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CONTRIBUTED ARTICLE If you live in New South Wales or have assets connected with that state, your estate can be susceptible to a notional challenge after you pass away. Australian Unity Trustees Limited’s Anna Hacker explains how to safeguard your estate against this unique state law.

Each state in Australia has different legislation related to Wills and the administration of deceased estates, as well as the laws surrounding family provision claims (ie: challenges to estates).

New South Wales in particular provides for “notional” estates which effectively means that not only can people potentially challenge the assets that form part of the deceased estate, but they can include in that challenge those assets which were transferred from the deceased person to another for less than market value in the immediate three years prior to the person passing away.  This includes assets over which the deceased person holds effective control ie: potentially assets held in a trust structure.

Commonly, estate planning lawyers recommend various strategies to minimise the ability of disappointed beneficiaries to challenge an estate with a family provision claim.  This includes transferring assets out of an individual’s name or control, or transferring property into a joint holding with another person, which will result in that asset automatically transferring to the surviving owner after the other joint owner passes away.  Unfortunately, if a transfer of an asset occurs within the three year time period prior to a person passing away and then a claim is made with insufficient assets being held by the estate to fund a potential settlement, notional estates allows for those assets to be clawed back into the estate.

Residents in states other than New South Wales may still be subject to the notional estates provisions if they own a New South Wales based asset.  For example, if a Queensland resident jointly owned a New South Wales house with another individual, which would normally transfer automatically to the surviving proprietor upon their passing, a notional estates claim could be brought by a disappointed beneficiary in the Supreme Court of New South Wales using the interest the deceased person held in that New South Wales property as the subject of their claim. Recent case law has generally indicated that the courts see the security of accommodation for a remaining spouse as paramount.

So in cases where a child may challenge the transfer of their biological parent’s share in a property to a step-parent those claims have generally failed – but that does not mean the significant costs burdens do not seriously impact parties.

Standard estate planning strategies must consider the impact notional estates may have on any future potential estate challenges, regardless of where the client is based.  While New South Wales based clients should be particularly cautious, anyone with New South Wales based assets must consider notional estates outcomes.  The key for transferring assets in an attempt to thwart an estate challenge is for this to be done as early as possible.  Once the three year period has lapsed, those assets cannot be clawed back and they will be protected, unless they are still seen as in the effective control of the deceased person.

Unfortunately where an asset remains in the control of a person up until they pass away, even if that asset may have been transferred into a structure such as a family trust or theoretically, a self managed superannuation fund, those assets remain potentially vulnerable to notional estates claims.  In those cases, other more complex strategies must be employed and each case will turn on its own circumstances.  For example, if a person transferred an asset into a discretionary trust structure of which they had no effective control at all, that may not be clawed back into the estate but it does not follow that all transfers of property into trust structures provide that level of protection.  The experience in the courts is that even if there is no formal control, if there is effective control which can be demonstrated, that may result in a successful notional estates claim.

As always, the key is advanced, specialised planning and advice. To ensure objectives can be carried out the way you want them to be, and beneficiaries benefit as you desire, provide full and frank disclosures about ownership and control of assets, as well as details of location of holdings to assist with the investigation of assets that may be possibly clawed back as a result of the operation of notional estates legislation.

* Anna Hacker is National Manager – Estate Planning at Australian Unity Trustees Legal Services

First published in FS Private Wealth: https://www.fsprivatewealth.com.au/blogs/view/how-to-safeguard-your-estate-135488429