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University of Otago Law Theses and Dissertations |
Last Updated: 18 September 2023
Fortifying Family Protection:
The Need for Anti-Avoidance Provisions in the Family Protection Act 1955
Josie Te Rata
A dissertation submitted in partial fulfilment of the degree of Bachelor of Laws (with Honours) at the University of Otago
October 2016
Acknowledgements
To Professor Nicola Peart, my formidable supervisor, thank you for your patience, your sage advice and your sense of humour.
To the Selwyn College Welfare Team and Te Roopu Whai Putake Executive, thank you for letting me drop the ball this semester.
To the LAWS101 tutors, thank you for your solidarity. And to Jared in particular, thank you for your desk.
To Mum, for all your help. And to Dad, for existing.
CHAPTER I: THE NEED FOR REFORM 2
The Origins of Family Protection Legislation 2
Mechanisms for Avoiding the Family Protection Act 4
Conclusions: The Case for Reform 7
Introduction
In New Zealand there is an expectation that people will provide for their immediate families, both during their lifetimes and upon death. When a person dies, the Family Protection Act 1955 enforces that obligation by enabling family members who have not been adequately provided for to bring a claim against the deceased’s estate. It is social legislation that aims to protect the economically vulnerable. As such, it cannot be contracted out of.
However, it is not difficult to avoid family protection obligations by using alternative methods of transmitting property upon death. These methods, known as ‘will-substitutes’, allow property to change hands without ever passing into the estate. Alternatively, a person can simply dispose of their property before they die. Either way, the goal is to decrease the size of the estate, so that there is little property available with which to satisfy a family protection claim.
This paper seeks to demonstrate why legislative intervention is warranted in order to prevent people from avoiding their family protection obligations. Chapter 1 sets out the background and context of the Family Protection Act, in an attempt to show why it is desirable to uphold the Act and ensure that it is complied with. It sets out the different methods of avoiding the Act and provides examples of this happening in New Zealand.
Having established that New Zealand should implement anti-avoidance measures, the next question is how to ensure such measures are effective without being overly invasive. The measures must balance the obligation to provide for family against the freedom to deal with property. Chapter 2 looks to international examples and examines how this has been achieved in England and in New South Wales.
Chapter 3 draws on the international examples in an attempt to find solutions that can be adapted to the New Zealand situation. The paper culminates in a series of proposals that together provide the framework for a practicable, balanced and effective anti-avoidance scheme under the Family Protection Act.
Chapter I: The Need for Reform
The Origins of Family Protection Legislation
New Zealand is the birthplace of family protection legislation. The first statute of its kind was the Testator’s Family Maintenance Act 1900.1 Prior to this, a testator was free to devolve their property in whichever way they wished. New Zealand inherited this principle of absolute testamentary freedom from England.2 Throughout the nineteenth century there was a strong resistance against encroaching on testamentary freedom, particularly due to the broadly liberal social policy of the time, which emphasised the importance of self-reliance and protecting private property.3
However, there were other, conflicting ideals at play. The idea that ‘charity begins at home’, rather in than in the community, was influential. Testamentary freedom was not perceived as an unfettered discretion, but rather it was burdened by a moral obligation to provide for family:4
“Yet it is clear that, though the law leaves to the owner of property absolute freedom in his ultimate disposal of that of which he is enabled to dispose, a moral responsibility of no ordinary importance attaches to the exercise of the right thus given... Hence arises a reasonable and well warranted expectation on the part of a man’s kindred surviving him, that on his death his effects shall become theirs, instead of being given to strangers. To disappoint the expectation thus created and to disregard the claims of kindred to the inheritance is to shock the common sentiments of mankind, and to violate what all men concur in deeming an obligation of the moral law.”
Towards the late 1800s, there was a shift towards converting this moral obligation into a legal one.
It was the combined weight of the women’s movement and ‘new liberalism’ that eventually led to the enactment of the Testator’s Family Maintenance Act 1900.5 While the new liberalism allowed for greater state intervention into social and economic affairs, it was really the women’s movement that brought the issue of family provision before Parliament as an area in need of reform.6 Concern for economically vulnerable women and children was the primary motivator.7 In this context,
1 Testator's Family Maintenance Act 1900.
2 Upon the enactment of the English Laws Act 1858, New Zealand inherited absolute testamentary freedom from the Wills Act 1837 (UK) 7 Will 4 & 1 Vict c 26, s 3.
3 Grant Duncan Society and Politics: New Zealand Social Policy (2nd ed, Pearson Education New Zealand, Auckland, 2004) at 70-73.
4 Banks v Goodfellow (1870) 5 LR QB 549 at 563.
5 Rosalind Artherton "New Zealand's Testator's Family Maintenance Act of 1900 - The Stouts, the Women's Movement and Political Compromise" [1990] OtaLawRw 2; (1990) 7 Otago LR 202 at 202.
6 Artherton, above n 5 at 202-206.
7 Mary Foley "The Right of Independent Adult Children to Receive Testamentary Provision: A Statutory Interpretation and Philosophical Analysis of the New Zealand Position" (PhD Thesis, University of Otago, 2011) at 32.
absolute testamentary freedom was reconceptualised as a weapon which could be used to leave women and children destitute.8
Despite this growing concern, it took several attempts to get the legislation through Parliament. Robert Stout’s bills, which attempted to reintroduce the civil law system of forced inheritance, were quickly rejected as too great a fetter on testamentary freedom.9 It was Robert McNab that introduced the novel idea of discretionary provision, premised on meeting the basic needs of the applicant and nothing more.10 This was a significantly lesser incursion on testamentary freedom and was therefore much more positively received. But it was probably the ‘state vs estate’ debate that eventually got the Bill over the line.11 This is the idea that because testators are obliged to provide for their families, they should not instead be able to cast their dependants upon the charity of the state. Thus, it was the desire to protect vulnerable women and children, together with the desire to reduce public spending that led to the birth of family protection legislation.
A Century of Change
The Testator’s Family Maintenance Act 1900 gave the courts a discretion to make an order for provision out the estate of a deceased, where the will failed to make ‘adequate provision’ for the ‘proper maintenance and support’12 of a spouse or child.13 In 1908 the Act was renamed the Family Protection Act and the version that stands today, the Family Protection Act 1955, remains substantially unchanged.14 However, judicial approaches towards family protection claims have shifted significantly over the last century, expanding far beyond the original aim of providing modest orders for the economically dependent.
At first, the courts were conservative in exercising of their jurisdiction under the Act. The early view was that the Act merely extended the reach inter vivos maintenance obligations, rather than imposing a more onerous duty of support.15 Thus, orders were made solely on the basis of financial need. However, it was not long before the courts adopted a more generous approach founded upon
8 Artherton, above n 5 at 206.
9 Limitation of Power of Disposition Bill 1986 and Limitation of Power of Disposition by Will Bill 1987.
10 McNab’s first bill, the Testator's Family Provision Out of Estate Bill 1898, was sold to Parliament as an extension of the Destitute Persons Act 1894 which imposed an inter vivos obligation to provide for destitute family members. However, the obligation was limited to bare maintenance only. See Foley, above n 7 at 21- 29.
