Loans in Wills – including mortgages – can cause serious problems with a Willmaker’s estate.

Gift of Property Subject to a Mortgage

A case we recently saw with a ‘home made’ Will involved the Willmaker giving real estate to each of their two children. The fact situation was as follows:

  • A (the Willmaker) had an estate consisting of two pieces of real estate in Victoria: property B and property C (both valued at around $800,000)
  • A had two children, D and E
  • A’s Will gave property B to D and property C to E
  • Property B had a mortgage of $300,000
  • Property C had no mortgage (i.e. it had a clear title)

A’s Will made no mention of the mortgage on property B

So far, so good you might think. However, in Victoria the law says that, if the Will is silent on the issue, when property subject to a mortgage is given to a beneficiary, that beneficiary will receive the property and the mortgage. In other words, the beneficiary will receive the property and the mortgage.

In A’s case above, this meant that D received a property with net equity of $500,000 (i.e. $800,000 less the mortgage of $300,000) while D’s sibling E received an asset with net value of $800,000. A claim by D against A’s estate may now result on the basis that D’s sibling E received substantially more than D.

This situation was entirely avoidable. Firstly, a distribution of A’s estate by overall percentage value rather than on an ‘asset by asset’ basis might have been preferable. Alternatively, had A’s Will dealt with the issue of the mortgage on property B (perhaps through some kind of equalisation clause which ‘levelled out’ the net benefits between D and E) the problem would never have arisen.

Gifts to Beneficiaries who are also Creditors

Further issues can arise with Wills where beneficiaries are also creditors. Suppose that Aunty Maude leaves her nephew Richard the sum of $30,000 in her Will. Let’s also assume that when Maude dies she  owed her nephew the same amount of money - $30,000. Does this mean that the $30,000 for Richard is intended to satisfy the debt Maude’s estate owes him, or did Maude intend that the $30,000 gift was intended to be in addition to repayment of the debt owed?

If the Will is silent on the point, the equitable Doctrine of Satisfaction deals with the issue. The Doctrine of Satisfaction says that, if the Will does not specify, a presumption is to be made. The presumption is that a gift to a creditor is made in satisfaction of the debt owed by the estate. In our example this would mean that Richard would have his debt repaid by the estate, but that he would not receive a further gift of $30,000.

  1. The Doctrine of Satisfaction will apply as long as:
  2. The debt was incurred before the Will was made;
  3. The nature of the debt and the gift clause in the Will are substantially the same;
  4. The amount of the gift is equal to or greater than the debt owed; and
  5. The gift is as advantageous to the creditor as the debt (for example, the gift can’t be conditional)

None of this applies if the Willmaker outlines their intentions in the Will. 

If the Willmaker intends that the beneficiary/creditor is to have their debt paid and receive a gift in addition, but this is not made clear in the Will and the debt is unpaid upon the Willmaker’s death, the beneficiary/creditor  may find  they ‘can’t get no satisfaction’ *

Please feel free to contact us concerning this article or any other questions you may have concerning Wills & Estates.

*with apologies to the Rolling Stones