Disposing of your assets before your death will not always defeat claims against your estate
NOTIONAL ESTATE ORDERS
In some cases where an applicant has made a claim against the executors of a deceased person’s estate seeking additional provision for their proper maintenance, education, or advancement in life, there may be inadequate funds within the estate for the Court to award any additional provision.
This may be the case for a range of reasons including:
- The deceased mostly held jointly owned assets that passed on death to the surviving joint tenant;
- The deceased placed funds in a superannuation fund payable on death to a nominated person;
- The deceased had a life insurance policy with those funds payable on death to a nominated party;
- The deceased structured his finances to place funds in a trust or similar entity;
- The deceased gifted assets to parties in the 3 years prior to his death;
- The deceased’s estate has been distributed to the beneficiaries.
This paper addresses situations where a court in NSW has the power to look to assets outside of the deceased’s estate in order to be able to make a Family Provision order .
Part 3.3 of the Succession Act 2006 (NSW) allows a court in certain circumstances when dealing with an application for family provision from a deceased estate to take into account assets that are no longer (or never were) owned by the deceased person and make orders affecting the parties holding those assets or in respect of the proceeds of sale of those assets. Orders of this nature are referred to as “notional estate orders” and their purpose is to prevent actions or omissions by a testator during their lifetime from having the effect of defeating a family provision claim by an eligible person pursuant to Chapter 3 of the Succession Act 2006. They can also catch assets of the deceased person transferred to someone else after the date of death.
The provisions relating to notional estate orders in NSW are set out in Sections 75 – 90 of the Succession Act 2006 (NSW). These provisions are not included in the corresponding Wills and Estates legislation in Victoria, ACT, Western Australia, or Queensland.
RELEVANT PROPERTY TRANSACTIONS
To catch notional estate the court must designate some asset as notional estate.
For an order to be made designating property as notional estate this property needs to be the subject of a “relevant property transaction”, or a distribution from the estate.
Section 75 (1) of the Succession Act defines a relevant property transaction (“RPT”) as being where a person does, directly or indirectly, or omits to do any act, which results in their property being held by another person or subject to a trust, and full valuable consideration was not received by the person in this transaction.
In considering whether full valuable consideration was provided the Court will look at the value of the asset at the time of the transaction and consider what has been provided in return for the transfer of this asset including financial and non-financial contributions.
EXAMPLES OF RELEVANT PROPERTY TRANSACTIONS
Section 76 of the Succession Act sets out a number of examples of relevant property transactions. These include:-
- The failure of the person to exercise a power to appoint, or dispose of property that is not in the person’s estate with the result that the property becomes held by another person or entity.
- The failure to prevent property held in joint tenancy passing by survivorship on the person’s death to another person or entity e.g. jointly held bank accounts, property owned as joint tenants, etc.
- Failure to exercise a power to extinguish an interest in the testator’s property held by another person or subject to a trust where that power exists to do so.
- Failure to deal with entitlements under a policy of life insurance which would otherwise result in these monies being paid to another person or entity.
- Failure to deal with entitlements under schemes, funds, plans or associations, e.g. superannuation funds
- Entering into a contract providing for a disposition of property out of the person’s estate, whether or not the disposition is to take effect before or after the person’s death or under the person’s Will or otherwise.
The above examples are not exhaustive and other obvious examples are where a person gifts substantial monies or property to persons shortly prior to their death.
NOTIONAL ESTATE ORDER MAY ONLY BE MADE IF FAMILY PROVISION ORDER OR ASSOCIATED COSTS ORDER TO BE MADE.
Section 78 of the Succession Act states that a Court can only make a notional estate order for the purposes of a Family Provision order or for payment of costs arising from that order.
CIRCUMSTANCES WHERE PROPERTY MAY BE DESIGNATED AS NOTIONAL ESTATE
- Distributed estate
Section 79 of the Succession Act provides that assets distributed from an estate can be designated as notional estate. This is most likely to occur where there is a late Family Provision claim and the executors have already distributed the estate to the beneficiaries. In those circumstances it is advisable that the holder of the distributed estate be joined in the proceedings as a defendant.
- RPT takes place within 3 years before the testator’s death and deliberate intent to defeat family provision claims.