11 See Hutcheson (10 August 1898) 102 NZPD 424; Symes 422; McKenzie 422; Hogg 422; Meredith 427. 12 The term ‘proper’ was a last minute change proposed by McNab when the Bill was being considered by the Committee of the whole Council.
13 Testator’s Family Maintenance Act, s 2.
14 Key differences: the class of claimants was widened to include step children and parents who were being maintained immediately before death, the disentitling conduct proviso was removed, the jurisdiction of the Act was expanded to include intestate as well as testate estates.
15 Re Rush (1901) 20 NZLR 249 at 253-254.
the recognition of a ‘moral duty’.16 This paved the way for orders that went beyond bare maintenance, allowing for a degree of luxury that accorded with the claimant’s station in life.17
In modern times, the courts have extended the meaning of ‘proper’ support to the extent that adult children can now claim solely on the basis of a ‘family bond’, without evidence of financial need or contribution to the estate.18 This approach has received widespread criticism for being inconsistent with the original justifications behind the Testator’s Family Maintenance Act and out of step with modern views.19 In its review of the law of succession in the late 1990s, the Law Commission said:20
The legislation, as it affects adult children, is not being applied with consistent principles and defined objects in mind. Rather, it depends upon judicial views of what is fair in the context of the particular case. This makes it difficult, at least in the view of some of those we have consulted, to advise will-makers on what provisions they might make which will clearly comply with their “moral duty”.
The Courts have responded to this criticism by adopting a more conservative approach towards the quantum of orders for adult children.21 However, the courts continue to recognise the ‘family bond’ as a sufficient reason to make a family provision order.
The result is that the scope of a deceased’s support obligation is now uncertain and difficult to predict. This is an important point to note for the purposes of this paper, as the uncertainty in this area is likely to prompt attempts to avoid the reach of the Act altogether. The enthusiasm of the courts to do what essentially amounts to rewriting wills also begs the question of whether it is wise to arm them with even broader powers to redistribute property under the Act.
Mechanisms for Avoiding the Family Protection Act
Because family protection orders are made out the deceased’s estate,22 the Family Protection Act can be easily sidestepped through careful estate planning which ensures that there is nothing in the estate from which to make a claim. There are a variety of devices that can be used for this purpose,
16 Allardice v Allardice (1910) 29 NZLR 959 at 972-973.
17 Bosch v Perpetual Trustee Co Ltd [1938] AC 463 (PC).
18 Re Adams HC Wanganui A 34/84, 1 April 1986; Williams v Aucutt [2000] NZLR 479.
19 For example, see J Caldwell "Where There's A Will... Family Protection Claims and the Court of Appeal" (2003) 4 BFLJ 155; J Caldwell "Family Protection Claims by Adult Children, What is Going on?" (2008) 6 NZFLJ 4; Nicola Peart "New Zealand's Succession Law: Subverting Reasonable Expectations" (2008) 37
C.L.W.R 356; Richard Sutton and Nicola Peart "Testamentary Claims by Adult Children - The Agony of the "Wise and Just Testator"" [2003] OtaLawRw 6; (2003) 10 Otago LR 385.
20 Law Commission Succession Law: Testamentary Claims (NZLC PP24, 1996) at [222].
21 Williams v Aucutt, above n 18; Henry v Henry [2007] NZCA 42; [2007] NZFLR 640; Auckland City Mission v Brown [2002] NZCA 33; [2002] 2 NZLR 650.
22 Family Protection Act 1955, s 4.
including joint tenancies, inter vivos trusts, contracts to leave property by will and straightforward gifting.
Property that is held by joint tenancy passes by survivorship rather than falling into the deceased’s estate. Ordinarily, there is no way to access joint tenancies for the purposes of making a family protection order. However, in New Zealand it is possible to gain access to some joint tenancies by applying for the division of relationship property under the Property (Relationships) Act 1976.23 This will work if the joint tenant was the spouse or partner of the deceased. The division of relationship property will have the effect of severing the joint tenancies and bringing the property back into the estate. However, the personal representative of the deceased must obtain the leave of the court to bring an application, which will only be granted if ‘serious injustice’ would otherwise result.24
In Public Trust v Whyman, the deceased had structured his property so that he held his major assets as a joint tenant with his de facto partner, leaving insufficient property in his estate to provide for his dependent children from a previous marriage.25 The surviving de facto partner was the executor of the estate. The Public Trust applied for a grant of administration, so that it could then apply for the division of relationship property under s 88(2). This would then enable the children to apply for provision out of the reclaimed relationship property. In light of the finding that leave under s 88(2) was likely to be granted because of the strength of the children’s claim, the Court of Appeal removed the de facto partner as executor and appointed the Public Trust. The matter then settled out of court.
In Horne v Public Trustee the deceased’s major asset, a villa, passed to his wife by survivorship. His estate was not significant. His adult children applied for leave to divide relationship property, but were denied because their family protection claim was not held to be ‘seriously arguable.26
These cases demonstrate how the Act can be avoided by using joint tenancies. Although there is some prospect of clawing property back under the Property (Relationships) Act, there is no analogous remedy where the joint tenant is not a partner or spouse of the deceased. Furthermore, the requirement that ‘serious injustice’ would otherwise result sets a higher bar than is required for provision under the Family Protection Act.
23 Property (Relationships) Act 1976, s 88(2).
24 Section 88(2).
25 Public Trust v Whyman [2004] NZCA 327; [2005] 2 NZLR 696.
26 Horne v Public Trustee (in its capacity as representative of the estate of Webster) HC Nelson CIV 2010- 442-44, 4 May 2010.
Trusts are a popular way of protecting assets against a number of different risks, including family protection obligations. They are particularly prevalent in New Zealand, which is considered to be the ‘trust capital of the world’.27 Trusts have featured prominently in estate planning since the 1950s, when they became a popular method of avoiding onerous estate duties.28 Although estate duty was effectively abolished in 1993, the number of family trusts continues to grow.29 While they are generally established to provide for family members both during the settlor’s lifetime and beyond, the flexibility of the discretionary trust structure means that they can be used to achieve the very opposite effect.
In Re Henderson, the testator transferred the majority of her assets into a trust settled in favour of her son but not her daughter.30 The intention was to ensure that her daughter would not be able to bring a claim under the Family Protection Act, as her estate would be empty. However, the testator died before completing a debt forgiveness programme whereby she would forgive the debt owed by the trust at a rate of $27,000 per year in order to avoid attracting gift duty.31 Thus the daughter was able to make a claim against the remaining balance of the debt.
Re Henderson illustrates how the recent removal of gift duty will make it easier to avoid the Family Protection Act.32 Where gift duty used to control the rate at which dispositions could be made into a trust, it is now possible to dispose of large amounts of property in one transaction. Thus, the Act could now be avoided at quite short notice. One example of this is in Penson v Forbes, where the testator had transferred her house into trust in 2006 and begun a debt forgiveness program.33 Once gift duty was repealed, the testator forgave the remaining debt in one transaction. Around that time, she also removed one of her daughters as a discretionary beneficiary of the trust. When she died the year after, there was very little left in her estate as everything had been transferred to the trust. Thus, her daughter had no recourse under the Family Protection Act and instead brought an unsuccessful claim for breach of trust. As she was on legal aid, it seems likely her claim for support and maintenance would have been meritorious.
