that is not actually part of a deceased estate as being notionally part of their estate. This means that for a TFM claim, a court not only looks at the assets that were actually part of the deceased’s estate on death but also the assets of the notional estate. This can increase the prospects of the TFM claim succeeding, as well as the potential sum (including costs) that the court may award to the TFM claimant.
These notional estate provisions also potentially frustrate the wishes of the deceased. Professional advisors (including legal practitioners, accountants and financial planners) that overlook the reach and operation of these laws do so at their clients’ peril as well as their own.
|Example 2 –notional estate provisions in action|
|Joanne is domiciled in NSW. Joanne owns shares and has an estranged adult daughter (Mary) from a former marriage.
Joanne develops terminal cancer in September 2010. In December 2010, Joanne gifts her shares to her current husband (Mark).
Joanne dies in June 2013. Critically, the December 2010 share transfer took place less than 3 years before Joanne’s death and those shares may form part of Joanne’s “Notional Estate”.
Accordingly, Mary could bring a TFM claim against her mother’s estate. This could result in the court compelling Mark to return the shares to Helen’s estate
The NSW notional estate provisions are not simply an issue for those advising clients living (ie domiciled) in NSW. The Act extends to any property within NSW. This includes real NSW property (ie land), shares in a company incorporated in NSW (including a shelf company or trustee company), superannuation assets and many other financial assets that are legally situated in NSW.
Even where the deceased is not domiciled in NSW and has no actual estate or assets physically located in NSW, these “Notional Estate” provisions may apply.
The mere use of a holding company incorporated in NSW could bring the notional estate provisions into operation:
|Example 3 – Property (inadvertently held) within NSW jurisdiction|
|David is domiciled in Queensland. David owns 100% of the shares in Trading Pty Ltd and has 3 children (Charles, Heather and Nicholas).
Several years ago, David restructured the Pre-CGT business to introduce a holding company (Hold Co) above Trading Pty Ltd via a CGT rollover. David’s accountant arranged for a shelf company (incorporated in NSW)to act as holding company.
David is diagnosed with a terminal illness on 25 April 2010. On 1 May 2010, Dominic validly gifts his shares in Hold Co to Charles, as Charles has worked in the business for many years, without any assistance or contribution from his siblings.
David dies on 7 March 2013. He is not domiciled in NSW and his deceased estate has no assets physically located in NSW. Despite this, the shares in Hold Co could form part of David’s notional estate. This could enable the 2 other children to pursue a TFM claim in the NSW courts and the latter could again compel Charles to return the shares to David’s estate.
Note: If instead the transfer of the shares was conditional on, and only took effect on, the death of David, those shares may also be deemed as part of David’s estate for the purposes of a TFM claim made under Queensland law.
Although the notional estate provisions currently only exist in NSW, similar notional estate provisions may be implemented in other States in the foreseeable future given the Uniform Succession Laws Project. The National Committee of that project has recommended that other States adopt the notional estate provisions (however, the Victorian Law Reform Comission have recently recommended that similar notional estate provisions should not be enacted in Victoria at this point in time).
The notional estate provisions are designed to prevent people “getting around” the conventional TFM claim laws by moving property outside their actual estate prior to their death (see Example 2 above). The Act casts a wide net to achieve this goal.
For a property to be part of the notional estate, a “relevant property transaction” must occur. This can include any positive act or omission that directly or indirectly results in the property being owned by some other than the deceased or subject to a trust.
Secondly, the “relevant property transaction” must take place within certain specified times from the date of death of the deceased. There are different tests that will apply depending on the actual length of time between when the “relevant property transaction” took place and the death of the deceased.
As demonstrated below, the notional estate provisions do not apply to any “relevant property transaction” that took place more than 3 years before the death of the deceased.
|Example 4 – Time of transactions|
|Richard lives in NSW. Richard owns 2 farming properties in Victoria (Yarra Valley and Gippsland), has 3 children (Douglas, Rebecca and Emma) and is eligible for the small business concessions.
