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Family provision claims often interfere with the will maker’s intentions.
Family Provision Claims: The Marsella Case
What are family provision claims about? Who has a right to claim? And how to prevent a claim?
These are just some of the questions Paul Mackenroth of Cleary Hoare in Brisbane will discuss in this episode. The Marsella case will make a good example.
Here is what we learned but please listen in as Paul Mackenroth explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
The Marsella Case
Riccardo Marsella and Helen Swanson had married in 1984. Helen had brought 2 children into the marriage – Caroline Wareham (12 at the time) and Charles Swanson (14 at the time).
When Helen died in April 2016, she left a will with Riccardo as the executor of her estate. Her estate included the family home where Riccardo and Helen had lived for 32 years of marriage, an apartment unit and some cash.
The will provided that Riccardo was to move into and receive a life interest in the unit, receive $100,000 for the upkeep of the unit and that the rest of the estate (notably the family home) was to go Helen’s two children, Caroline and Charles.
Riccardo contested the will and filed a family provision claim.
Attempts to Mitigate
Helen had attempted to mitigate a family provision claim by Riccardo through the following clause in her will when talking about the lack of gifts to Riccardo:
“….. by agreement and bearing in mind that the assets herein disposed were pre- marital assets acquired during my previous marriage and my husband has monies of his own and business interests……”
While these statements are common in wills that make a disproportionate gift to one and leave another out and do explain the will maker’s motivation, they are not an impenetrable shield as the Marsella case shows.
Outcome
In the Marsella case, the Supreme Court intervened and, effectively, re-wrote parts of the will. The court order resulted in a significantly different outcome to what Helen had intended.
The court decided that Riccardo should receive a flexible life interest in the house rather than the unit. Flexible means that Riccardo can sell the house and retain the funds to downsize to a smaller house or supported living accommodation.
Riccardo can invest the rest of the funds from the sales proceeds and receive the investment income. And Ricardo received the cash gift of $100,000 as originally intended by Helen.
On the death of Riccardo, Helen’s children Caroline and Charles will receive the remainder assets.
Helen appealed against this decision at the Victorian Courts of Appeal but lost.
Fair Doesn’t Matter
In a family provision claim it doesn’t matter what is fair. The court won’t decide what is fair. What matters is whether a provision is adequate. In the Marsella case – Re Marsella: Marsella v Wareham [2018] VSC 312, 82 – the court found the following,
The Court’s function is not to ensure a fair distribution of the testator’s estate or to achieve equality amongst various claimants but goes no further than making adequate provision for the proper maintenance and support of an applicant.
So a court will not necessarily make a family provision order unless there is a need for it. A family provision claim needs to prove one way or another that the will either makes adequate provision or not. Evidence is critical.
Size of the Estate
A family provision application is only worth the effort if the estate is big enough to justify legal costs. And so the first step in any family provision application is to identify the size of the estate. What assets actually went into the estate?
The estate includes any property the deceased held in individual names – be it real estate, shares, units in a unit trust, cash, other valuables or something else.
An estate doesn’t include an interest in a super fund (be this an SMSF or other super fund) unless there is a binding death benefit nomination to pay the death benefit to the estate.
An estate also doesn’t include anything held as joint owners – be this real estate, a bank account or a share portfolio in joint names.
And it doesn’t include trust assets or company assets itself, only the shares or units in those.
However, notional estate provisions in NSW might have the effect that some of these excluded assets are included in a notional estate and are hence available for distribution through the estate.
NSW Notional Estate Provisions
The notional estate provisions only apply to estates or estate assets in NSW. These provisions allow a court to “claw back” property into a notional estate if a “relevant property transaction” occurs within a certain time. Any property in a notional estate is available for distribution.
To create a notional estate, the applicant must prove that there has been – 1 – a relevant property transaction, – 2- within the prescribed time – 3 – with a prescribed intention or moral obligation.
The definition of a “relevant property transaction” is in s75 of the NSW Succession Ac and is very wide and fuzzy, hence will cover most transactions that take place within the prescribed time.