27 Law Commission Some Issues with the Law of Trusts in New Zealand: Review of the Law of Trusts Second Paper (NZLC IP20, 2010) at [2.1]-[2.8]. Tax return data shows that New Zealand has at least twice as many trusts per capita as Australia, and thirteen times as many as the United Kingdom.
28 Law Commission Review of Trust Law in New Zealand: Introductory Issues Paper (NZLC IP19, 2009) at [2.37]; L McKay "Historical Aspects of the Estate Tax" (1978) 8 NZULR 1 at 21-24.
29 Estate Duty Abolition Act 1993.
30 Re Henderson HC Wellington CP 433/92, 6 April 1993.
31 The combined effect of s 62 and Schedule 3 of the Estate and Gift Duties Act 1968 meant that a donor could gift $27,000 per year to a particular donee without attracting gift duty.
32 Taxation (Tax Administration and Remedial Matters) Act 2011, s 245.
33 Penson v Forbes [2014] NZHC 2160.
Beaven v Beaven was a case brought under the Property (Relationships) Act, in relation to a family farm that had been transferred into trust.34 The wife claimed that a proportion of the farm would otherwise have been relationship property, and that its transfer into trust had therefore defeated her rights under the Property (Relationships) Act. In the judgement it is clearly outlined that the trust was established by the husband’s parents in order to ensure the husband acquired the whole of the family farm upon their death, to the exclusion of his brothers and sisters.35 While this worked against the wife in this case, it is a clear example of how trusts can be set up in order to prevent a family protection claim.
Another effective method of defeating a family protection claim is simply to dispose of assets before death. When a disposition is made for less than full value, it decreases the total size of the potential estate. Such a disposition can be made outright or into a trust. Now that gift duty has been repealed, there is no impediment to how quickly a person can divest themselves of assets. Currently, the only way to access such a disposition under the Family Protection Act is if it is a donatio mortis causa, which is a gift made in contemplation of death.36 However, the gift must also be conditional on death, meaning property is not intended to pass until the donor dies. Thus, this provision can be sidestepped if the disposition is intended to take effect before death, even where it is made in contemplation of it.
Conclusions: The Case for Reform
Although there is not a significant amount of case law that shows a trend towards avoiding the Family Protection Act, the potential for abuse is self-evident and has been compounded by the repeal of gift duty. Furthermore, it is unlikely that cases of avoidance would be litigated as there is no reasonable prospect of succeeding under the current law. The cases discussed above are examples in which an alternative claim was available, either in equity or under another piece of legislation. It seems likely that there would be many cases where a disinherited family member may not have been so fortunate.
I therefore argue that New Zealand should adopt anti-avoidance provisions in order to uphold the integrity of the Family Protection Act. It is social legislation designed to protect the financially dependent and cannot be contracted out of.37 Yet the obligation to provide for family upon death can be easily avoided, as demonstrated above. That obligation remains important and should be upheld. Although the extent of the duty has expanded and is now uncertain, the original rationale behind family protection remains as relevant now as it was in 1900; people are obliged to provide for those of their close family members that cannot provide for themselves. In 1996, the Law
34 Beaven v Beaven [2015] NZFC 611.
35 At [25]-[48].
36 Family Protection Act 1955, s 2(5).
37 Gardiner v Boag [1922] NZGazLawRp 186; [1923] NZLR 739; Re Churchill [1978] 1 NZLR 744.
Commission said that “any attempt to evade that responsibility should not be viewed favourably”.38 I agree and consider that New Zealand needs to implement a set of anti-avoidance provisions to prevent any such attempts.
In order to be effective, any anti-avoidance measures should provide a mechanism for returning assets that passed by will-substitute or were disposed of during the deceased’s lifetime. Essentially, the provisions will limit how a person can deal with their property while they are alive, in order to ensure that their family responsibilities will be met upon death. Because of this, they have the potential to undermine certainty of title and impede the making of everyday transactions. Therefore, care must be taken to ensure that the appropriate balance is struck between the right to family provision and the freedom to deal with property. In attempting to remedy one injustice, it is important to be wary of creating new ones. By drawing on international examples, the remainder of this dissertation will aim to find a practicable and equitable solution that is workable in the New Zealand context.
38 Law Commission, above n 20 at 342.
Chapter II
Both England and New South Wales have enacted anti-avoidance measures to protect family provision claimants. This chapter will explore why those provisions were enacted, identify the considerations that were taken into account when formulating the provisions, and outline how they operate to circumvent various avoidance mechanisms.
England
In England, the Inheritance (Provision for Family and Dependants) Act 1975 (UK) governs the law of family provision. The grounds for provision are needs based and are therefore much narrower than in New Zealand, although there is a dual standard under which spouses and civil partners are treated more generously than other classes of claimants. This is because matrimonial property legislation in England does not apply upon death, and the legislature wanted to ensure that a surviving spouse had at least the same rights as a divorcee.39 Thus, spouses and civil partners are entitled to provision that goes beyond ‘bare maintenance’, whereas other claimants are not.40
The case law to date shows that spouses and civil partners tend to receive relatively generous awards.41 This is in contrast to all other classes of claimants, including children, cohabitants and dependants,42 who are entitled to ‘such financial provision as it would be reasonable in all the circumstances of the case for the applicant to receive for his maintenance’.43 Maintenance is not defined in the Act, but is generally accepted to amount to “payments which, directly or indirectly, enable the applicant in the future to discharge the cost of his daily living at whatever standard of living is appropriate to him”.44 The quantum of awards for these claimants tends to be far lower, and financial need remains a necessary precondition.45
The Net Estate: How it Came to Be
39 England and Wales Law Commission Family Property Law (EWLC WP42, 1972) at [0.21] [The 1972 Working Paper].
40 Inheritance (Provision for Family and Dependants) Act 1975 (UK), s 1(2).
41 Fielden v Cunliffe [2006] W.T.L.R; [2006] 1 F.L.R and P v G, P and P (Family Provision: Relevance of Divorce Provision) [2006] 1 F.L.R. 431; [2007] W.T.L.R. 691 establish that the overriding inquiry is what amounts to reasonable provision for a surviving spouse. It is inappropriate to simply replicate the ancillary relief process for divorce proceedings as this distracts from the essential task at hand. In Moore v Holdsworth [2010] 2 F.L.R. 1501; [2010] W.T.L.R. 1213, McNulty v McNulty [2002] W.T.L.R. 357, Adams v Lewis
[2001] W.T.L.R. 493 and Baker v Baker [2008] 2 F.L.R. 1956 the surviving spouses received around half of the estate, which was more than what they would have received upon divorce.
42 The Law Reform (Succession) Act 1995 (UK) extended to class of claimants to include adult children, cohabitants and dependants.
