Nothing creates more family disharmony than a challenge to a Will or to assets held outside the estate. It is one of the greatest fears many parents have when they are considering estate planning.
Challenges to Your Estate
Where a business or a large asset is included as part of the estate or controlled outside of the estate any family disharmony can erode the value of the business or the asset either because the estate is depleted of funds defending the challenge, or simply because family members or the asset are distracted from managing the business.
While each state and territory has its own legislation, generally speaking the relevant court will only make an order in favour of an eligible person of Australia who challenges your Will if you have not made adequate provision for that person.
In making such a determination a court will look at a number of factors, such as: the nature and length of your relationship with the person; their financial dependence on you (or vice versa); the size of the estate; the financial means and needs of the person and the benefits the person and other beneficiaries have received throughout your lifetime.
Only an eligible person under the relevant legislation is able to make a claim against your estate. Again, while each jurisdiction has its own provisions, eligible persons typically include your widowed spouse, former spouse, de facto spouse, child, grandchild and parents (in some circumstances). Any person who was wholly or partly dependent on you might also be an eligible person. In Victoria, ‘anyone for whom the deceased had a responsibility to provide for’ has the right to make a claim against your estate.
In most cases, if one of your adult children is independently financially comfortable it is unlikely they will be able to successfully claim against your estate if the claim is simply based on the fact that they benefited less under the Will than your other children.
lf you are considering leaving your estate or non estate to beneficiaries in other than equal proportions it is a good idea to include an outline of your reasons and discuss your reasons with a solicitor. This information will be useful to your executors in defending any claim against the estate.
However, excluding or provisioning unfairly for one of your children because there is bad blood between you will not usually be an adequate defence if your child is in financial need.
Defensible reasons for inequitable treatment may include:
- You gave your child money during your lifetime
- One of your children has special needs, due to physical or intellectual disabilities
Character and conduct are factors that are taken into account by a court, but just because your child has misbehaved does not mean their claim will be unsuccessful — especially if they have a financial need.
How to Ensure Equal Entitlements Outside the Estate
It is one thing for all beneficiaries (such as your children) to be made joint appointors and trustees (and/or equal shareholders in an appointor or trustee company) after the death of the current appointor, but this does not in itself ensure that they will receive equal entitlements from the trust (if this is what is intended).
Where there are more than two joint appointors/trustees (or two shareholders of an appointor and/or trustee company), it may be possible for the majority to outvote the minority.
This means that one or more of the appointors/shareholders could be prevented from being a trustee or a director of a trustee company. As a result, that person may not be able to participate in the trustee’s determination of distributions of income and capital of the trust and may not receive their intended entitlements.
The control of the trust therefore needs to be dealt with at all three levels: appointorship, trusteeship and directorship of the trustee company. Where there are concerns in relation to ensuring equal entitlements for the beneficiaries, this may be dealt with along the following lines:
- Appoint all your children as joint successor appointors either through your Will or by deed
- Ensure the trust deed provides that:
- The appointors can only exercise their powers jointly,
- Provide dispute resolution mechanisms between appointors, and
- Each appointor is able to appoint their own successor. This overcomes the problem of a joint appointor becoming a sole appointor on the death of the other appointor(s)
Control of the Trustee Company
- Leave shares in the trustee company equally to your children.
- Change the company’s constitution to provide:
- That each shareholder is entitled to be represented by a director nominated by them who can only be removed by the nominator,
- That certain decisions, such as distributions of capital or income, require a unanimous resolution, and
- Provide a dispute resolution mechanism between directors and shareholders
Memorandum of Wishes
Leave a Memorandum of Wishes, which as the name implies, states your wish that the trust be administered for equal benefit of your children.
While these strategies outline that all the successors may have an equal say in decisions, it does not ensure that decisions can actually be made. If the successors disagree in relation to a particular issue, for example, one or more of them does not approve an equal distribution of income or capital, then no resolution would be able to be passed.
To guard against this situation, it may be appropriate to have an independent third party as the appointor rather than all the beneficiaries, If the successors as trustees (or directors/shareholders of the trustee company) then become deadlocked, the independent appointor could remove the trustees and appoint himself/herself, or another person, in their place to operate the trust in accordance with your wishes.
Making changes to a trust deed, or having the trustee enter into any arrangements that have the effect of determining the future distributions of income and/or capital, could create the possibility of a resettlement of the trust — and that brings with it significant tax issues!
It is therefore preferable for the mechanism to be framed as a negative, as in the situation discussed above, whereby the appointor is able to remove the trustee if the trustee is not making decisions in accordance with your wishes.
Alternatively, you could combine a Memorandum of Wishes with a Deed of Agreement between the current controller and the successors.
The mechanism that is appropriate for the promotion of family harmony will depend on your unique circumstances, structure and type of ownership of assets and relationships that exist between members of your family.