The prescribed timeframe is 1 year or 3 years prior to the death of the deceased, depending on intention or moral obligation.
It is 3 years for any property transaction that was entered into with the intention, wholly or partly, of denying or limiting provision of any person being made out of the estate of the deceased.
And it is one year where the deceased had a moral obligation to provide for the applicant’s maintenance, education or advancement.
A notional estate also includes any transaction that took effect or is to take effect on or after the deceased’s death.
Family Provision Application
A family provision claim starts with an application stating that the applicant is an eligible person, requires maintenance from the estate and that there is a moral duty to provide such.
The timeframe within which the application must be made varies between states and territories. It is between 3 to 12 months of the testator’s death.
A court decides about the application and stipulates its decision in a family provision order.
If the executor distributes funds too early, they are personally liable to such an applicant, if the applicant was successful.
Eligible Person
Only an eligible person can lodge a family provision application. An eligible person varies from state to state, but all states include a spouse, de facto spouse and child as an eligible person.
In addition, the following are included as follows:
Queensland – dependant per s41 Succession Act 1981 (Qld);
New South Wales – former spouse and dependant per s57 Succession Act 1981 (NSW)
Western Australia – former spouse, grandchild and parent per s7 Family Provision Act 1972 (WA)
Victoria – former spouse, dependant, spouse of child and member of household per s90A Administration and Probate Act 1958 (VIC)
Factors
The court will consider the following factors when assessing family provision claims.
- Relationship between deceased and the eligible person;
- Obligations of deceased toward the eligible person;
- Responsibilities of deceased toward the eligible person;
- Size and nature of the estate;
- Financial resources of the eligible person;
- Disabilities suffered by the eligible person;
- Age of the eligible person;
- Contribution by the eligible person to the estate;
- Previous benefits paid to the eligible person or any beneficiary;
- Whether the eligible person was maintained by deceased;
- Liabilities of the deceased to maintain the eligible person;
- Character and conduct of the eligible person or any other person;
- Effect a family provision order would have on the other beneficiaries;
- Any other matter.
How To Defend Against a Claim
Helen could have protected her assets from family provision claims in three steps, being creation of a trust, a will contract and then an option contract.
With these three steps, the estate would have been empty. So there would have been nothing left for a family provision claim.
1 – Creation of a Trust
Helen could have gifted her assets to the trustee of a separate trust. The trustee would then have lent the assets back to Helen and taken security. So do a gift and loan, also called a secured debt strategy.
Security for the house and unit would have been a mortgage. Security for other assets would have been an interest registered in the Personal Property Securities Register under the Personal Property Securities Act 2009 (Cth).
This way Helen would have converted equity into debt owed to the trust. And the trust would have had priority above unsecured creditors.
2 – Will Contract
The second step would have been a will contract between Helen and the trust. In this contract Helen would have agreed that she will make a will. And she would have waived any right to change this will, leaving her assets to the trustee of the trust.
This contract creates enforceable rights in the trustee and a breach of the terms of the contract leads to a right to monetary damages. The contractual rights are enforceable before death and generally provide significant asset protection.
3 – Option Contact
The final step is an option executed in favour of the trustee of the trust in relation to certain property. This document grants the trustee of the trust the option to buy the assets listed in the will. To buy them at market value. In Helen’s case, she would have granted an option to the trustee in relation to the unit and the house.
If there is a breach of the will contract by a claim against the property – before or after death – the option is exercisable by the trustee and the trustee acquires property at market value. This amount is offset by any amount owed under the debt in step 1.
Consider the exercise of the option a last line of defence. In the case of real property the exercise might result in stamp duty and CGT.
Conclusion
When planning your estate, consider the possibility of family provision claims. They happen more often than people think and often go against the will maker’s intentions. Make sure that your assets pass on as intended.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 23 October 2023
Tax Talks spoke to Paul Mackenroth - Senior Associate at Cleary Hoare - for more details.