43 Inheritance (Provision for Family and Dependants) Act 1975 (UK), s 1(2)(b).
44 Re Dennis [1981] 2 All E.R. 140 at 145, per Browne-Wilkinson J.
45 See Nazreen Pearce Inheritance Claims and Challenges (Callow Publishing, London, 2004) at 64-67.
The Law Commission’s proposals
The Law Commission first recommended that anti-avoidance provisions be adopted into family protection legislation when it reviewed the law of family property in the early 1970s. While there was no evidence that avoidance was a particularly common practice, the 1938 Act had been widely criticised for failing to cover non-testamentary means of passing property, for subordinating the rights of dependants to those of creditors, and for being easy to avoid by disposing of property inter vivos.46
Consistency with matrimonial property legislation was another justification for adopting anti- avoidance provisions.47 The Commission noted that, because the Court had the power to avoid transactions made with intent to defeat a claim for financial provision in matrimonial property proceedings,48 it would make sense to have a similar power in family protection proceedings.49 This is a particularly persuasive argument in England because, as mentioned earlier, their matrimonial property legislation does not apply upon death. While the Commission acknowledged that the anti- avoidance provisions would have certain disadvantages, such as creating uncertainty in inter vivos transactions, it considered that “the overriding consideration is to ensure that family provision laws are effective”.50
Thus, the Commission recommended that the court should have the power to reopen inter vivos transactions, where it could be proven that it was made with the intention of defeating a claim for family provision.51 However, because the Commission was ‘disturbed by the prospect of litigation in which it is necessary to examine a man’s intentions at remote periods of time’ it recommended that the power to reopen inter vivos dispositions should be limited to those dispositions made within six years of death.52
The Commission also considered that the net estate out of which family provision orders can be made should be extended to apply to donationes mortis causa, general powers of appointment and statutory nominations.53 These classes of assets are property to which a person is entitled
46 R.D. Oughton Tyler's Family Provision (2nd ed, Professional Books Ltd, Abingdon, 1984) at 210, citing
47 The 1972 Working Paper, above n 39 at [3.70].
48 Matrimonial Proceedings and Property Act 1970 (UK), s 16.
49 The 1972 Working Paper, above n 39 at 205.
50 The 1972 Working Paper, above n 39 at 204.
51 England and Wales Law Commission Second Report on Family Property: Family Provision on Death
(EWLC R61, 1974) at [197] [The 1974 Report].
52 The 1974 Report, above n 51 at [211].
53 The 1972 Working Paper, above n 39 at [3.71] and The 1974 Report, above n 51 at [134]-[136].
immediately before death, but which pass otherwise than by will or intestacy. Thus, the Commission considered that they should be automatically available for family provision orders.
However, it considered that joint tenancies deserved an additional layer of protection because a joint tenant already has settled rights in the property that might be affected by a family provision claim.54 To this end, the Commission recommended that the Court have a discretion to sever joint tenancies ‘where just in all the circumstances’ and subject to a strict time limit of six months from the grant of administration.55
Parliamentary proceedings
The Inheritance (Provision for Family and Dependants) Bill of 1975 was well received in both houses and not considered to be particularly controversial.56 The anti-avoidance provisions received little attention but appear to have been implicitly accepted by most members of Parliament. Lord Wilberforce was one of the few to express his concerns. He warned against the dangers of over legislating and asked whether the anti-avoidance provisions were really necessary.57 The Lord Chancellor responded, saying:58
I am very willing to look at whether Clauses 10, 11, and 12 are really necessary, because we certainly do not want to clutter up the Statute Book with the unnecessary. But it is the case that an element of malice and spite, alas, too often enters into testamentary dispositions, with most elaborate and diverse methods, if there is no provision against it for dodging the law’s provisions.
Presumably Parliament did consider that the anti-avoidance provisions were necessary, as they were passed into law without amendment, almost exactly as recommended by the Law Commission.
Subsequent reform
The Inheritance (Provision for Family and Dependants) Act 1975 was subsequently reviewed in 2011, but the only change to the anti-avoidance provisions was to extend the time limit within which to bring an application to sever a joint tenancy.59 Because the Law Commission did not consider that the remaining anti-avoidance provisions were in need of review, it can be inferred that they are working reasonably well.
54 The 1974 Report, above n 51 at [140].
55 The 1974 Report, above n 51 at [141].
56 Awdry (16 July 1975) 895 GBPD HC 1691.
57 Lord Wilberforce (20 March 1975) 358 GBPD HL 934.
58 Lord Chancellor (20 March 1975) 358 GBPD HL 937.
59 The strict six month time limit was omitted from section 9(1) of the Inheritance (Provision for Family and Dependants) Act 1975 by virtue of the Inheritance and Trustees' Powers Act 2014 (UK), s 12(2).
The Net Estate: How it Works
The following is a summary of the anti-avoidance provisions in the Inheritance (Provision for Family and Dependants) Act 1975, as amended, including the relevant case law on these sections. The provisions can be found in full in Appendix 1.
Orders for financial provision can be made out the net estate of the deceased, which is comprised of five different classes of property:
The former four categories are all assets not traditionally part of a deceased’s estate. Categories (b),
(c) and (d) deal with property to which a deceased was entitled immediately prior to death, but which pass otherwise than by will or intestacy. Category (e) enables a court to reopen transactions made during the deceased’s lifetime. As different considerations apply in respect of each category, there are different processes by which they can be made available for financial provision.
Donatio mortis causa and statutory nominations
Donatio mortis causa and statutory nominations automatically fall into the net estate by the operation of ss 8(1) and 8(2). Statutory nominations are generally small sums held in accounts of friendly societies and trade unions.61 Some public pension schemes also qualify as statutory nominations, provided that the deceased had the power to nominate a particular beneficiary. However, private sector pension schemes fall outside the ambit of s 8.62
Section 9 gives the court a discretion to treat joint tenancies as part of the net estate, to the extent that the court considers it to be just in all the circumstances of the case. It is a generous discretion. In Kourgky v Lusher, the court stressed that although an order can only be made for the purpose of facilitating financial provision, that does not unduly limit their broad powers under this provision.63 In Re Crawford the court declined to endorse any particular approach to the exercise of its discretion, rather, it considered that s 9 itself provided adequate guidance.64 The courts generally take into account factors such as the financial needs and resources of the parties and the function of the property in question, for instance, if it serves as a family home or as financial security for the
60 Note that this provision has never been litigated.
61 Sidney Ross Inheritance Act Claims (3rd ed, Sweet & Maxwell, London, 2011) at [3-007].
62 See Cairnes v Howard (1983) 4 F.L.R. 225.
63 Kourgky v Lusher [1983] 4 F.L.R. 65, (1982) 12 Fam Law 86 as per Wood J.
64 Re Crawford (Deceased) [1983] 4 FLR 273.
deceased’s family.65 Despite this wide discretion, there is no evidence to suggest that the power is being used too liberally or is undermining certainty of title. To the contrary, the general thrust of the Law Commission’s 2011 Consultation Paper was that the joint tenancy provisions were too restrictive, leading to the amendments discussed above.66
Under these provisions, a person who has received property from the deceased during their lifetime, can be ordered to provide money or property for the purpose of making financial provision. However, the court must not make an order against the donee of such property unless satisfied that:67
The test for whether a disposition was made with the requisite intention is set out in s 12(2): that condition shall be fulfilled if the court is of the opinion that, on the balance of probabilities, the intention of the deceased (though not necessarily his sole intention) in making the disposition was to prevent an order for financial provision or to reduce the amount of provision which might otherwise be granted.
