Avoiding Estate Litigation – Why A Statutory Will Might Be Your Best Answer

About statutory wills

To put it simply, a statutory will is a Will or Codicil made by the Court on behalf of a person that lacks testamentary capacity.

The legal framework

In April 2006, Queensland introduced a statutory framework for the manner in which the Court may make a statutory will. An application, usually by a litigation guardian, on behalf of the adult is made to the Court under the provisions of the Succession Act 1981 (Qld).

The circumstances in which the Court may make an order are summarised as follows:

  1. The person must lack “testamentary capacity” and be alive when the order is made;
  2. The applicant is the appropriate person to seek the orders;
  3. Adequate steps have been taken to allow representation of other persons with a proper interest; 
  4. The proposed Will or Codicil, would have been made by the testator if the person had testamentary capacity; and
  5. The Court considers the proposed Will or Codicil is suitable.

However, it is only when an order for leave to proceed is made that the Court will proceed to hear the substantive application. The court must first be convinced the circumstances warrant such application.

There are a number of factors that the Court considers on the hearing of an application for leave. The full list is set out in the legislation. Some of the factors include evidence of the lack of testamentary capacity (and the likelihood of the person ever regaining capacity), the size and character of the estate, evidence of the person’s wishes and the likelihood of a family provision application (claims on the estate).

When should you consider making an application?  

The decision in Re APB, ex parte Sheehy [2017] QSC 201 is a great example of a situation when an application to the Court for a statutory Will should be made.

The case involved a 91 year old male, who had a very large estate.  The adult (referred to as APB in the judgment) held assets valued at approximately $70,000,000. He had a significant interest in a shopping centre which was operated under a joint venture agreement. He wanted the venture to continue after his death.

There were unusual circumstances leading up to the application, involving a number of people befriending the adult when he was vulnerable, with the intention of advancing their own interests. He was alienated from family and friends. There was also evidence of Will making without the requisite capacity.

The Court considered whether APB would make provision from his estate for those people. It also considered the amount of provision for his three children, their respective spouses and his grandson. 

Due to the complexity of the estate assets, including a property joint venture, there was an issue whether there should be one or two testamentary trusts established by the Will and who was to be appointed as trustee and executors.

The case shows, and it was recognised that, had these issues not been determined prior to the adult’s death, it is most likely that costly and complex litigation would have ensued. Both the adult and the parties were clearly better off resolving the issues before the courts whilst the adult was alive and to preserve and protect his assets.

Take away points

So, whilst some may feel daunted by the process of applying to the Court on behalf of a person without testamentary capacity, for an Order authorising a Will, it may save loss of potential assets and avoid disputes in the longer time.

This is particularly so in circumstances where there are multiple parties seeking to benefit from an estate, the nature of the assets are inherently complex and there is evidence of a lack of testamentary capacity.

If you would like to fund out more, please contact either Elizabeth Ulrick or Tony Crilly at Perspective Law on 07 3839 7555.

Tax and Duties of Executors and Trustees – Are you liable for tax?

Executors and Trustees are personally liable for the tax assessable on a trust estate, so it is critical that they be absolutely sure the extent of that tax liability. But how can you be sure? What action can you take? What forms of application can you make, to ensure you are protected as far as possible from future claims or a re-assessment?

The requirement of self-assessment puts much greater responsibility on taxpayers to ensure their income tax returns were correct before lodgement with the ATO. Much greater certainty about the ATO’s views on the technical enforcement of the tax law is necessary to protect yourself from strict liability. 

Consider firstly, what is “advice” in terms of a communication from the ATO? Advice consists of “public” and “private rulings, which are very different and have a weight that applies at public or private levels. public and private rulings are now ‘binding’ on the ATO and it is recommended that trustees obtain clarity using these.

Public Rulings  

Public rulings explain the application of the tax law to taxpayers generally (for example Taxation Rulings and Determinations), a class of taxpayers (Class Rulings) or a particular arrangement (Product Rulings). These apply particular sections of the legislation in detailed factual circumstances, to confirm a binding position taken by the ATO regarding assessments.

A public ruling provides protection until it is withdrawn, or when it specifies that it ceases to apply.

You don’t need to know of the existence of a public ruling to rely on it.

What are not Public Rulings?

The Income Tax (IT) and Capital Gains Tax (CGT) Determination series which were published prior to 1 July 1992 when the legislative framework for public rulings was established, are not legally binding on the Commissioner. Income Tax Ruling IT2622 (about present entitlement during the stages of administration of deceased estates)  is of particular importance in this regard. The Commissioner will treat these determinations as “administratively binding”.

A draft public ruling is a document that sets out the Commissioner’s preliminary view about the way in which a relevant provision applies. This means that reliance on a statement in a draft ruling provides the same level of protection as ‘guidance’ (penalty and interest protection). 

In the context of deceased estates and trusts , rulings within this category include TR 2004/D25 (about absolute entitlement) and TR 2010/D1 about the meaning of income of a trust estate.       

Private Rulings

In the absence of a binding ATO position, a trustee or executor might apply for a private ruling from the ATO. This gives the person certainty about how the facts will be applied to the law and assessment made, rather than assuming a position which could be open to interpretation. No one  wants a nasty surprise by way of a re-assessment long after the estate assets have been distributed.

The ATO is bound to follow a private ruling on which the rule relies. This is unless a section of the Act, is repealed or amended to have a different effect, or a Court makes a judgment that takes a view about the section that is more favourable to the rule.

A ruling assists in deciding whether the taxpayer has taken reasonable care when determining penalties. Be careful not  to rely on views  in edited versions of private rulings  published on the ATO  Legal Database.  The devil is always in the detail.

