Attwood Marshall Lawyers Wills & Estates Senior Associate and Accredited Aged Care Professional Debbie Sage joins Robyn Hyland on Radio 4CRB to discuss the intricacies of inheriting property in an estate. People often overlook the complex web of expenses and challenges that come with specific gifts when preparing a Will and distributing those assets, particularly with real estate. Here, we explore the often-neglected aspects of property inheritance, and the questions surrounding who is entitled to the income and responsible for the expenses.
Leaving property as a gift in your Will
When someone includes a property as a specific gift in their Will, they are designating that property to be inherited by a particular beneficiary. This is distinct from the residuary estate, which usually comprises of everything else left in the estate after settling debts and expenses and distributing specific gifts.
Beneficiaries of a residuary estate are commonly referred to as residuary beneficiaries.
One common question that arises throughout the estate administration process is whether a beneficiary who has been specifically gifted a property in the Will is automatically entitled to its income, especially when the property generates rental income.
The entitlement to income can vary based on the terms outlined in the Will.
If the Will explicitly gifts the property to a beneficiary, that beneficiary is typically entitled to the property’s income unless stated otherwise in the Will.
However, it is crucial for the Will to clearly define the extent of the beneficiary’s entitlement to eliminate any doubts or disputes.
Failure to do so can lead to disagreements among beneficiaries, and this relates to not only property but also shares and other assets held in the deceased’s estate.
To prevent such disputes and potential strain on the beneficiaries’ relationships, careful and precise Will drafting is essential. These disputes can be both costly and have lasting effects on family dynamics long after the estate has been administered.
Responsibility for ongoing property expenses and taxes
Generally, where a beneficiary has been specifically bequeathed a property in a Will, whilst the beneficiary may be entitled to the income the property generates, it is also common for them to bear the responsibility of maintaining, preserving, and covering the property’s expenses from the date of the deceased’s passing. This includes the costs associated with transferring the property to them as the beneficiary unless the Will provides otherwise.
This is a frequent source of disputes, often stemming from insufficient consideration by the Will-maker regarding the implications of such a gift.
For example, when a property is specifically gifted to a beneficiary, but the deceased still has a mortgage on the property, the beneficiary may assume the responsibility of either taking over or settling the mortgage to retain ownership of the property, unless otherwise stated in the Will.
Will-makers should consider this aspect carefully when providing instructions for their Will. If they intend to leave a specific gift of property or assets, they must think through whether the beneficiary should bear the ongoing expenses and property maintenance responsibilities. In the case of a property with a registered mortgage, they should also decide whether the residuary estate should be used to pay off the mortgage before the property is transferred to the intended beneficiary.
Depending on the extent of your assets and liabilities, it might be prudent for the Will-maker to establish a contingency plan to prevent the beneficiary from being burdened with financial obligations they may struggle to meet in order to retain the property.
When a beneficiary can’t cover ongoing expenses for a property
In cases where the beneficiary lacks the financial means to cover ongoing property expenses, it may be necessary to sell the property, and for the beneficiary to receive the net proceeds from the sale after settling outstanding debts, taxes, and property-related expenses.
Nevertheless, the beneficiary may also be entitled to other assets in the estate as specified in the terms of the Will. For instance, they may also be receiving a share of the residuary estate or a separate cash legacy. In such cases, the beneficiary can potentially reach an arrangement with the estate’s executor for an adjustment to be made during distribution. With the consent of the executor and any impacted beneficiaries, the estate could perhaps cover the property expenses upfront, and the beneficiary’s entitlement can be adjusted accordingly by deducting the total expenses paid from their entitlement at distribution.
However, if the property generates rental income, those property-related expenses can typically be paid from the rental income during the estate administration process.
What happens to the property and rental income during estate administration?
Administering a deceased estate can take a substantial amount of time, often spanning 12-18 months. When a property is left to a beneficiary and generates rental income, that beneficiary cannot immediately access the income. This waiting period exists because potential claimants could challenge the estate, potentially altering the beneficiaries’ entitlements as outlined in the Will.
During this interim period, the legal personal representative (being the executor/s named in the Will or the appointed administrator/s), takes on the responsibility of receiving the rental income on behalf of the estate, and receipting such funds into an estate bank account or solicitors trust account on behalf of the estate. The legal personal representative (LPR) must also ensure that the property is adequately insured until the property has been sold or transferred in accordance with the terms of the Will. This is because the property is still an estate asset which the LPR is required to take possession and control of as part of the administration of the estate.
Typically, the intended beneficiary is responsible for insuring a specifically gifted property, however, if necessary, the LPR may need to arrange insurance on behalf of the estate, with the expense either deducted from the income or adjusted during the distribution process for the beneficiary.
These procedures, however, depend on the terms of the Will. If the Will directs that ongoing property expenses be borne by the estate until the successful transfer to the beneficiary, then the residuary estate becomes responsible for the expenses.
This underscores the critical importance of drafting your Will properly and precisely.
Considerations when gifting specific assets in your Will
For individuals considering leaving specific gifts such as property or shares in their Will, it is imperative to consult with an experienced estate planning lawyer. Crafting a clear and comprehensive Will is essential to address potential scenarios, such as income entitlement and expense responsibilities.
Additionally, you must anticipate what may happen to that item that you have specifically gifted during your lifetime, for example if the property gets sold to fund your entry into a retirement village or aged care facility. A well-drafted clause can effectively deal with this issue and prevent ademption, a situation where a gift fails because the asset no longer belongs to the deceased at the time of their passing.
We have covered the topic of ademption in Wills in a previous blog, a topic often overlooked when drafting Wills, particularly in homemade, online, or do-it-yourself Will kits.
Another crucial matter to discuss with an estate planning lawyer is to ensure you thoroughly understand what assets you own and how you own them.
We have encountered many estates where the Will attempts to gift an asset that does not belong to the deceased. A common example is jointly owned bank accounts or properties where the other joint owner is still alive. Such assets cannot form part of your estate unless you were the last survivor of the jointly owned asset.
For beneficiaries receiving specific gifts like property or shares, it is vital to comprehend the terms of the Will, and, if necessary, seek advice to ensure you understand your rights and responsibilities fully.
If the Will lacks guidance or clarity about any of these situations, the LPR should promptly seek legal advice from an experienced estate administration lawyer. In certain cases, it may be recommended that the LPR seek judicial advice from the Court to protect them from personal liability.
Attwood Marshall Lawyers – helping people plan for the future and preserve their wishes
Attwood Marshall Lawyers has one of the largest and most experienced Wills and Estates Department in Australia, with dedicated team who practice exclusively in estate litigation, estate administration, and estate planning.
Our lawyers understand that no two families and no two estates are the same. When writing your Will, it is an extremely person task. It is important to get advice to ensure your wishes can be fulfilled and that what you want to happen to your estate, ultimately will.
Our estate administration team also can assist executors in their role and provide advice to beneficiaries of an estate.
To discuss your estate matter, please contact our Wills and Estates Department Manager, Donna Tolley, any time on 1800 621 071, or her direct line 07 5506 8241, or email dtolley@attwoodmarshall.com.au,