When it first proposed these provisions in 1974, the Law Commission expressed concern that it might be difficult to prove the intention of a deceased person. However, it is now clear that such intention can be inferred from the circumstances of the disposition, including the value of the property in issue, the amount of consideration provided, and the relationship between the deceased and the donee.68 For example, in Dawkins v Judd the deceased sold the family home to his daughter for £100 and subsequently willed her his entire estate, leaving his second wife with nothing.69 Given these circumstances, the judge had no problem inferring that the disposition was made with the requisite intent.
In England, a test of intention also applies to contracts to pass property by will. If some consideration has been given under the contract, the test for intention is the same as discussed above. However, in cases where no valuable consideration has been given, intention is presumed.70 However, to date there have not been any anti-avoidance cases on contracts to dispose of property by will.
65 Pearce, above n 45 at 118.
66 England and Wales Law Commission Intestacy and Family Provision Claims on Death (EWLC CP191, 2011)
67 Inheritance (Provision for Family and Dependants) Act 1975, s 10(2).
68 See Pearce, above n 45 at 122.
69 Dawkins v Judd [1986] 2 FLR 360.
70 Inheritance (Provision for Family and Dependants) Act 1975, s 12(2).
One of the notable features of the English provisions is the lack of protection afforded to donees. While the amount that a donee can be ordered to pay is limited by reference to the value of the property they received,71 there is no change of position or good faith defence available. Instead, this appears to be something that a court will take into consideration as a part of its overall discretion.
Conclusions
The English anti-avoidance provisions are simply drafted and enable recovery of donationes, statutory nominations, joint tenancies, inter vivos dispositions made within six years before the deceased’s death and contracts to leave property by will. The mechanism of recovery is a personal order against the donee or recipient of the property. The various devices for transmitting property are separated into four categories in respect of which different jurisdictional requirements apply. Stricter requirements attach to joint tenancies and inter vivos dispositions because expectations and rights in respect of such property tend to be more well-settled. The provisions have not attracted criticism for undermining certainty of title, perhaps because the primary jurisdiction to make family provision orders is so narrow. Although the anti-avoidance provisions are not heavily utilised, they appear to be operating effectively.
71 Inheritance (Provision for Family and Dependants) Act 1975, ss 10(3) and 10(4).
New South Wales
Australia is a federation of states and territories, each of which is a separate jurisdiction with its own succession laws. In New South Wales, the Succession Act 2006 (NSW) governs the law of wills, intestacy and testamentary claims.72 The statutory formula for family provision is the ‘proper maintenance, education and advancement in life’ of eligible applicants.73 In determining whether such provision has been made, the Australian courts generally have regard to both need and moral claim in globo.74 Although there have been statements to the effect that the focus on a moral claim puts an unacceptable gloss on the words of the statute,75 recent cases have confirmed that it remains directly relevant to the court’s jurisdiction under the Act.76 The result is that the basis of family provision claims in New South Wales is wider than it is in England, but narrower than in New Zealand as Australia does not consider the existence of a ‘family bond’ to be sufficient grounds for a family provision claim. Although the courts have taken an expansive view of what constitutes ‘need’ in cases concerning large estates, it is need, rather than the existence of a family bond that is the basis of claim.77
The Notional Estate: How it Came to Be
By the early 1950s, practitioners were beginning to notice an increase in the incidence of inter vivos avoidance in New South Wales.78 Nevertheless, it was not until the 1970s, when the New South Wales Law Reform Commission reviewed the law of family protection, that the issue was considered seriously or in any detail. The product of that undertaking was the Family Provision Act 1982 (NSW), which contained the first iteration of anti-avoidance provisions, known as ‘notional estate’ provisions. These were then reviewed as a part of the Uniform Succession Project in the late 1990s, which was a joint effort by all Australian jurisdictions to consolidate the law of succession. New South Wales then incorporated an amended version of the 1982 provisions into the Succession Act 2006 (NSW). To date, no other Australian jurisdictions have enacted anti-avoidance measures,
72 Succession Act 2006 (NSW).
74 John de Groot and Bruce Nickel Family Provision in Australia (Lexis Nexis Butterworths, Australia, 2007) at [2.4].
75 Hughes v National Trustees Executors & Agency Co of Australasia Ltd [1979] HCA 2; (1979) 143 CLR 134 at [158]; Singer v Berghouse (No 2) [1994] HCA 40, (1994) 123 ALR 481 at [487] per Mason CJ, Dean and McHugh JJ.
76 See Permanent Trustee Co Ltd v Fraser (1995) 35 NSWLR 24 at [36] per Handley JA; Vigolo v Bostin
[2005] HCA 11, (2005) 221 CLR 191.
77 The leading case on large estates is Re Buckland (No 2) [1967] VicRp 1; [1967] VR 3. See also Re Anderson (SC(Qld) Civil Div, Kelly J, OS No 414/81, 30 May 1984, unreported); Mayfield v Lloyd-Williams [2005] NSWCA 189; Gregory v Hudson (No 2) (1997) ACL Rep 395 NSW 34; Picone v Kirkby [2002] NSWSC 1233.
78 Charles McLelland "Fifty Years of Equity in New South Wales - a Short Survey" (1951) 25 ALJ 344 at 355 McLelland suggests that the incidence of avoidance warrants legislative intervention.
despite the National Committee’s recommendation that they should follow New South Wales’ example in this respect.79
The Law Commission’s proposals
When the New South Wales Law Reform Commission reviewed the law of family provision in the 1970s, one of their major goals was to ensure that the new legislation would be effective. It noted that the Testator’s Family Maintenance and Guardianship of Infants Act 1916 (NSW) was easy to avoid, that most solicitors were well versed in estate planning to this effect and that sophisticated property dealings were much more common than they were in 1916.80 The Commission focused on two main categories of property that were not then available for family provision: property that is disposed of inter vivos and property that passes by will substitute. Like in England, these categories were discussed separately as they have different policy implications.
The Commission was cautious about reopening inter vivos transactions, for fear of diminishing the utility and value of property and discouraging owners from developing or making improvements to their property.81 It recognised that a delicate balancing act would be necessary. The Commission decided that the appropriate compromise between these two competing considerations was to limit the court’s jurisdiction by imposing both a time limit and a requirement to prove that the disposition was made with the intention of defeating a claim. The Commission considered that a time limit of three years prior to the deceased’s death would be sufficient.82
The Commission also turned its attention to property that passes by will substitute, meaning any property which the deceased could have withdrawn or reclaimed before they died. The Commission recommended that where inadequate consideration has been given for such property, it should be available to be designated as notional estate, irrespective of when the arrangement was made or whether it was designed to defeat a claim for family provision. The rationale was that because the property does not vest absolutely in another until the point of death, no well settled expectations will be disturbed if the property goes instead into the deceased’s notional estate.83 The Commission paid particular attention to joint tenancies, life insurance policies and superannuation schemes, all of which it considered should become a part of the notional estate. Although not all superannuation schemes technically operate as will-substitutes, the Commission recommended that they form a
79 National Committee for Uniform Succession Laws Family Provision (QLRC MP28, 1997) at 93 [The 1997 Miscellaneous Paper].
