Parents want to help their children along in life. This help often takes the form of a payment to establish the child in life. The classic 21st century Australian example is a sum of money given to assist with a house purchase.
Disputes in the Wills & Estates area most commonly arise between siblings. Parents providing gifts or special treatment to particular children can lead to problems later on.
Here is a scenario to show what can happen in this situation:
David (62) and Elisabeth (60) have three children – Dennis (34), Roger (32) and Alison (29). $200,000 was given by David and Elisabeth to Dennis and his wife Anna in 2015 to allow them to purchase their first home. David and Elisabeth were subsequently killed in a joint accident. Their joint estates are estimated at approximately $3 million. Roger and Alison have not had the benefit of any such advance by their parents. They are therefore looking to ensure that the payment Dennis and his wife received is in some way taken into account when the estates are finalised.
If David & Elisabeth Did Not Make Wills
If David and Elisabeth had not made Wills (that is, they had died intestate) the government intestacy provisions would apply.
Will these provisions allow the $200,000 payment to Dennis and Anna to be considered when David and Elizabeth’s estates are divided? The answer is “no”. This would lead to inequality of outcome as between Dennis, Roger and Alison, because Dennis would receive $200,000 more from David and Elisabeth then either Roger or Alison. It might also lead to a claim being made against David’s or Elizabeth’s estate.
If David & Elisabeth Made Wills
If David and Elisabeth made wills which made no reference to the $200,000 advance to Dennis, the executors of their estates would have a duty to enquire as to the nature of the transaction. If the $200,000 advance had the characteristics of a loan, for instance, the estates’ value would be increased. So, to change the facts in our example, if David and Elisabeth had paid the $200,000 to Dennis and Anna by loan rather than gift and suitable documentation showing the terms of the loan had been completed, the executors may either seek repayment of the loan or offset it against Dennis’ entitlement to a share of the estate.
Unfortunately, in our experience loans between family members are often undocumented. If the transaction were a loan but there was no documentation, it may be very difficult to prove the loan’s existence.
The ideal scenario
The ideal position is that David and Elisabeth made Wills which provided clarity as to whether the $200,000 advanced to Dennis was a gift or a loan.
If the $200,000 was a gift, the Will should indicate whether Dennis was to receive $200,000 ‘extra’ or whether the $200,000 received by Dennis should be considered as ‘advance payment’ towards what he was to receive from the estates of his parents.
Thoughtful estate planning in this case could have the effect of reducing inter-sibling tensions and simplifying the cost and expense of the administration of David and Elisabeth’s estates.