Section 80 (1) of the Succession Act provides that the Court may make an order designating property as notional estate where such property is:
- the subject of a relevant property transaction;
- it took effect within 3 years before the date of death of the testator;
- was entered into with the intention of limiting provision for a person who may be entitled to apply for a family provision order.
- RPT takes place within 1 year before the testator’s death in circumstances where the testator had a moral obligation to make adequate provision towards an eligible person.
Section 80 (2) of the Succession Act provides that the Court may make an order designating property as notional estate where such property is the subject of a RPT that takes place within 1 year before the testator’s death in circumstances where the testator had a moral obligation to make adequate provision towards an eligible person who is entitled to apply for a family provision order which was substantially greater than any moral obligation of the testator to enter into that transaction (“the competing moral claims test”).
- RPT that takes effect on the testator’s death
Section 80 (3) of the Succession Act provides that the court may make an order designating property as notional estate where such property is the subject of a RPT that took effect or is to take effect on or after the testator’s death, e.g. property held in joint tenancy, life insurance, superannuation pay-outs, failure to exercise a power of appointment, failure to extinguish another interest in the testator’s property, etc..
The “competing moral claims” test under Section 80 (2) does not apply to RPT’s that take effect on the testator’s death.
OVERRIDING DISADVANTAGE TEST
All of the circumstances where property may be designated as notional estate as set out in points (i) – (iv) are subject to an overriding disadvantage test set out in Section 83 before a notional estate order can be made.
This test requires that the Court be satisfied that the RPT or the holding of property from that RPT:
- Directly or indirectly disadvantaged the estate of the principal party to the transaction or a person entitled to apply for a family provision order
- Involved the exercise by the principal party to the transaction of a right, discretion, power of appointment, disposition, nomination or direction that if not exercised could have resulted in a benefit to the estate or the applicant for provision
- Involved the exercise by the principal party to the transaction of a right, discretion, power of appointment, disposition, nomination or direction that could have been exercised so as to benefit the estate or the application for provision, or
- Involved an omission to exercise a right, discretion, power of appointment, disposition, nomination or direction so as to benefit the estate or the applicant for provision.
RESTRICTIONS ON MAKING A NOTIONAL ESTATE ORDER
Section 88 of the Act states that the Court must not make a notional estate order unless it is satisfied that the deceased person’s estate is insufficient for the making of a family provision order or any order as to costs, or provision should not be made out of the deceased’s estate because there are other persons entitled to apply for family provision orders, or because there are special circumstances.
The notional estate cannot be used to pay the testator’s funeral and testamentary expenses or the testator’s liabilities. The notional estate can only be used for a family provision order or the costs of the proceedings.
FACTORS THAT MUST BE TAKEN INTO ACCOUNT BY THE COURT BEFORE MAKING A NOTIONAL ESTATE ORDER
Section 87 of the Act states that the Court must not make a notional estate order unless it has considered:-
- The importance of not interfering with reasonable expectations in respect of property
- The substantial justice and merits involved in making or refusing to make an order
- Any other matters it considers relevant.
WHICH PROPERTY IS TO BE DESIGNATED NOTIONAL ESTATE?
Section 89 of the Act states that the Court in determining what property should be designated as notional estate must have regard to:-
- The value and nature of any property the subject of a relevant property transaction
- The value and nature of any consideration given in that transaction
- Any changes in the value of the property or the consideration provided since the transaction
- Whether the property transferred could have been used to obtain income
- Any other matter the Court considers to be relevant.
Section 89 (2) of the Act states that the Court is only to designate as notional estate that property as is necessary to allow the order for provision or costs to be made.
THE EFFECT OF LATE FAMILY PROVISION APPLICATIONS ON APPLICATIONS FOR NOTIONAL ESTATE ORDERS
Section 90 of the Act states that if the family provision claim is issued out of time, i.e. later than 12 months after the date of death of the testator, or the application is in respect of an estate that has previously been the subject of a family provision order, the Court must not make a notional estate order unless it is satisfied that:-
- The property is held on trust, and
- There are special circumstances that justify the making of the order.
PROPERTY THAT HAS BEEN SUBSEQUENTLY SOLD OR TRANSFERRED
Section 89 (3) of the Succession Act allows the Court where a person has received the benefit of a RPT or a distribution from the deceased’s estate, to designate any of that person’s other property as notional estate in circumstances where that person has on-sold or transferred the property.
