Notional Estate – what does it mean?
Introduction
Will disputes, matters relating to distribution of a deceased estate, contested wills and the rights of beneficiaries are issues that an experienced will lawyer understands.
For various reasons, a will maker may form an opinion that they are not morally obligated, or duty bound to make provision for certain persons in their will. For example, where a will maker has been estranged from their child for several years, they may not feel duty bound tomake any provision for this child.
In the context of blended families, will makers often are faced with hard decisions about who they would like to benefit more from their estate given the competing financial needs of adult children from their previous relationship and their current spouse. Having made those hard decisions, asking an experienced wills lawyer to prepare the will or will update will lessen the risk of a successful will dispute.
Family provision claim upon a deceased estate
In NSW, an eligible applicant can challenge the distribution of a deceased estate by making a
family provision claims against the deceased estate on the basis that they have been inadequately provided for their proper maintenance, education and advancement in life. The Supreme Court has the powers to award provision to an eligible applicant from the deceased estate if they feel that adequate provision has not been made by a will of the deceased or on the rules of intestacy.
One obvious way in which to circumvent the family provision rules is to limit what assets constitute the will maker’s estate. For example, a will maker that is wary of a potential willdispute via a family provision claim being made against their estate could now start gifting assets they own during their lifetime to their intended beneficiaries so that once they have died there is nothing or very little in which the family provision applicant could attack.
Application of notional estate rules
In NSW, consideration needs to be given to the notional estate rules. If there are insufficient funds in the deceased estate to make an order for family provision the Courts can look at assets that may be designated by the Court as “notional estate” in which to make an order of family provision from.
Notional estate assets can include:
- assets transferred/gifted by the will maker during their lifetime for less than market value (provided it is within a three-year period from the date of death); and
- assets held in structures which are controlled by the deceased in some way.
The first of the above examples means that any assets transferred by the will maker outside of the three-year period will not be designated as notional estate. This approach may have capital gains tax and stamp duty implications for transfers involving assets which are not cash.
In addition to the added potential taxation costs of doing transfers during their lifetime thewill maker will also not know exactly when they will die and hence if they have gifted some or most of their assets, they need to still ensure that they have sufficient income to live off.
Failure or omission by the will maker
The second of the above examples show how far reaching the notional estate rules can be. The notional estate rules can apply to assets held in structures which are controlled by the deceased in some way but would not form part of their deceased estate.
This is because the notional estate provisions can designate assets as notional estate if the willmaker had the power to ensure certain assets did form part of their estate but their omission or failure to act means that those assets did not form part of their estate.
Some examples are:
- the deceased’s half share in jointly held property can be designated as notional estatebecause the deceased during their lifetime could have severed the joint tenancy;
- the deceased’s superannuation death benefit can be designated as notional estate if thedeath benefit is paid to somebody other than the executor or administrator if the deceased could have made a binding death benefit nomination to this effect before,he/she died but failed to do so. A deceased’s superannuation death benefit will also include any life insurance policy that is held through the superannuation fund which could be significant;
- assets held in a family trust could be designated as notional estate if the deceased has apower of appointment under the terms of that trust to appoint all the capital to him orherself before they died.
Take away points
Given the above comments even if a will maker has very little assets in their personal estate and most of their wealth is held in jointly held assets or superannuation or other trusts, there is still the potential for the Court to have the power to award a family provision claim out of the “notional estate” assets.
More Information
If you wish to obtain further information, advice or assistance in updating your will, please contact one of our will lawyers in our Estate Planning team at Matthews Folbigg on 9635 7966, email us at estates@matthewsfolbigg.com.au or through the website www.matthewsfolbigg.com.au
DISCLAIMER: This article is provided to readers for their general information and on a complimentary basis. It contains a brief summary only and should not be relied upon or used as a definitive or complete statement of the relevant law. Liability limited by a scheme approved under Professional Standards Legislation.