80 New South Wales Law Reform Commission Testator's Family Maintenance and Guardianship of Infants Act 1916 (NSWLRC WP86, 1974) at [11.2] [The 1974 Working Paper].
81 NSWLRC, The 1974 Working Paper, above n 80 at [11.3].
82 NSWLRC, The 1977 Miscellaneous Paper, above n 79 at [2.22.9].
83 NSWLRC, The 1974 Working Paper, above n 80 at [11.40].
part of the notional estate because Australia’s compulsory superannuation schemes mean that the funds are often a major asset.84
The Commission wanted to implement its recommendations by automatically imposing a statutory trust over the notional estate, thereby relying on equitable tracing remedies to bring property back into the pool from which family provision orders could be made.85 However, this proposal was highly unpopular with the Parliamentary Counsel drafters, who considered that approach to be cumbersome and overcomplicated.86 They preferred to follow the structure of the Inheritance (Provision for Family and Dependants) Act 1975 (UK), which instead allowed the court to make orders against donees personally. This structure also provided greater discretion in designating which property will form a part of the notional estate, rather than having to identify the relevant property through the process of tracing. The Parliamentary Counsel’s framework was preferred and remains intact in the Succession Act 2006 (NSW).87
Parliamentary proceedings
The Family Provision Bill of 1982 was not rigorously debated in Parliament, instead it was largely accepted as fait accompli, generating little discussion and essentially ‘walking through’ Parliament in one short month.88 Thus, the Family Provision Act 1982 (NSW) was passed into law without controversy, despite the new notional estate provisions which significantly extended the reach of the Act by making further inroads into testamentary freedom.
Subsequent reform
The notional estate provisions in the Family Provision Act 1982 (NSW) were reviewed by the National Committee for Uniform Succession Laws in the late 1990s and early 2000s as part of the Uniform Succession Laws Project. The general consensus was that although the framework was complicated, it was comprehensive and effective, “like a full orchestral equity symphony – as such I would not complain that there are ‘too many notes’”.89 There was anecdotal evidence that the notional estate was working well and the Committee recommended that a plain language version
84 NSWLRC, The 1977 Miscellaneous Paper, above n 79 at [2.23.19]. See also Nicola Peart and Prue Vines "Will-Substitutes in New Zealand and Australia" in A Braun and A Rothel (eds) Passing Wealth on Death: Will-Substitutes in Comparative Perspective (Hart Publishing, Oxford, 2016) at 14-15.
85 NWSLRC, The 1974 Working Paper, above n 80 at [11.46]-[11.47].
86 See Rosalind Croucher "Law Reform as Personalities, Politics and Pragmatics - The Family Provision Act
1982 (NSW): A Case Study" (2007) 11 Aust J Leg Hist 1 at 23-24.
87 Sections 80(3) provides that a notional estate order can be made against property that is held by or on trust for the recipient or beneficiary of a relevant property transaction, whether or not the property was the subject of that transaction.
88 See Croucher, above n 86 at 24-25.
89 National Committee, The 1997 Miscellaneous Paper, above n 79 at 80, quoting WA Lee, consultant to the Queensland Law Reform Commission on the Uniform Succession Laws Project, by correspondence dated 2 September 1997.
of the provisions be incorporated into its model legislation, subject to a handful of technical amendments which will be discussed later in this paper.90
The Notional Estate: How it Works
The following is a summary of the notional estate provisions in the Succession Act 2006 (NSW), including the relevant case law on these sections. The provisions can be found in full in Appendix 2.
A court has the discretion to make a notional estate order designating certain property as part of the notional estate of a deceased.91 That property may be then be used to satisfy a family provision order.92 A notional estate order can be made in four different situations:
A person enters into a relevant property transaction if the person does, directly or indirectly, or does not do, any act that results in property being:
and full valuable consideration is not given to the person for doing or not doing the act.97 This is a very broad definition designed to catch not only traditional distributions, but also nominations, contracts and omissions to bring property into the estate where such a power existed. It is to be given a large and liberal construction in line with the policy underpinning the Act; restrictions and limitations apply at later stages in the analysis.98
A court can make a notional estate order when a relevant property transaction took effect:99
90 National Committee, The 1997 Miscellaneous Paper, above n 79 at 87. The notional estate provisions (Part
91 Sections 79 and 80.
92 Section 63(5).
93 Section 79.
94 Section 80.
95 Section 81.
96 Section 82.
97 Section 75.
98 Kavalee v Burbridge (1998) 43 NSWLR 42.
99 Section 80(2).
The first category covers classical situations of avoidance, the second covers dispositions made shortly before death and the third covers both property that passes by will substitute as well as a range of omissions to bring property back into the estate, which are ‘transactions’ deemed to take effect on the deceased’s death.100 The bulk of the notional estate litigation is in relation to the third category and in particular the failure to sever joint tenancies, the failure to exercise a power of appointment in relation to a trust, and the nomination of superannuation recipients. The first two categories, relating to inter vivos transactions, have been surprisingly under-utilised.
There appears to be no consensus on whether to consider the validity of a family provision claim before deciding if there is property available to designate as notional estate. Many cases determine the outcome of the family provision claim first,101 but others prefer to determine the possible size of the notional estate first, as the total size of the estate will have a bearing on whether or not a family provision order will be granted.102
Assets that were subject to an unexercised power of appointment can be brought into the notional estate by virtue of s 76(2)(a):
If a person is entitled to exercise a power to appoint, or dispose of, property that is not in the person’s estate and does not exercise that power before ceasing to be entitled to do so, with the result that the property becomes held by another person or subject to a trust, or another person becomes, or continues to be, entitled to exercise the power [then that omission is a relevant property transaction].
The main point of contention is usually whether the deceased’s ‘power’ was extensive enough to enable them to legitimately compel the disposition of property in a way that would have benefitted their estate.
The major case in this area is Kavalee v Burbridge, which concerned a Foundation established under the law of Liechtenstein.103 The court found that prior to his death, the deceased had the legal ability to compel the Founder of the Foundation to distribute the Foundation’s property to any beneficiary, including the deceased. Although the power of appointment belonged to the Founder,
100 Section 77.
101 For example, see Chu v Ngar [2015] NSWSC 1505 and Woodleigh v Williams [2016] NSWSC 979.
102 This approach was taken in Wardy v Salier [2014] NSWSC 473 and Carr v Douglas [2016] NSWSC 854.
103 Kavalee v Burbridge, above n 98.
the deceased had control over the power at law, which amounted to a ‘power to appoint or dispose of property’ within the meaning of the Family Provision Act 1982. Mason J said that ‘power’ in this context is not a ‘technical term of law’ and must be interpreted as ‘something more than a traditional power of appointment’.104 Thus, the omission to exercise the power was held to be a relevant property transaction which disadvantaged the deceased’s estate and as such, the assets of the Foundation were liable to be designated as notional estate.
