Notional Estate Disputes in Current Cases

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NOTIONAL ESTATE DISPUTES IN CURRENT CASES

JOHN ARMFIELD - BARRISTER

The Notional Estate Provisions in the Succession Act

Introduction

The notional estate provisions are contained in Pt 3.3 of the Succession Act (“the Act”). S3 of the Act defines “notional estate” as property designated by a notional estate orderas notional estate of a deceased person. A notional estate order is defined as “an order made by the Court under Chapter 3 designating property specified in the order as notional estate of a deceased person”.

In Kastrounis v Foundouradakis [2012] NSWSC 264 (“Kastrounis”) Hallen As J at para 79 cited with approval the statement of the New South Wales Law Reform Commission Report 110 (2005) – Uniform Succession Laws: Family Provision at paragraph 3.1 where notional estate orders are described as “orders issued by the Court which are intended to make available for family provision orders assets that are no longer part of the estate of a deceased person because they have been distributed either before or after the deceased’s death (either with or without the intention of defeating applications for family provision)”.

s63(3) of the Act provides that a family provision order may not be made in relation to property of the estate that has been distributed by the legal personal representative of the estate in compliance with the requirements of s93, except as provided by subsection (5). S93 permits the legal personal representative to distribute after six months from the deceased’s death and after giving the prescribed notice and not receiving notice of an application or intended application for a family provision order.

s63(5) of the Act provides that a family provision order may be made in relation to property that is not part of the estate of a deceased person or has been distributed if it is designated as notional estate.

S 88 of the Act prohibits the Court from making a notional estate order unless it is satisfied that (a) the deceased person left no estate, or (b) the deceased person’s estate is insufficient for the making of the family provision order, or any order as to costs, that the Court is of the opinion should be made, or (c) provision should not be made wholly out of the deceased person’s estate because there are other persons entitled to apply for family provision orders or because there are special circumstances.

Relevant property transactions vs Distributed Estate

The Actdifferentiates between relevant property transactions and distributed estate.

S74 of the Act defines a relevant property transaction as a transaction or circumstance affecting property and described in s75 or s76.

S75 of the Act provides:

Transactions that are relevantpropertytransactions

(1) A person enters into a relevantpropertytransaction if the person does, directly or indirectly, or does not do, any act that (immediately or at some later time) results inpropertybeing:

(a) held by another person (whether or not as trustee), or

(b) subject to a trust,

and full valuable consideration is not given to the person for doing or not doing the act.

(2) The fact that a person has entered into a relevantpropertytransaction affectingpropertydoes not prevent the person from being taken to have entered into another relevantpropertytransaction if the person subsequently does, or does not do, an act affecting the samepropertythe subject of the first transaction.

(3) The making of awillby a person, or the omission of a person to make awill, does not constitute an act or omission for the purposes of subsection (1), except in so far as it constitutes a failure to exercise a power of appointment ordispositionin relation topropertythat is not in the person’s estate.

S76 of the Act provides

76 Examples of relevantpropertytransactions

(1) The circumstances set out in subsection (2), subject to full valuable consideration not being given, constitute the basis of a relevantpropertytransaction for the purposes of section 75.

(2) The circumstances are as follows:

(a) if a person is entitled to exercise a power to appoint, or dispose of,propertythat is not in the person’s estate and does not exercise that power before ceasing (because of death or the occurrence of any other event) to be entitled to do so, with the result that thepropertybecomes held by another person (whether or not as trustee) or subject to a trust or another person (immediately or at some later time) becomes, or continues to be, entitled to exercise the power,

(b) if a person holds an interest inpropertyas a joint tenant and the person does not sever that interest before ceasing (because of death or the occurrence of any other event) to be entitled to do so, with the result that, on the person’s death, thepropertybecomes, by operation of the right of survivorship, held by another person (whether or not as trustee) or subject to a trust,

