Overview

Clients sometimes express concern that potential beneficiaries might assert that they should have received a greater share of the deceased estate. This scenario more commonly arises where there has been a second marriage in the family, or a breakdown in relationships between parents and children.

A testator cannot be guaranteed that their estate will not be challenged by a person who has been excluded from the will, or who thinks that their entitlement under the will is too small. Certain procedures can be taken to lessen the chances of this happening successfully, but beneficiaries and would be beneficiaries still may opt to challenge the terms of the will.

Strategy analysis

Every state/territory has laws in relation to who can contest an estate. This is usually confined to immediate family members (spouse, children and former spouses) or certain other people who can show financial dependency. In New South Wales for example, challenges are usually brought under the Family Provision Act 1982 (FPA). The general principle is that a court may amend the terms of a will if it thinks the testator failed in their obligation to provide for the maintenance, education, and advancement in life of the applicant.

To minimise, and even avoid an estate challenge the following vehicles and strategies may be considered:

  • Tax Paid Investment Bonds – An exception to this in certain States (particularly in SA/Victoria) is that monies invested into Tax Paid Investment Bonds (otherwise known as Insurance Bonds), do not form part of the Estate therefore cannot be contested. This is due to the proceeds being paid out at death (of the life insured) directly to the nominated beneficiaries (and not involving the Estate.)
  • Family trusts and superannuation – Assets in family trusts or superannuation funds will generally be protected from estate challenges, though the testator’s particular circumstances will have to be taken into account.
  • Letter of wishes – Testators who plan to leave out people who may otherwise have expected to benefit under the will may wish to leave a letter of wishes attached to the will explaining why they have decided to exclude particular expectant beneficiaries. They should also mention if they consider that they have made adequate provision for the expectant beneficiary whilst they were alive. The onus will be on the applicant to demonstrate that the testator failed in an obligation to make adequate and proper provision for them. This however may then become a public document.

Tip: One point to note is that under the Family Provision Act (FPA) for example, any person can apply to the court to to have the will re-drafted. So, a sister or brother who would not be eligible under the Act, may make a case to have the will re-drafted under this Act if they prove that the deceased intended to give them a greater share of the estate.

Case study

Elaine is a widow with three adult children. She has good relations with Susan and Andrew, but has had continual problems with Chad. She wants to leave the bulk of her estate to Susan and Andrew, and a smaller amount to Chad, but is worried he will mount a legal challenge for a greater portion of her estate.

Elaine may consider the following strategies to lessen the likelihood of Chad successfully making a claim upon her estate:

  • Set up a Tax Paid Investment Bond where Elaine is the ‘Life Insured’ and nominate Susan and Andrew, as her beneficiaries – in whatever amount or proportion she wishes. When Elaine dies, the monies in the Bond will pass tax free and directly to Susan and Andrew – without involving Elaine’s Estate – and Chad will therefore not be able to contest or make any claim.
  • Use binding nominations to Susan and Andrew for her superannuation and nominate them as beneficiaries of any life insurance policy.
  • Retain any assets already held in a family trust structure and transfer control of the family trust to Susan and Andrew.
  • Leave a letter of wishes with her will detailing any gifts already made to Chad, and why she is limiting his inheritance in the estate.

The information contained in this publication is based on the understanding KeyInvest (ABN 74 087 649 474 AFSL No. 240667) has of the relevant Australian legislation as at the date shown in this publication.

The information contained in this publication is of a general nature only and is intended for use by financial advisers and other licensed professionals only. It must not be handed to clients for their keeping nor can any copies of sections of this publication be given to clients. KeyInvest is not a registered tax agent under the Tax Agent Services Act 2009. We recommend that your client be referred to their registered tax agent or legal adviser prior to implementing any recommendations that you may make based on the information contained in this publication.