Law Talks Episode: Giving an early inheritance – What happens if the estate is contested later?

Robyn: Good morning and welcome to Law Talks here on 4CRB where we break down the legal issues that affect the community. 

And today we’re talking about something that’s becoming more common, giving an inheritance early. With rising cost of living and housing affordability concerns, many parents and grandparents want to help their loved ones financially while they’re still alive. But what happens if someone later challenges the estate? Could those gifts be clawed back? To help us navigate this complex topic, we’re joined by Attwood Marshall Lawyers, Estate Litigation Partner Lucy McPherson. Lucy has worked exclusively in estate litigation since 2010 and works across both Queensland and New South Wales jurisdictions. Thanks for joining us today, Lucy.

Lucy: Thanks so much for having me.

Robyn: So, let’s start with a common scenario. If a parent or grandparent gives a large financial gift to a child or grandchild before they pass away, can that gift be challenged if someone makes a claim on the deceased’s estate?

Lucy: That’s a really good question, and the answer ultimately depends on which state the estate is being administered in. So, in Queensland it would be a very effective estate plan in order to avoid potential claims being made on an estate, to gift property out of an estate before the date of death. Because the property would belong to the recipient and wouldn’t typically be subject to estate claims.

However, if the deceased person was domiciled, so living permanently in New South Wales at the date of death or held property in New South Wales at the date of death, then, that’s a little bit different because in New South Wales, New South Wales has a section of their legislation called notional estate provisions, which only exists in New South Wales. It doesn’t exist in any other jurisdiction in Australia, but these notional estate provisions allow the court to claw back gifts into the estate for the purpose of making a family provision order, if there is insufficiency in the actual estate for the making of an order. Though, it can defeat these notional estate provisions and defeat this strategy to sort of gift your assets and give your assets away before you die in order to mitigate against a claim being made, because the court can just call them back into the purpose of making a family provision claim.

It’s important because even if you live in Queensland and you own real estate in New South Wales, those assets could still be subject to those notional estate laws, so if there’s a sufficient connection to the jurisdiction of New South Wales that can invoke these notional estate provisions that exist only in that jurisdiction.

Robyn: So, can you explain further what are notional estate rules and how do they work in New South Wales?

Lucy: So, the term notional estate refers to assets of the estates that are no longer legally owned by the deceased person at the time of their death.

So, usually your estate would consist of assets that are held in your personal name at the time of your death. So not assets held, for instance, in a trust, because those assets would be held by a separate legal entity, being the trust, but assets that are held in your personal name at the date of death would form part of your estate.

Notional estate assets are assets that have been disposed of for less than valuable consideration. So essentially gifts that have occurred prior to the date of death within a certain time frame. So, the specific timeframes set out in legislation. And the court has the ability to claw back those assets that have been transferred out of the name of the deceased person, generally within three years before the date of death, for the purpose of making an order out of those assets under family provision legislation.

It’s really important to remember, though, that the court will only rely on these provisions if there’s not sufficient funds, so sufficient money in the actual estate to make provision for eligible claimants.

So, it’s not just an open-door policy to, you know, just claw back assets as the court pleases. There must be insufficiency in the actual estate of the deceased person for the court to rely on these orders.

Just to give you some examples of assets that can be designated notional estate: the court can claw back jointly owned property for instance. So, property that was held under joint tenancy that falls into the category of notional estate, superannuation benefits fall into this category of notional estate, and also assets held in a trust, so assets that may have been distributed to somebody else through a trust can potentially be clawed back into the estate for the purpose of making a family provision order.

Robyn: So, Lucy, what happens if the person who received an early inheritance or had an asset transferred to them has already spent the money or sold the asset?

Lucy: In New South Wales, there are provisions that deal with this particular scenario in the legislation. Ultimately, what would need to happen is that the party who received the gift would be joined as a defendant in the proceedings and they would be answerable to the court, and the courts would make orders affecting their personal assets in order to satisfy the court order for the court.

And the court, for instance, could make an order affecting their personal assets, their home or their bank accounts, in order to bring those assets back into the estate for the purpose of the family provision claim.

In saying that, though, the enforcement of those orders can be really difficult and you know, even if the court makes an order that a particular asset is to be clawed back into the estate to meet a family provision order, if for instance that particular recipient of the gift has, just use an example, declared themselves bankrupt, then you are going to have a lot of difficulty being able to recover that asset into the estate for the purpose of meeting a family provision order. Or if the asset has been sold or distributed to an unrelated party, it becomes a matter of ultimately a tracing exercise, if you like, and it becomes very difficult, not only difficult but costly…

Robyn: I was going to say I imagine an expensive exercise to do.