(c) if a person holds an interest inpropertyin which another interest is held by another person (whether or not as trustee) or is subject to a trust, and the person is entitled to exercise a power to extinguish the other interest in thepropertyand the power is not exercised before the person ceases (because of death or the occurrence of any other event) to be so entitled with the result that the other interest in thepropertycontinues to be so held or subject to the trust,

(d) if a person is entitled, in relation to a life assurance policy on the person’s life under which money is payable on the person’s death or if some other event occurs to a person other than thelegal representativeof the person’s estate, to exercise a power:

(i) to substitute a person or a trust for the person to whom, or trust subject to which, money is payable under the policy, or

(ii) to surrender or otherwise deal with the policy,

and the person does not exercise that power before ceasing (because of death or the occurrence of any other event) to be entitled to do so,

(e) if a person who is a member of, or a participant in, a body (corporate or unincorporate), association, scheme, fund or plan, dies andproperty(immediately or at some later time) becomes held by another person (whether or not as trustee) or subject to a trust because of the person’s membership or participation and the person’s death or the occurrence of any other event,

(f) if a person enters into a contract disposing ofpropertyout of the person’s estate, whether or not thedispositionis to take effect before, on or after the person’s death or under the person’swillor otherwise.

(3) Nothing in this section prevents any other act or omission from constituting the basis of a relevantpropertytransaction for the purposes of section 75.

(4) For the purposes of this Chapter, in the circumstances described in subsection (2) (b), a person is not given full or any valuable consideration for not severing an interest inpropertyheld as a joint tenant merely because, by not severing that interest, the person retains, until his or her death, the benefit of the right of survivorship in respect of thatproperty.

S80 of the Act provides

Notional estate order may be made where estate affected by relevant property transaction

80Notional estate ordermay be made where estate affected by relevantpropertytransaction

(1) TheCourtmay, on application by an applicant for afamily provision orderor on its own motion, make anotional estate orderdesignatingpropertyspecified in the order asnotional estateof adeceased personif theCourtis satisfied that thedeceased personentered into a relevantpropertytransaction before his or her death and that the transaction is a transaction to which this section applies.

Note:The kinds of transactions that constitute relevantpropertytransactions are set out in sections 75 and 76.

(2) This section applies to the following relevantpropertytransactions:

(a) a transaction that took effect within 3 years before the date of the death of thedeceased personand was entered into with the intention, wholly or partly, of denying or limiting provision being made out of the estate of thedeceased personfor the maintenance, education or advancement in life of any person who is entitled to apply for afamily provision order,

(b) a transaction that took effect within one year before the date of the death of thedeceased personand was entered into when thedeceased personhad a moral obligation to make adequate provision, bywillor otherwise, for the proper maintenance, education or advancement in life of any person who is entitled to apply for afamily provision orderwhich was substantially greater than any moral obligation of thedeceased personto enter into the transaction,

(3)Propertymay be designated asnotional estateby anotional estate orderunder this section if it ispropertythat is held by, or on trust for:

(a) a person by whompropertybecame held (whether or not as trustee) as the result of a relevantpropertytransaction, or

(b) the object of a trust for whichpropertybecame held on trust as the result of a relevantpropertytransaction,

whether or not thepropertywas the subject of the relevantpropertytransaction.

S81 and 82 of the Act overcome the decision of Macready A.J in Prince v Argue [2002] NSWSC 1217 where His Honour held there was no power under the Family Provision Act to make an order designating property as notional estate when the person to whom the property had been transferred has died.

S87 of the Act provides

87 General matters that must be considered byCourt

TheCourtmust not make anotional estate orderunless it has considered the following:

(a) the importance of not interfering with reasonable expectations in relation toproperty,

(b) the substantial justice and merits involved in making or refusing to make the order,

S79 confers on the Court a power to make a notional estate order in respect of property that has been distributed from an estate. The provision is in the following terms:

TheCourtmay, on application by an applicant for afamily provision orderor on its own motion, make anotional estate orderdesignatingpropertyspecified in the order asnotional estateof adeceased personif theCourtis satisfied that on, or as a result of, a distribution of thedeceased person’s estate,property(whether or not the subject of the distribution) became held by a person (whether or not as trustee) or subject to a trust.