In a recent Court of Appeal decision in Philips v James  NSWCA 4 (6 February 2014 ) the Court overturned a decision of Justice Stevenson who declined to make a notional estate order in circumstances where two children each received a property from their mother’s estate and then proceeded to rapidly sell those properties and use the proceeds to purchase two other properties within twelve months of the date of death of their mother. Although Stevenson J determined that the deceased’s third child had been left without adequate provision he had declined to make any notional estate order on the basis of the section 87 factors of not interfering with the reasonable expectations in respect of property. Basten JA in his judgement overturning this decision made pointed reference to the fact both of the other siblings were on notice of their brother’s claim before settling the purchase of these new properties and they both had significant funds available after completion of these transactions.
THE TRANSFER OF ASSETS TO TRUSTS
Where a testator places his or her assets in a trust and the testator continues to control these assets prior to his death then the assets in the trust may be subject to a notional estate order even if the trusts were created more than 3 years before the testator’s death and the transfer of assets occurred 3 years before the testator’s death.
In considering whether to make a notional estate where the central issue for the Court is the extent of the testator’s control over the assets of the trust and the testator’s ability to transfer property from the trust back to the testator’s personal estate but the testator not doing so. The omission by the testator to use that power can be argued to have resulted in property being held without full consideration being provided to the testator.
CASES INVOLVING TRUSTS AND OTHER SCHEMES WHERE NOTIONAL ESTATE ORDERS WERE SOUGHT
Case study 1 – Kavalee v. Burbridge – testator effectively controlled overseas trust up to date of his death. Notional estate order made.
In the case of Kavalee v. Burbidge (1998 43 NSW LR 422) the testator who had amassed great wealth from a feather business engaged in a series of transactions in 1972 designed to limit the capacity of his then wife and the children of that marriage from making successful claims on his estate. To achieve this, the testator transferred his assets to a type of trust known as a stiftung in Liechtenstein named the Garner Foundation.
The stiftung was a separate legal identity managed by a board of directors with a founder who had the power to designate the beneficiaries, the directors, and to determine distributions from the fund.
However with this particular arrangement the Court determined that the founder was obliged to act in accordance with the testator’s directions and the testator had the power to remove the founder and appoint a new founder.
In 1987 the deceased executed a memoranda of wishes which was incorporated in a special by-law in 1988 pursuant to which the foundation, after the death of the deceased in 1989, distributed some of its assets to certain members of the deceased’s family to the exclusion of other members of this family.
The Court of Appeal determined that there were three “prescribed transactions” under the then Family Provision Act 1984 (NSW) the first being the deceased executing a memorandum of wishes which caused it to be incorporated into a special by-law in 1988 and the testator leaving this by-law unrevoked. Secondly, the testator’s failure to direct the stiftung to appoint properties to persons other than the stiftung. Thirdly, the testator’s omission to exercise the power to appoint or dispose of the stiftung’s property and as a result the property became held by the stiftung free of the deceased’s control.
The decision of the Court of Appeal concurred with the original decision of Windeyer J who found that it was clear that from the time the foundation was set up that it acted on the instructions of the testator.
Case study 2 – Flinn v. Fearne – although testator had power to remove the trustee of the trust, the Court did not accept that the testator would be able to find a compliant trustee who would disregard their fiduciary duties. No notional estate order made.
In the case of Flinn v. Fearne  NSW SC 1041 the testator placed most of his assets in a family trust set up for himself and his second wife. The testator left no monies to his four children from his first marriage. The children of the testator’s first marriage sought notional estate orders in respect of the assets in the family trust.
The testator was the appointor or nominator of his family trust with the power to remove the trustee and appoint a replacement trustee. The testator also had the power as nominator to designate the beneficiaries from the class of eligible beneficiaries. The trustee had discretionary powers to dispose of the income of the trust in favour of “nominated beneficiaries” and in certain circumstances (but only with the consent of the Nominator), the capital.
The Plaintiffs seeking the notional estate orders submitted that the effect of these provisions was to give the testator de facto control of the trust and its assets, in that he could have appointed a compliant trustee who would have been prepared to act on the testator’s direction including the transfer of the corpus of the trust assets to the testator. It was submitted that the testators failure to exercise that de facto control for that purpose constituted a prescribed transaction under the Family Provision Act 1982.
