IN BRIEF
On 13 February 2005, Maria Korp was found unconscious in the boot of her car in suburban Victoria. Her husband Joseph and his mistress were almost immediately charged with her attempted murder. Whilst Maria was in a coma, her daughter applied successfully to the Victorian Supreme Court for a new will for her mother. The effect of this application was the removal of Joseph as executor and beneficiary of Maria's estate. It remains the most well-known case on the emerging legal concept of statutory wills.
A statutory will is a will made by a court for a person lacking the capacity to make a will for themselves. It was introduced in New South Wales as part of the Succession Act in 2006. It is now well-established that a court can create a statutory will where there would be an unsuitable outcome on intestacy or where the testator's incapacity was caused by a beneficiary (as was the case for Maria Korp).
What is not as well-known is that the courts are warming to the idea of making statutory wills for the purposes of asset protection and tax minimisation.
In this article, we consider:
- what the test is for making a statutory will
- how a statutory will may help beneficiaries for the aforementioned purposes
- what recent cases can tell us about how the courts may reach a decision
WHAT IS THE TEST?
After it has been established that a person does not have the capacity to make a will, the court must be satisfied that the statutory will is or is reasonably likely to be one that would have been made by the person.
Critically this does not necessarily require that the will be in the best interests of the beneficiaries or even in the best interests of the person. It simply means, is it likely that the person would have made the proposed will if they had the capacity to do so?
The court must additionally be satisfied that that the application is or may be appropriate. A non-exhaustive checklist of the information required to establish that an application is or may be appropriate is set out in the Succession Act.
STATUTORY WILLS WITH TESTAMENTARY TRUSTS
When writing a will under normal circumstances, the best way to protect your assets from creditors and to minimise the tax burden on your beneficiaries is to utilise testamentary trusts. The same principle holds for the creation of statutory wills. Testamentary trusts have three important advantages:
- the ability to split income and stream different types of income to minimise tax
- assets are afforded a general level of protection from loss by virtue of being trust assets
- vulnerable or incapable beneficiaries can be guided by an appointed trustee
With this in mind, there could be significant benefits for the intended beneficiaries of a testator if a statutory will creates testamentary trusts instead of gifting assets absolutely.
RECENT CASES
In Hausfeld v Hausfeld & Anor [2012] NSWSC 989, the New South Wales Supreme Court refused to alter the will of a testator whose son was facing the possibility of bankruptcy. The son had approached the court requesting that his father's will be altered to substitute his wife as a beneficiary instead of himself. The Court agreed that it was reasonably likely that the will would have been made by the father if he had capacity. However, the proposed alteration was still rejected because the Court did not believe that it was appropriate to authorise an alteration to a will in order to pass a debt from one person to another with the intention of avoiding creditors.
The Queensland Supreme Court did allow testamentary trusts to be incorporated into a will (by way of a statutory codicil) in the case of Re Matsis; Charalambous v Charalambous & Ors [2012] QSC 349. Here the residuary estate was left by the testator to his three grandchildren absolutely.
The Court considered in this case that two of the grandchildren ran a business together and could be exposed to risk in an insolvency situation of the testamentary trusts were not created. Moreover, the testator was a self-made man who would likely have been in favour of any action that would have helped his grandsons protect their business.
The issue of 'appropriateness' was not considered by the Court although an obvious point of difference to the Hausfield case is that in this instance the threat of creditors was only a possibility, whereas in Hausfield creditors were already 'knocking on the door'.
The Queensland Supreme Court also authorised the making of a statutory will including testamentary trusts in Doughan v Straguszi [2013] QSC 295.
In this case, one of the beneficiaries was a part of discussions with receivers of companies of which he was involved. However, Hausfield was again distinguished because in this case using testamentary trusts was not intended to pass on the beneficiary's potential liability.
The testamentary trusts were instead approved because they would protect a much wider array of family members and their future interests.
TAKEAWAY
The statutory will is one of the most significant estate planning developments Australia has seen in the past decade. The New South Wales Supreme Court has stopped just short of using statutory wills as a 'get out of jail' card with creditors. However, it is now clear that a statutory will can be made to create testamentary trusts for the tax and asset protection benefits they provide to beneficiaries.
For further information, please contact:
Angela Harvey, Partner
Phone: +61 2 9233 5544
Email: axh@swaab.com.au
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