Discretionary matters

S 87 of the Act deals with the matters which the Court must take into account before it makes a notional estate order. That section is in the following terms:

TheCourtmust not make anotional estate orderunless it has considered the following:

(a) the importance of not interfering with reasonable expectations in relation toproperty,

(b) the substantial justice and merits involved in making or refusing to make the order,

Relevant property transactions and the concept of “full valuable consideration”

The first step in establishing a relevant property transaction is to demonstrate that the act or omissionresults in property being held by another. The second step is to establish that “full valuable consideration” was not given for the act.

In Kastrounis the deceased left an estate which had an estimated net value of $24,378.Under the terms of her will she left a pecuniary legacy of $10,000 for each of her three children, Max, Jasmine and Maria. The rest and residue of her estate passed to two of the defendants, namely her granddaughters, Anna and Irene. In June 2009 being three months before her death the deceased entered into a contract to sell a property she owned at Brighton Le Sands to the defendants who were three of her granddaughters. The purchase price disclosed on the contract was $500,000. None of the purchase price was paid. The defendants sold the property in May 2010 for $549,000. The plaintiffs, Max and Maria sought to have the proceeds of sale of the Brighton Le Sands property or other property of each of the defendants designated as notional estate.

At the time the contract was made the deceased had the following conversation with her solicitor:

"I said:"This is the Contract that you wanted me to prepare. You understand that you are transferring your house to your three granddaughters, Anna, Connie and Irene?"
She replied:"Yes I understand that."
I said:"I know that you have instructed me to do this but I need to ask you some questions. Do you understand what the transfer means?"
She replied:"I know that they can throw me in the street if they want. But they won't."
I said:"You know that you are not getting any money for the transfer of the house to your granddaughters?"
She replied:"That's alright. The girls will feed me and look after me. They have been doing it for years anyway."

The following special condition appeared in the contract:

"The Vendors and Purchasers agree that the consideration listed on the face of the Contract is the market valuation for stamp duty purposes.
The Vendor will not require the Purchasers to pay any consideration to the Vendor for the transfer in gratitude for and acknowledgement of the purchasers' (sic) taking care of the Vendor's welfare since the death of the Vendor's husband.
The Purchasers hereby agree that they will allow the Vendor to reside within the property for the whole of her lifetime for no consideration and the Purchasers further agree that they will pay for all outgoings, utilities and maintenance for the property during the occupation of the property by the Vendor.
This clause shall not merge upon completion."

Hallen As J held that the expression “full valuable consideration” means such valuable consideration as amounts to, approximates, or is broadly commensurate with, or is a fair equivalent, of the value of that for which it is given”. In doing so he followed the judgement of Young J in Wade v Harding (1987) 11 NSWLR 551 at 554-555

His Honour was of the view that whether full valuable consideration is given is a question of fact and involves no exercise of discretion. The onus of establishing full valuable consideration was not given lies on the person asserting that proposition. Where, however, that party establishes a prima facie case of inadequacy of the valuable consideration given, the evidential burden will pass to the other party to establish that there was, indeed, consideration given, and the extent of that consideration.

In the instant case where the transfer of the property disclosed a monetary consideration, namely, the purchase price but it was common ground that no part of the consideration was paid the evidentiary onus passed to the defendants to establish that there was consideration given and the extent of that consideration.

In determining the question His Honour held that the first inquiry was what was the actual value of the property? Secondly whether the monetary consideration identified in the contract is commensurate with that value. The next question is what consideration is given by the other parties to the deceased? The final question is whether the consideration given amounts to full valuable consideration.

His Honour dealt with these issues at paragraphs 287 – 295 in the following terms:

The Plaintiffs submitted that since the deceased, upon the transfer of the Brighton-Le-Sands property to the Defendants, did not receive the consideration set out on the face of the Contract for Sale ($500,000), there is a relevant property transaction for which there was not full valuable consideration given. The only amount that the Defendants paid was the stamp duty ($17,790).

