For those acting as an attorney, it is important to understand the intersection of powers of attorney and ademption. Given the complexity and potential implications, having an understanding of this topic is crucial for ensuring the proper management of a principal's affairs, particularly as our population ages.
Powers of Attorney in New South Wales
A Power of Attorney is a legal document enabling one person (the principal) to appoint another (the attorney) to manage their personal and financial matters. In New South Wales (NSW), this authority is governed by the Powers of Attorney Act 2003. This Act delineates the powers, responsibilities, and limitations of an attorney.
There are two primary types of Powers of Attorney:
- General Power of Attorney: This ceases to be valid if the principal loses mental capacity.
- Enduring Power of Attorney: This remains effective even if the principal loses capacity, continuing to authorise the attorney to act on their behalf.
It's vital to note that an attorney's authority does not extend to making health or lifestyle decisions; these are managed separately by an Enduring Guardian. Further, this document only operates during the principal's lifetime and ceases to have any legal effect when the principal dies.
Ademption - definition and importance
Ademption, derived from the Latin "ademptio," meaning "a taking away," occurs when a specific gift made in a Will is no longer part of the deceased's estate at the time of their death. Essentially, if an asset that was specifically gifted has been disposed of before death, the gift fails, and the beneficiary receives nothing in its place. For example, a gift of a specific property via a Will will fail if the property was sold prior to the testator's date of death. The proceeds of the sale will generally form part of the residue and will not be gifted in substitution.
In NSW, ademption issues are particularly pertinent when dealing with Powers of Attorney. If an asset specified in a Will is sold or otherwise disposed of by an attorney, the impact on the intended beneficiary must be carefully considered. Ademption can lead to instances where the distribution of the estate leads to unfair or unexpected outcomes.
Legislative exemptions and case law
Legislative exemptions
There are two common exceptions to ademption.
- A specific gift does not adeem where the gift has only changed in name and forms only and not its substance.
- A Will maker has an Enduring Power of Attorney and as a result of the Attorney's dealings with an asset, the asset no longer exists.
Sections 22 and 23 of the Powers of Attorney Act 2003 provide an exception to the rule of ademption. Under section 22, if a specific gift is sold by an attorney under an enduring power of attorney, the beneficiary is entitled to the proceeds from the sale as if the asset had not been sold. This provision aims to preserve the beneficiary's interest despite the sale.
It is important to note that this only applies to powers of attorney documents executed on or after 16 February 2004.
This rule does not apply to any person to whom section 83 of the NSW Trustee and Guardian Act 2009 applies. That is, a protected person who is subject to a financial management order as defined by section 25D of the Guardianship Act 1987.
However, section 83 of the NSW Trustee and Guardian Act 2009 provides a similar exemption to ademption found at section 22 of the Powers of Attorney Act 2003.
Case examples
Courts will generally try to avoid an ademption but the Supreme Court of New South Wales has shown a more careful approach than other Australian jurisdictions.
- RL v NSW Trustee and Guardian [2012] NSWCA 39
This case is an appeal of the first instance judgment.
This case involved the sale of a property by a financial manager that was specifically gifted in the Will of a protected person, referred to as PBL
PBL's niece was appointed financial manager of the estate.
PBL had made a Will dated 30 July 1999. At the time of making the Will she owned a property at Darlinghurst that comprised a home unit, a car space and a lock up garage (Darlinghurst Property). In the Will, she made a specific gift of the lock up garage to her neighbour for his own use. The remainder of the Darlinghurst Property formed part of residue, which was to be equally divided between her niece (also her financial manager) and her two nephews.
In or about 2006, PBL moved into a nursing home in January 2006. PBL's cash assets were insufficient to pay an accommodation bond at the nursing home. The Darlinghurst Property was sold by public auction.
The Financial Manager sought the advice of the Supreme Court of NSW as to the treatment of the whole of the net proceeds of sale.
Despite the sale, Campbell J held that the net proceeds of the sale of the lock up garage be invested, separately to the funds of the estate. The funds should be treated as if the specific gift had not been disposed of, ordering that the funds be set aside for the original beneficiary.
The case highlighted the Court's approach to preserving testamentary intent, even in the face of ademption.
- NSW Trustee and Guardian v Bensley & Ors [2012] NSWSC 655
In this case, the Court considered the Will of a deceased person, Dawn Bensley, with a prima facie adeemed specific gift. The Will dated 30 September 2009, gifted a specific property to Dawn's niece. The residue of the estate was to be divided equally between Dawn's two nieces, one of these nieces being the intended beneficiary of the specific gift.
During her lifetime, Dawn had appointed the NSW Trustee and Guardian as her attorney appointed by an enduring power of attorney dated 5 March 1998. The attorney sought to sell the property, the subject of the specific gift, to assist with the payment of an accommodation bond. At the time of the sale, Dawn suffered from dementia.
The Court found that none of the various statutory provisions apply. Section 83 of the NSW Trustee and Guardianship Act 2009 does not apply because the deceased was not "a managed person". Section 22 of the Powers of Attorney Act 2003 does not apply, as the attorney document was executed before 16 February 2004.
The proceeds of sale of the property are a change of the asset in substance. At the date of Dawn's death, the property was not an asset of the estate and the gift failed by ademption. The proceeds of sale of the property were directed to be dealt with as part of the residue of the estate.
The case underscored the need for attorneys to be mindful of their actions and their impact on specific gifts.
Takeaway
When acting as an attorney or financial manager, there will often be times where a decision may ultimately impact upon a beneficiary's interest following the death of a Will maker, such as selling the principal's main residence to fund an accommodation bond. However, it is paramount to remember that an attorney or financial manager, has a duty to act in the principal's best interests.
Navigating the complexities of powers of attorney or financial management and ademption requires careful consideration and adherence to legal standards. By understanding the statutory provisions and case law, attorneys and financial managers can better manage their responsibilities and protect the interests of beneficiaries. Always seek legal advice when faced with uncertainties to ensure decisions align with statutory requirements and do not result in complex issues of ademption which may result in Court proceedings.
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.