On 1 February 2010, Richard transfers (by way of gift) Yarra Valley to Rebecca as an “early inheritance”. On 1 March 2010, Richard transfers (by way of gift) Gippsland to Emma as an “early inheritance”.
Richard dies on 5 February 2013.
Yarra Valley cannot form part of the Richard’s notional estate as the transaction took place more than 3 years before his death. However, Gippsland could form part of the Richard’s notional estate and hence be included in a TFM claim made by Douglas.
A transaction in the conventional sense of the word is not the same as a “relevant property transaction” as defined under the NSW notional estate provisions. Property could be part of the notional estate even though the last transaction (in the conventional sense) took place more than 3 years ago. This is because the Act contains deeming rules that deem certain “relevant property transactions” (which includes omissions) to take effect on the person’s death.
This can throw up many unexpected outcomes. Where these deeming rules apply, the relevant property is immediately included in the notional estate (and hence subject to a TFM claim). This is demonstrated below.
|Example 5 – Joint Tenants since 2001|
|Geraldine has 2 children (Albert and Cathy). In 2001, Geraldine purchases a 2-bedroom unit with Albert (as joint tenants). They have purchased the property as joint tenants so that Albert would own the entire unit if Geraldine dies.Geraldine does not want Cathy to have any claim to this unit.
Geraldine and Albert live in the unit until Geraldine dies in 2013. Half of the unit could form part of Geraldine’s notional estate under the NSW provisions. This is despite the fact that the unit was purchased 12 years before Geraldine’s death.
If Geraldine had converted her interest in the property from being as “joint tenants” to “tenants in common” prior to her death, in particular more than 3 years before her death, Cathy would have no claim against the property.
Many advisors use trust structures to protect assets against TFM claims. The example below highlights the impact the notional estate provisions could have on trust where the deceased (until their death) had the power to control the trust. In these circumstances, the assets of the trust could form part of the notional estate.
|Example 6 – Trust established in 2004|
Xavier lives in Queensland and has 3 children (Olivia, Donald and Sally). In 2004, the Xavier Family Trust is established. Xavier is the trustee of the trust. The Xavier Family Trust owns valuable shares (NSW Shares) in companies that are incorporated in NSW.
Xavier dies in 2013. Despite the Xavier Family Trust being set up 9 years before Xavier’s death, Xavier (as trustee) had control of the trust and could have used that control to distribute the trust assets to himself personally, up until his death.
This means that the assets of the trust within the NSW jurisdiction (the NSW Shares, being shares in companies incorporated in NSW) would become part of Xavier’s notional estate.
What if Xavier was not the trustee?
If Xavier was not the trustee, but rather held the controlling roles of appointor and guardian (or some other controlling role), it is still possible that the NSW Shares could be part of Xavier’s notional estate. Clearly, strategically planning of these “control” offices can be extremely important.
Although the 3 year “relevant property transaction” time limit is designed to give some certainty, there are many instances where, in effect, there is no time limit. Careful planning can limit exposure to these provisions.
One way could be to pass control to others (such as their children) during the deceased’s lifetime. However, divesting oneself of control of assets is a big decision. How many of us are prepared to handover control during our lifetimes, particularly in circumstances that could trigger adverse taxation consequences? If so, other strategies may be possible and would need to be tailored to suit the particular circumstances.
This is a complex area of law. Those that could be affected by these provisions should seek to “audit” their estate plans to consider whether the NSW notional estate provisions could apply. When in doubt, professional advice should always be sought.
Given that similar notional estate provisions could conceivably be introduced in other States, estate plans which are not at all connected to NSW should also be “future proofed” to limit the impact of any similar provisions introduced in other States.
Of course, the issue of notional estates is only one aspect of estate planning. We recommend that estate plans be reviewed at least every 2 years to account for any changes in circumstances.
*** First Published in Thomson Reuters Weekly Tax Bulletin – Issue 32, 26 July 2013