In Finn v Fearne the deceased was the settlor of a discretionary family trust and had the power to appoint and remove trustees.105 However, this did not amount to a ‘power to appoint or dispose of property’ because unlike in Kavalee, the trustees were not under a legal duty to act in accordance with the deceased’s instructions. Thus, because the deceased did not have the legal ability to reclaim the corpus of the trust, it was not able to designated as notional estate even though the deceased may have been able to reclaim the assets in practice.
Wardy v Salier was another case involving a discretionary family trust. The deceased was one of two directors of Linfield, which was the sole corporate trustee of the trust.106 It was held that the deceased had the legal ability to appoint the corpus of the trust to himself, either with the consent of the other director or by removing the other director, which he was entitled to do as the major shareholder of Linfield.107 In interpreting the provisions, the judge had regard to their purpose, which was to make provision for dependants in situations where property had been transferred into asset holding structures:108
The placing of assets in a family discretionary trust with a corporate trustee controlled by the deceased is a paradigm case for the intended application of the notional estate provisions.
The judge then went on to designate $3.76M out of the total trust property of $11M as notional estate in order to make provision for the deceased’s widow and two of his adult sons.
In New Zealand, the existence of such a power of appointment would be of no benefit to a family protection claimant. A deceased person cannot exercise such a power; it is worthless in their hands. Thus, in the absence of anti-avoidance provisions such a power could not conceivably be an asset of the deceased’s estate.
The approach towards joint tenancies is relatively straightforward. The failure to sever a joint tenancy is a relevant property transaction that takes effect upon death. It is therefore available to be
104 At 451, per Mason J. This point was also emphasised in Stern v Sekers; Sekers v Sekers [2010] NSWSC 59.
105 Finn v Fearne [1999] NSWSC 1041.
106 Wardy v Salier, above n 102.
107 At [117].
108 At [141].
designated as notional estate provided that the surviving owner did not give full valuable consideration for the deceased’s share.
The majority of cases involving joint tenancies are applications by children to recover assets that passed by survivorship to their deceased parent’s spouse or de facto partner.109 For example, in Carr v Douglas the deceased’s daughter applied for provision out of her father’s estate.110 Her father’s net estate was worth $51,615, but his most significant asset, a property valued at $1.2M had passed by survivorship to his de facto partner. The court designated the deceased’s share in the house as notional estate, from which a legacy of $275,000 was awarded to his daughter.
In New Zealand, these kinds of claims could be satisfied if the personal representative of the deceased brings a claim for the division of relationship property under s 88(2) of the Property (Relationships) Act 1976. However, leave is granted only if ‘serious injustice’ would otherwise result and this remedy is not available in respect of joint tenants who are not the partner or spouse of the deceased. In New South Wales, matrimonial property legislation does not apply on death, so this is not an option.
As mentioned earlier, these provisions have not received much attention. Possible reasons for this might be that outright gifts are much less common than gifts into trusts, which are primarily dealt with through the ‘omission to exercise a power’ route. Another reason might be that the three-year time limit is too restrictive. For example, in Ramsay v Schiller the deceased had transferred his house to his new wife for consideration of $1, but because the transaction took effect three years and 10 months prior to his death, it could not be used to make provision for his three daughters.111 The only reason that case was litigated was because there was uncertainty as to when exactly the transaction took effect, so it is possible that there are more cases like it where litigation was not attempted because there was no prospect of success.
Wilson v Wright was a claim by two brothers for provision out of both their mother and their father’s estates.112 Their father, who died first, left all his assets to his wife, which then passed to their daughter in accordance with the mother’s will. There was only about $22,000 in the mother’s estate. However, the parents had also during their lifetime gifted to their daughter a property worth
$300,000, which the sons argued should be designated as notional estate. The transaction had occurred within the three year time limit and after some deliberation the judge held that it had been made with the intention of defeating a claim for family provision. This was inferred from the
109 See Barker v Magee [2001] NSWSC 563; Kennedy v Jvancich [2003] NSWSC 441; Cameron v Hills
NSWSC BC8901539, 26 October 1989 and Cetojevic v Cetojevic [2007] NSWCA 33.
110 Carr v Douglas, above n 102.
111 Ramsay v Schiller [2012] NSWSC 596.
112 Wilson v Wright NSWSC BC9202062, 25 February 1992.
deterioration of the relationship between the mother and her sons. In the Supreme Court Windeyer J dismissed the brothers’ claim to their father’s estate but this was reversed on appeal; the entire property was designated as notional estate, from which $92,000 was paid out to each son to satisfy their family provision claims.
In New Zealand, there is no way to access property that was disposed of during the deceased’s lifetime. Thus the sons in Wilson v Wright would only have been able to claim against the $22,000 left in their mother’s estate.
Notional estate orders apply in respect of property that is held by, or on trust for, the recipient or beneficiary of a relevant property transaction, whether or not the property was the subject of that transaction.113 This is the same as the position in England. However, in New South Wales, the concept of a ‘subsequent’ relevant property transaction casts the net even wider. It allows the court to follow multiple donees or transferees through a chain of subsequent relevant property transactions.114 For example, if the deceased gifted some money to a transferee and the transferee then gifted any of their property to a second transferee, the court has the ability to make a notional estate order against the property of the second transferee. The provision is drafted in a way that allows the court to order against an infinite number of subsequent transferees, so long as there is a chain of relevant property transactions to follow. However, an order against subsequent transferees must be warranted by the existence of ‘special circumstances’.115
In making a notional estate order, the court is required to consider both the importance of not interfering with reasonable expectations in relation to property and the substantial justice and merits involved in making the order. In Petschelt v Petschelt McLaughlin M noted that it is not clear as to whose reasonable expectations the provisions refer, but considered that it included not only the reasonable expectations of the current owner of the property, but also those of the deceased and possibly of the applicant.116 This approach was affirmed in Carr v Douglas, where the deceased’s expectations that his wife would only receive a one third share in his half of the property was taken into account.117
In determining what property should be designated as notional estate, the court must consider factors such as the nature and value of the property that was the subject of the relevant property transaction, the nature and value of any consideration given for the transaction, changes in the value
113 Sections 80(2).
114 Section 81.
115 Section 81(1)(c).
116 Petschelt v Petschelt [2002] NSWSC 706 at [68].
of the property and whether the property is the kind from which income could be derived.118 In Charnock v Handley the court emphasised that the property that becomes notional estate does not have to be related in any way to the property that was originally the subject of the relevant property transaction. Hallen AsJ explained that the reason for this is because the provisions are designed to do ‘practical justice’ as between the persons entitled to benefit from the deceased’s estate.119
However, it is important to note that donees and transferees do not have any protections that operate independently of the court’s discretion; they have nothing beyond the right to have their reasonable expectations and the substantial justice and merits of the case taken into account. While such an assessment may well entail a change of circumstances defence, that is not necessarily so. Thus, recipients in New South Wales are in a potentially vulnerable situation and are completely at the mercy of what the courts consider to be just. It is possible that limiting the operation of the inter vivos provisions to those dispositions occurring within three years of the deceased’s death was considered to be an adequate safeguard for recipients.