Lucy: It can be, you know, a very difficult exercise. But in saying that, there’s notional estate provisions because there’s a time limits that apply in the legislation that the asset must have been transferred within three years of the date of death, it’s very unusual for you to come up against those difficult circumstances because generally the recipients going to still be holding the asset that was transferred, or at least a very substantial portion of the value of that asset.

Robyn: And how can someone structure gifts during their lifetime to avoid future legal disputes like this?

Lucy: That’s a very difficult question to answer. There are, you know, a number of things that you can do to try and mitigate against the family provision claim being made in your estate. The question of whether these notional estate provisions will apply to you ultimately depends on a number of factors, including where you live, so, it’s what we as lawyers, call your domicile. That is a fancy word for where you treat as your permanent home.

Robyn: Yeah.

Lucy: Where your assets are held. So, whether your assets are held in New South Wales or in Queensland or any other jurisdiction in Australia, as well as the nature of those assets, so under the family provision law, the court distinguishes between what we call movable and immovable assets and movable assets are things like shares and bank accounts, things that can be moved around, whereas immovable assets are property or land that are fixed to a particular location. And determining you know, which jurisdiction applies is going to depend on those factors and that will then determine whether these notional estate provisions apply, because in order for the notional estate provisions to apply, the estate would need to pull into the jurisdiction of New South Wales, which is where these provisions exist.

So it’s a really tricky question to answer and really you know my advice there is that seeking appropriate advice from an experienced estate planning lawyer is a really good place to start. This is a really complicated area of law and if you really want to set up your, and structure your estate, or even gift before you pass away, in the most effective way legally, then, seeking advice from a lawyer is really important.

Robyn: So, Lucy, what should people consider before making a large financial gift as an early inheritance?

Lucy: Look, there’s a lot of important things to think about because ultimately you know my advice to my clients in this situation is always the first thing that you need to consider is your livelihood. You know your own financial future.

Robyn: Yeah.

Lucy: Are you going to be comfortable for the rest of your life if you do this, you know you’ve got to think about yourself first and make sure that you’re going to have sufficient funds to see you out for the rest of your life. That’s the first consideration. Absolutely, because giving away too much money would leave a person in a very vulnerable position at an age where they really need that money the most. You know, we become more vulnerable as we age and therefore, you know, you don’t want to leave yourself in a very vulnerable position financially as well. Also need to think about the family dynamics. You know, what will other beneficiaries, or potential beneficiaries of your estate, feel if they discover significant gifts have been made. You know what actions will they take? Will they bring legal action? Will it create resentment in the family and, you know, create future litigation within the family. That’s another important consideration.

The other thing to remember is you know always keep records. Not only, you know, keep records of importantly any transactions or gifts that are being made, but also your reasoning behind these advances. Why you’re attempting to transfer, whatever it may be, to particular people in your life, because you’ve got to remember that that record keeping can be relied upon in any court dispute that eventuates after you die.

But most importantly in all of this is, just going to go back to what I mentioned earlier, is seeking the appropriate professional advice and not only advice from a lawyer but also advice from an accountant and a financial advisor, as to how making these gifts can affect your financial circumstances. It can in some circumstances, jeopardise things like your social security benefits.

That’s why it is important to make sure that you’re seeking advice from a financial planner about whether making a substantial gift to a family member is going to mean that you’re disqualified from receiving Centrelink payments, for instance. And often in these sort of situations, a good estate planning lawyer and financial planner and accountant will work together, in their client’s best interests, to work out the best strategy to achieve what the client wants to achieve, but in order to protect their own situation as well.

Robyn: Yeah, Lucy, it’s clear that while giving you an early inheritance can be a great way to support loved ones, it’s important to do it carefully and especially with New South Wales’ notional estate laws in mind, planning ahead with the right advice can make all the difference as you say.

Lucy: Absolutely Robyn, it’s always the best approach to be proactive in these situations and seek the right advice rather than leaving a mess for your family to deal with later on. You know, we see too often a party not getting the right advice and it ultimately ends up in a very expensive and delayed court dispute, when really you know it could have been avoided if the person had sought the appropriate advice at the time that the transfer was made.

Robyn: Yeah. Not to mention the emotional stress that goes with all of that as well. Thanks for joining us today, Lucy.

Lucy: You’re welcome. Thanks so much for having me.

Robyn: You’ve been listening to law talks here on 4CRB, which you can hear every Friday morning from 9 o’clock.