Digging deeper – finding notional property in a deceased estate

You may have heard about cases involving Will disputes where the will-maker has left nothing of value in the estate to satisfy an expectant beneficiary. These issues typically stem from long-standing family feuds or where the will-maker anticipates that a family provision claim will be made on his or her estate.

In a bid to circumvent such a claim, the will-maker, conscious of his or her impending death, may make a calculated transfer or distribution of assets to the preferred beneficiaries effectively depleting the estate in the event of a family provision claim.

In some circumstances in New South Wales however, certain asset transfers made before a testator dies may be deemed ‘notional’ and later ‘clawed back’ to form part of the estate for distribution to a successful family provision applicant. In such cases, the testator’s attempts to quarantine those assets will fail.

Family provision claim legislation

There are statutory rights in all Australian jurisdictions for eligible persons to contest a Will on the basis that they have been left with inadequate provision by the testator.

If a family provision claim is successful, the Court can adjust the terms of the Will in the applicant’s favour, effectively reducing or negating gifts to the beneficiaries named in the Will.

The applicant must be an eligible person and prove that the deceased had a duty or moral obligation to provide for his or her proper maintenance and advancement in life and that the distribution proposed under the Will fails to do that.

Generally, an applicant will seek provision from the deceased’s estate and / or notional estate to capture any known or unknown ‘prescribed transactions’ which may be declared ‘notional’ by Court order and therefore available to meet a family provision claim.

What is a notional estate order?

A notional estate order may affect property owned by a deceased person that transfers either directly or indirectly to a third party (including a company or trust) before the person’s death without the person having received the full value of the asset in exchange for the transfer. Notional estate orders may also affect assets that automatically vest in a third party on the person’s death, such as jointly held property or the proceeds of life insurance or a superannuation fund.

The effect of a notional estate order is that certain property will be treated as if it still (hypothetically) forms part of the estate although it is not owned by the deceased at the date of death. The property becomes available to satisfy a family provision claim.

The asset must have been the subject of a ‘relevant property transaction’ as provided in the Act and a notional estate order will extinguish the rights of the current legal owner of the property to the extent made by the order.

What is a relevant property transaction?

A relevant property transaction occurs where a person by a positive act or omission and either directly or indirectly (immediately or in the future) causes property to be held by another person or in trust, and in circumstances where full valuable consideration for the property is not given.

A relevant property transaction includes a transaction:

  1. that took effect within three years before the testator’s death with the intention of wholly or partly, or denying or limiting provision being made for a person entitled to make a family provision claim;
  2. that took effect within one year before the testator’s death and at a time when the deceased person had a moral obligation to make provision for a person entitled to make a family provision claim which obligation was substantially greater than the testator’s moral obligation to enter into the transaction;
  3. that took effect or is to take effect on or after the deceased person’s death.

Property the subject of a notional estate order may include assets transferred for less than market value, substantial gifts made by the will-maker, property held in trust structures which are in some way controlled by the will-maker, jointly owned real estate (where the testator fails to sever the tenancy) that automatically vests in the surviving owner or the proceeds of superannuation or life insurance via a death benefit nomination.

What does a Court consider when making a notional estate order?

Not surprisingly, many family provision claims are disputed by the beneficiaries named in the Will or the third parties who have already received property which may be affected by a notional estate order.

The Court will only make a notional estate order in circumstances where a family provision claim has been made and it is satisfied that an order for provision should be made. The Court must not make a notional estate order without considering:

  1. the importance of not interfering with reasonable expectations in relation to property (for example breaking up large parcels of land which could frustrate or devalue an enterprise – such as farmland);
  2. the substantial justice and merits involved in making or refusing to make the order;
  3. any other matter deemed relevant in the circumstances.

The Court must be satisfied that the deceased left no estate or insufficient assets to make the family provision order.

Conclusion

Notional estate order rules can defeat a testator’s intention to isolate assets from an estate and to avoid a family provision claim. Divesting assets or relinquishing their control to others to prevent such claims can also be risky – testators should consider the possibility of triggering adverse tax consequences and stamp duty liabilities that might otherwise be avoided when assets pass to beneficiaries under a Will. We recommend obtaining legal advice to minimise the potential for future disputes and to ensure your estate is distributed according to your wishes.

If you believe you have been unfairly left out of a Will you may be eligible to make a family provision claim, even if the estate appears to be of little or no value.

Talk to a specialist

For a confidential, free case assessment, please call us on 02 6621 2481 at Lismore, Ballina on 02 6686 2522 or Byron Bay on 02 6680 8525, email [email protected] or contact us online.