A private ruling  provides protection to the taxpayer it is issued to and only for the tax years covered. (There is an exception where a trustee obtains a private ruling in relation to a trust. In that case, the private ruling will apply to the beneficiaries of the trust (other than an indirect tax or excise ruling) and to any trustee that replaces the applicant trustee, for as long as the ruling remains current.

An edited version reflects the law (and the Commissioner’s view of the law) at the time it was issued – so it is very important to check if either have changed since the ruling was published.

For example, there are issues about the application of the complex partial main residence exemption provisions. For executors who are risk averse, we would suggest that they obtain a private ruling.

What can a ruling be about?

A private ruling can cover anything involved in the application of a relevant tax law, including issues relating to:

  1. Liability for tax;
  2. Administration;
  3. procedure and collection;
  4. ultimate conclusions of fact (such as residency status);
  5. Status to apply for a private ruling:

You can apply for a private ruling about:

  1. your own affairs
  2. the affairs of another entity (including a person) if you’re their agent or legal personal representative (LPR).

Various private ruling application forms together with instructions are available on the ATO website. The person applying for the ruling must indicate whether or not they will include detailed reasoning to support their application and should do so to support their case. An application must contain a full description of all relevant facts and circumstances.

The website also lists supporting information that should accompany private ruling applications on particular topics (including for example, those about death benefits, child maintenance trusts and capital gains for deceased estates).

A word of warning trustees must note carefully. The ATO will not be bound by a private ruling if you do not provide all material facts or the scheme which the ATO has ruled upon is not implemented in the way set out in the ruling.

Refusal to rule

The ATO may decline to give a private ruling in some circumstances, including if:

the making of the ruling would prejudice or unduly restrict the administration of the law – for example:

  1. the application is frivolous or vexatious;
  2. the arrangement is not seriously contemplated;
  3. making the ruling would not have any practical consequences – (e.g. the transaction in question occurred in the past and the amendment period has expired).
  4. the issue has been, or is being considered  – (e.g. in an audit relating to the particular question);
  5. the taxpayer has made an objection on the same matter;
  6. information requested by the ATO was not provided in a reasonable time;
  7. the ATO exercises a particular power available under the law, rather than provide advice on how that power would be exercised, (e.g. you should normally ask the Commissioner for an extension of time to lodge a form rather than seeking a ruling on the issue).
  8. the ATO considers that the correctness of a private ruling will depend on certain assumptions and it chooses not to make a ruling subject to those assumptions; (go figure!)
  9. you decline to pay the cost of obtaining an accurate valuation required for the ruling.

So consider these possible opportunities to clarify and obtain certainty as a trustee or executor in any potential tax liabilities. In some cases taxpayers have looked back over many years and raised concerns about historical tax returns and to ensure they will not be assessed at any future time, they lodge a voluntary submission for assessment. If the ATO decides there is nothing to assess then the trustee will be relatively insulated from any further re-assessments.

If we can assist with the estate administration and work with your accountant to ensure certainty for you as the “at risk” trustee or executor, please give us a call on (07) 3839 7555.

Consider your Insurance requirements before you enter into a Contract to Purchase

The Risk of a residential Property passes to a Purchaser one Business day after the contract date.

When a purchaser enters into a contract to purchase a residential property in Queensland it is a standard term of the contract that the property is at the buyers Risk from 5.00 pm on the next business day after the contract date.

What Insurance should the buyer obtain?

For the standard standalone dwelling the buyer should obtain Building insurance, contents insurance and public liability cover.  Should a claim arise during the period between contract and settlement insurance companies are aware of these standard conditions in the contract and will rely upon these contract terms if they are entitled to do so.

Contents Insurance

A common misconception by buyers is that they do not have any of their possessions in the residence before settlement and therefore there is no need for contents insurance. The contents insurance is an important aspect of the insurance requirements as most building insurance policies will not cover any damage caused to the internal part of the dwelling due an insurable event (i.e. storm damage to the internal fixtures and fittings such as curtains, shutters, blinds, stoves, fridges, microwave, washing machines, dryers, built in BBQ, exhaust and fans). These items are normally covered by a contents policy.

Body Corporate Contracts

Though there are a few exceptions, the Body corporate normally has a Building insurance policy for the complex and the building is covered under the Body Corporate policy. The internal area of each lot is therefore the responsibility of the lot owner or buyer under a contract of sale and contents and public liability insurance should be arranged with respect to the property within the time frames as set out above.

When insuring your unit you must also consider whether your policy covers any escape from your unit (i.e. water leaks) that may damage other units and whether your policy covers this eventuality in the event the Body Corporate insurer declines to cover the event or whether the assistance of an insurance broker to ensure you are fully covered should be considered.

When do you think about insurance?

Think about your insurance requirements before you enter into a contract to purchase.

The above examples are the standard considerations that a buyer must take into account when arranging insurance after signing a contract, however not all properties or situations are the same and the short time frame from the contract date to the time risk passes to a buyer can leave buyers limited opportunity to secure insurance if the property they are intending to purchase is outside the standard or if there are other circumstances which may affect their ability to obtain insurance; for example:

  1. Is the proposed purchase price in excess of the upper limit of cover offered by some insurance companies – do you need specialist assistance?
  2. Is there a natural event imminent that would cause insurance companies to decline offering insurance i.e. Cyclone warnings;
  3. Is there something particular about the property you are purchasing that would require specialised insurance assistance.

Should the Seller continue their Insurance Policies until settlement?

The simple answer is yes. The property is still your property until settlement has been completed and there are a variety of events that can take place which can prevent completion of the sale, even after the contract goes unconditional.  A seller should always ensure that their position is protected and not rely on the buyers to adequately insure their property.

If you require further information regarding purchasing property, please do not hesitate to call us and talk through any of these issues on (07) 3839 7555.