The concept of the “Notional Estate” is growing increasingly significant in times when more and more people hold their personal assets in trusts and super funds. In New South Wales, both the Courts and Government have clearly indicated that a person can no longer get around Family Provision rules by moving assets outside their “Actual Estate”.
Notional Estates: the basics
The basic premise of the “Notional Estate” principle is to extend a deceased person’s personal Estate (i.e. their Actual Estate) beyond those assets which are held solely in their own name at the date of their death.
The reason this principle was introduced is that, given super and the proliferation of complex asset-holding structures, a deceased’s personal Actual Estate is often worth very little. Their Actual Estate is often only one slice of the bigger “pie” of assets that the Deceased would have been entitled to enjoy if they had not died.
The concept of a person’s Notional Estate becomes very significant in the area of family provision claims. If an eligible claimant (within the Succession Act 2006 (NSW)) believes they have not been adequately provided for, their claim is no longer limited to the Deceased’s Actual Estate – it also takes into account the Deceased’s Notional Estate – if the Actual Estate is insufficient to provide for the successful claimant.
The Succession Act
Part 3.3 of the Succession Act applies to property that has been the subject of a “relevant transaction”, which is where property has changed ownership (by being transferred either to another person or to a trust) without full valuable consideration being given to the original owner. The relevant transaction must have taken effect within 3 years before the date of the Deceased’s death, on the date of death or after the date of death. Some common examples of relevant transactions that would be caught by Part 3.3 are assets transferred into a super fund or family trust, and real estate held with a joint tenant.
The important thing to note is that because Part 3.3 covers any act or omission that results in a change of ownership – therefore a failure to do something can also trigger the Notional Estate provisions. For example, if a person fails to exercise a right to extinguish an interest in property, or fails to deal with a life insurance policy, those “transactions” can become part of the person’s Notional Estate.
The question then arises: when will a claimant be entitled to provision out of a Deceased’s Notional Estate?
Section 78 of the Succession Act says that the Court may make an order designating property as Notional Estate only if a family provision order is made and the Actual Estate is not sufficient to cover the provision. The Court can also order that property is part of the Deceased’s Notional Estate to cover costs of the proceedings, but only if a claimant is first successful in securing an order for family provision.
The Succession Act provides the Court some flexibility by allowing it to make Notional Estate orders in other “special circumstances” (to be determined by the Court). In short, the Deceased’s Notional Estate is the extra “piggy bank” that can be dipped into by the Court if the Actual Estate is insufficient to provide enough cash value to support the orders that the Court thinks are necessary in the circumstances. However, the Court must give consideration to the importance of not interfering with the reasonable expectations of the beneficiaries in relation to property, and the substantial justice and merits involved in making an order before making use of the Notional Estate piggy bank.
Time limits are fairly significant when it comes to the question of whether a Notional Estate will be recognised. The time limit in New South Wales for a claimant to make a family provision claim is 12 months from the date of death of the deceased person. If a claimant is out of time or makes an application in respect of an Estate which has already been the subject of a family provision order, the Court must not make an order relating to the Notional Estate unless the Notional Estate is being held on trust and is “available” to the Courts or unless special circumstances justify the order.
The Courts’ interpretation
The key decision for the Notional Estate principle in New South Wales is the judgment of Young J in the case of Pope & Ors v Christie (Re The Estate of Glendon Frederick Dobrich). In that case, a portion of the super entitlement of the deceased father was the subject of a Notional Estate order to give the daughter adequate provision. This order was made despite the fact that the widow had already received and re-invested the Deceased’s superannuation entitlement. A significant outcome of Young J’s decision is that His Honour found that the words of the Act were so broad as to exclude the need for any actual act by the Deceased in a time when transactions “take place between two computers or by options exercised by silence” – meaning that the Deceased did not have to be found to have done (or failed to do) something that constituted a prescribed transaction. In fact, it appears that the trustee’s determination to pay the Deceased’s superannuation entitlement to the widow was sufficient to fall within the scope of a prescribed transaction and leave the Deceased’s superannuation open to a Notional Estate order.
There have been a number of subsequent cases in New South Wales that have affirmed Young J’s decision in Pope, confirming the Court’s broad interpretation of the Succession Act Notional Estate provisions.
Where to next?
“SCAG”, the Standing Committee of Attorneys-General, comprises the Attorneys-General of the Commonwealth and each of the States and Territories. SCAG has made uniform and model laws during its existence, and over the last few years uniform succession laws for the States and Territories has been one of its areas of focus. The only State that has not participated in discussions relating to uniform succession laws is South Australia, which suggests that the model law (created and implemented by New South Wales) will not be adopted by South Australia in the foreseeable future.
The practical consequences
So what’s next for New South Wales? It is fast becoming apparent that clients who wish to exercise more control over their assets when they die will need to be more careful – and creative – with how they hold their investments. This means that good legal and financial advice from the outset is more important than ever, and could mean the different between effective and ineffective gifting (whether under a Will or during a testator’s lifetime).
For people who feel they have not been adequately provided for under a Will – the extent of assets now potentially available to satisfy their claim has increased significantly.
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