Master McLaughlin was not convinced of this argument and did not accept the assumption that the testator would be able to find an amenable trustee who would be willing to disregard the trustee’s fiduciary duties. “The most that the deceased could have done was to remove the nominated trustee and to appoint as a new trustee the personal or entity whom the deceased might have expected would act in accordance with his direction.”
Master McLaughlin distinguished this situation from that in Kavalee v. Burbidge on the basis that there was no legal duty imposed on the trustee to act in accordance with the testator’s directions and that if he did so he would not be acting independently and this would be a breach of trust. Accordingly the testator did not enter into any prescribed transaction in regards to the property being the assets of this trust.
Case study 3 – Schaeffer v. Schaeffer – the taking of a valuable benefit can occur even though there is no change in the ownership of the property.
In the case of Schaeffer v. Schaeffer (1994) 36 NSW LR 315 the testator left a small estate of $17,000 to three of his four children having effectively transferred over a number of years his substantial interest in his farming property to his other child, Nigel. The two sons who had received very little from their father’s estate sought a notional estate order in relation to certain shares owned by the deceased that converted to a different status on his death and which had the effect of substantially increasing the value of the shares owned by their brother Nigel.
By way of background the testator owned a farm at Armidale where he and his son Nigel ran a grazing business in partnership. The farming property was transferred in mid-1974 to a company which was incorporated by the deceased and his son Nigel, being TCN Glenowen Pty Ltd (“the Company”). The deceased initially held 5,800 shares in the Company and Nigel and his wife held 200 shares.
In 1982 the testator transferred 4,410 shares in the company to his son Nigel and 391 shares to Armidale Nominees Pty Ltd which was trustee of the Nigel Schaeffer Family Trust, leaving the deceased with only 1,000 shares in their Company which owned the farming property.
On his death the deceased’s 1,000 ordinary shares under the articles of association of the Company converted from ordinary shares to non-cumulative 5% first preference shares. The Plaintiffs contended that the conversion of those shares constituted a prescribed transaction as this increased the value of Nigel’s shares in the company.
Although this argument was rejected by Master Windeyer in the first instance, on appeal Handley J.A. applied the reasoning of Bryson J in Wentworth v. Wentworth (which was confirmed on appeal in 1992) that the taking of a valuable benefit and it becoming held by a person can occur although there has been no change at all in the ownership of any real or personal property. Handley J.A. said “I see no difficulty in holding that an increase in value can be held by some person …. Such schemes enable their users to control a company, its assets and income until their death while ensuring that the benefits they enjoyed in their life time then pass to persons of their choice independently of their testamentary dispositions and transmissible property.”
Case study 4 – Belfield v. Belfield – No notional estate orders as the omission or failure to act by the testator occurred more than 3 years before she died as she lost mental capacity more than 3 years before her death.
In the case of Belfield v. Belfield  NSW SC 416 the testator Mrs Belfield died in 2004 and was survived by her two sons Richard and Charles. The testator left no actual estate and her son Richard sought an order to have the testator’s 20 shares in Kialami Pty Ltd which owned the family farm designated as notional estate. These shares were held in trust by Tolye Holdings Pty Ltd for the C H Belfield No 1 Family Trust which was a trust set up for the benefit of the deceased. The shareholding represented the deceased’s 40% interest in her late husband’s farming property at Kialami which had a net value of $4.1 million.
By way of background from 1956 to 1967 the two sons of Mrs Belfield worked on their parent’s farm in a partnership with their parents. On their father’s death in 1964, Mrs Belfield received 20% of title to the farm property and her sons each received a 40% share.
In 1967 the testator’s sons had a falling out and after court proceedings by Richard in 1972, he received $21,000 and then transferred his share in the farming property and the partnership to his brother Charles and Mrs Belfield. Richard thereafter made no contribution to the farming property or the grazing business.
In 1978 two trusts were established, The C.H. Belfield Trust No 1 for the benefit of Mrs Belfield and The C.H. Belfield No 2 for the benefit of Charles. In 1979 Mrs Belfield and Charles transferred their interests in the farm property to Kialami Pty Ltd. Mrs Belfield’s 40% interest in the farm was held by her trust and Charles’ 60% interest held by his trust.