However, the solicitor's conversation with the deceased reveals that the deceased acknowledged, and the Contract specifically provided, that the Defendants were not to give her any of the purchase price for the transfer to them of the Brighton-Le-Sands property. She expected them "to feed me and look after me" as they had done for years. In addition, whilst she would no longer be the registered proprietor, she would be entitled to remain in occupation, relieved from any obligation to paying outgoings, utilities and maintenance. The promises made by the Defendants as well as the payment of the stamp duty must also be regarded as part of the valuable consideration provided by them:Vaysbakh v Vaysbakh[2007] NSWSC 1223at[86]- [87].

But, I have earlier noted that the words "in money or money's worth", appearing in the former Act after the term "full valuable consideration", have been omitted from the Act. Possibly, this is because the balancing of imponderables such as companionship and other services to be provided, on which the court has, somehow, to put a financial value, against the consideration identified in the contract is a difficult task.

In this case, in any event, there is no evidence of the value of such imponderables that were to be provided by the Defendants. Natural love and affection on its own would not suffice. Nor is there evidence of, for example, what it would cost to feed and house the deceased and what the outgoings to be paid were likely to be.

Importantly, the Act requires "full valuable consideration" and not just "valuable consideration". The word "full" must be given meaning and effect. The valuable consideration given must be, therefore, approximately equivalent to the value of the property that is disposed of by the deceased.

In this regard, I must also bear in mind the medical records, which reveal that the deceased was not likely to live very long. Thus, the financial, and other, obligations of the Defendants would cease within a relatively short period of time. I have earlier stated that she needed palliative care and that it appeared she did not have very long to live. (I do not accept the Defendants' submission that "[A]lthough the deceased's health was deteriorating, it was not known how much longer she would live".)

In all the circumstances, it is unlikely, that the value of housing and feeding the deceased, as well as paying for all outgoings, utilities and maintenance, for the Brighton-Le-Sands property during her occupation would amount to, approximate, be broadly commensurate with about $500,000.

Because no part of the monetary consideration identified in the Contract was given by the Defendants to the deceased, and because the value stated therein appears to have been the value of the Brighton-Le-Sands property at the relevant time, and because of the matters stated above, I am of the view, in this case, that "full valuable consideration" was not given for the relevant property transaction.

(Even if one were to include the Defendants' care of the deceased's welfare following her husband's death (which is past consideration), I am not satisfied that "full valuable consideration" was given by them to the deceased for her entering into the relevant property transaction which resulted in the Defendants' ownership of the Brighton-Le-Sands property.)

The next issue was whether there was a relevant property transaction to which s80 applied. Hallen AsJ held that the transaction fell within s 80 (2)(b). That section requires a comparison of “the moral obligation to make adequate provision, by will for any eligible person with the moral obligation of the deceased to enter into the relevant property transaction.

On the facts of the case Hallen AsJ held that the moral obligation of the deceased to make adequate provision for each of the plaintiffs was substantially greater than the moral obligation to transfer the property to the defendants notwithstanding the care which they had and did render to their grandmother.

In this regard the case is to be contrasted to the decision in Ogburn v Ogburn [2012] NSWSC 79. In that case Ball J held that a transfer of a matrimonial home bythe deceased to himself and the defendant as joint tenants within one year of his death did not fall with s80(2)(b) because the defendant, who was the deceased’s widow had contributed substantial sums of money towards property renovationsand had a strong moral claim to have it transferred into her joint name which outweighed the moral claim of the plaintiffs who were the deceased’s sons.

Returning to Kastrounis, Hallen As J in the context of considering the discretionary matters in s87 held that it was relevant that at the time the defendants sold the Brighton Le Sands property each of them were aware that the plaintiffs were going to make a claim for provision. In the circumstances he was satisfied that the substantial justice and merits of the case required the court to make a designating order.

His Honour ordered that the first plaintiff Max receive a legacy of $65,000 out of the notional estate and the second plaintiff Maria receive $35,000.

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