At the time of settling the C H Belfield No 1 Trust the trustee company Tolye Holdings Pty Ltd entered into a deed of appointment with Mrs Belfield which conferred on her the power to direct the trustee to exercise any discretion and powers conferred on it as she may direct. It was submitted that Mrs Belfield had the power to nominate her son Richard as a beneficiary or pay income or appropriate trust property including the 20 shares in Kialami Pty Ltd in favour of Richard should she wish to do so.
In this case Mrs Belfield had suffered dementia for more than 3 years before she died and was incapable of making any such decision. Therefore the prescribed transaction would have occurred more than 3 years before her death. The existence of a power of attorney in favour of her son Charles was of no assistance as the attorney was not able to exercise Mrs Belfield’s rights under the deed of appointment as Section 163B of the Conveyance Act prohibited the performance by the attorney of functions as a trustee. Accordingly no notional estate order was made
Case study 5 – Wardy v. Salier – Testator as sole shareholder of trustee company in position to remove his son as director and appoint property of the trust to himself.
In the case of Wardy v. Salier and Anor  NSW SC 473 the late Mr Wardy died in 2009 leaving a substantial number of properties in his family trust which had been established in 1998. The Testator was the sole shareholder and a director of Linevale Pty Ltd, the trustee of this family trust.
In December 2007 one of the testator’s sons John Wardy was appointed as a director of the trustee company.
The deceased was also the appointor of the family trust with power to remove the trustee and appoint a new trustee up until about 17 months before his death. In March 2008 the deceased resigned as appointor of the family trust and nominated his son John Wardy as the appointor. Although the validity of this appointment was challenged in these proceedings, the court accepted the validity of this appointment.
In relation to the notional estate argument White J held, at paragraph 117 of his judgment “During his lifetime Edmund Wardy could have appointed the property of the trust to himself with the concurrence of John Wardy as his co-director. He could also have done so without the concurrence of John Wardy by exercising his power as shareholder to remove John Wardy as director and exercising his power as a director to appoint the property to himself before any step could be taken by John Wardy to remove Linevale Pty Ltd as trustee. Because he could have taken those steps, the continued holding of the assets by Linevale Pty Ltd, on the trusts of Edmund Wardy family trust deed was due to, that is was the result of Edmund Wardy’s omission to take those steps.”
White J rejected the argument that the relevant property transaction was the appointment by the deceased of his son John Wardy as appointor of the trust as this appointment took place 12 months before the testator’s death and he did not accept that this appointment was made with the intention of denying or limiting provision being made out of his estate.
In commenting on the meaning of “property being held” by another person or being subject to a trust where full valuable consideration has not been given for that transaction, White J stated that the words “property being held” need not require a change as to how the property is held to come within Section 75(1). The deceased’s omission to exercise his powers to appoint the assets of the trust to himself conveyed a valuable benefit on the beneficiaries of the trust as their right to compel due administration of the trust was substantially more valuable where the trust assets had a value of in excess of $11 million than they would be if the assets were substantially less or if they had been all appointed.
At paragraph 120 of his judgment White J refers to the decision of Molloy v. Webb 28 August 1998 unreported, where Bryson J held that the omission of the deceased to exercise a power to appoint his daughters as discretionary objects and his death constituted a valuable benefit because it ended the possibility that the deceased might revoke the trust under which his daughters were not beneficiaries and create other trusts under which they could have been discretionary objects. By reason of his not doing any of those things the trust continued as first constructed for the benefit of eligible beneficiaries (that is, eligible discretionary objects) and this constituted a valuable benefit because it ended the possibility that the deceased might act in those ways. It constituted an enhancement in a way that was clearly recognisable although difficult to measure in the value of the position of the listed discretionary objects. There was no valuable consideration for the omission to nominate his daughters as potential objects of the exercise of the discretionary power of the trustee.
The legal arguments in relation to notional estate can be very complex. Diamond Conway has a number of experienced estate litigation lawyers and accredited specialists who can advise you in these matters.
This document was prepared by Diamond Conway Lawyers. It contains information of a general nature only and is not intended to be used as advice on specific issues. Opinions expressed are subject to change. Although Diamond Conway gathered the information contained in this document from sources deemed reliable, and has taken every care in preparing the document, it does not guarantee the document’s accuracy or completeness. Diamond Conway disclaims responsibility for any errors or omissions.