Conclusions
The New South Wales anti-avoidance provisions are more comprehensive than the English ones. As a result, they are also more complicated and have attracted criticism for being difficult to decipher. They are widely drafted, with a catch-all definition of ‘relevant property transaction’ which enables the provisions to apply to a greater variety of situations. Property is split into two broad classes: property that passes upon or after death and property that is disposed of inter vivos. Like in England, stricter jurisdictional requirements apply in respect of inter vivos transactions. It is perhaps for that reason that they have not generated much litigation. Most cases in New South Wales are claims in relation to powers of appointment, joint tenancies and superannuation.
Both jurisdictions provide good examples of how New Zealand might strengthen its own Family Protection Act. Many of the provisions discussed would help to prevent avoidance from occurring in New Zealand. The New South Wales example in particular would be useful for gaining access to trust property, which is a common will-substitute in both New Zealand and Australia. However, because no two jurisdictions are alike, it is not simply a matter of importing one set of provisions or another. Chapter 3 will focus on how to adapt the international examples to the New Zealand climate.
118 Section 89.
119 At [193], citing Richardson v Rearden [2006] NSWSC 1252.
Chapter III: Suggestions for Reform
After examining the landscapes in England and New South Wales, it is now even clearer that New Zealand’s Family Protection Act is in need of fortification. Because our approach towards family protection orders is comparatively more generous than England or New South Wales, there is a stronger incentive to attempt to avoid the broad reach of the Act. Furthermore, our avoidance mechanisms are more attractive and easier to use than in England or New South Wales.
As the ‘trust capital of the world’, New Zealand has twice as many trusts per capita than Australia and thirteen times as many as the United Kingdom.120 The removal of gift duty in 2011 has now made trusts an even more attractive option as they can be set up quickly, easily and cheaply. In contrast, trusts in New South Wales and England are subject to Capital Gains Tax, making them a less lucrative asset holding structure.121 The same considerations apply in respect of outright gifts.
In New Zealand, the concern that trusts can be easily abused is clearly reflected in the trend towards trust busting. The Property (Relationships) Act 1976 and the Property Law Act 2007 contain trust busting provisions, and trust assets can be taken into account when assessing eligibility for residential care subsidies or liability for child support.122 The courts have attacked trusts by invalidating ‘alter ego’ trusts,123 by imposing constructive trusts upon express trusts124 and by finding that a power of appointment amounts to ‘property’ for the purposes of the Property (Relationships) Act 1976.125 The core of this attack is that because the settlor has failed to properly alienate the property, it should be treated as theirs for certain purposes, and particularly for the purpose of fulfilling social obligations. Given these developments, it is strange that no solution has yet been developed in the context of family protection obligations, beyond applying for the division of relationship property under s 88(2) of the Property (Relationships) Act 1976.
Yet in England and New South Wales, where family provision obligations are less onerous, trusts are less numerous, and property is more difficult to alienate, there are anti-avoidance measures in place. But in New Zealand, calls for reform have fallen on deaf ears.126 Now, with the repeal of gift duty, the need to fortify the Family Protection Act is more pressing than ever.
120 Law Commission, above n 27 at [2.1]-[2.8].
121 Peart and Vines, above n 84.
122 Property (Relationships) Act 1976, s 44; Property Law Act 2007, ss 344-350; Child Support Act 1991; Social Security Act 1964, s 147A.
123 W M Patterson "When is a Trust a Trust?" (paper presented at the Legal Research Foundation Seminar "A Modern Law of Trusts", Auckland, 28 August 2009) at 5.
124 See Clark v Clark HC Auckland CIV-2009-404-005931, 26 November 2012 and Murell v Hamilton
125 Clayton v Clayton [2016] 1 NZLR 551; [2016] NZSC 29.
126 See Hon D A M Graham "The Minister of Justice's opening speech" (1995) 25 VUWLR 3 at 7-8; Law Commission, above n 20 at 34.
Legislative intervention is warranted in order to uphold the integrity of the Act and to protect the interests of vulnerable family members. On the other hand, over-zealous interference may create more problems than it solves. Care must be taken to ensure that the appropriate balance is struck. But while it may be incredibly difficult to find a practicable and equitable answer to this problem, this is no reason to permit continued avoidance of the Act. England and New South Wales have managed to accomplish it without any overly dramatic consequences. The remainder of this chapter will draw on the international examples in an attempt to find a solution that is workable in the New Zealand climate. Particular attention will be paid to trusts, joint tenancies and inter vivos dispositions, as these are the most commonly utilised tools for avoidance in New Zealand.
The Law Commission’s Proposal
In the late 1990s the Law Commission undertook the Succession Project, which was an attempt to amend and consolidate the law of testamentary claims in New Zealand into one Succession Act.127 As noted in Chapter 1, the Commission was highly critical of the court’s liberal approach towards the making of family provision claims, particularly in relation to adult children. It proposed that the court’s jurisdiction to make family protection orders should be drastically narrowed. That approach was generally considered to be too harsh; this was likely the reason why Parliament did not consider any of the Commission’s proposals for reform of the Family Protection Act. It is a shame that the anti-avoidance measures were overlooked by virtue of their inclusion in this poorly received bundle of proposals for reform. However, it is useful to outline the Commission’s preferred approach to anti-avoidance, as it was not rejected for its lack of merit but merely because there was no agreement on the central issues up for reform.
The Law Commission recommended that the following ‘non probate’ assets be available to satisfy family provision claims:
The Commission also recommended that the court have powers in relation to inter vivos
dispositions, where:
127 See Law Commission, above n 20 and Law Commission Succession Law: A Succcession (Adjustment) Act (NZLC R39, 1997) .
The Commission also recommended that the court should not be able to make orders against good faith purchasers for value without notice and should have the discretion to decline or reduce any order made against a person who received property in good faith and has subsequently altered their position.
General Features of the Anti-Avoidance Scheme
Having established that an anti-avoidance scheme should be implemented in New Zealand, it is first necessary to discern what its general features should be. This raises the following questions:
Grounds for invoking anti-avoidance measures
I propose that the grounds for invoking anti-avoidance measures should be narrower than the grounds for making a family protection order. When the Law Commission suggested adding anti- avoidance provisions into our family protection legislation, it envisioned that they would attach to a much reduced discretion. It mentioned that if those suggestions were not implemented and the jurisdiction in respect of claims by adult children was preserved, their proposals in relation to avoidance would need to be revised as “there would not then seem to be the same compelling reasons to interfere with settled arrangements and transactions”.128 There is some logic in this; considering the risk of undermining certainty of title and diminishing the utility of property, interference should be as limited as is reasonably possible. The idea of interfering with settled property rights simply to provide emotional comfort to disinherited children is unlikely to sit well. On the other hand, if the principles expressed in Banks v Goodfellow remain relevant and disinheriting children still “shocks the common sentiments of mankind”, then interference may indeed be justified on wider grounds.129
The wiser option would be to err on the side of caution. Although there have been no adverse consequences in England or New South Wales, that may be because both jurisdictions have considerably narrower grounds for provision claims. New Zealand should adopt similar grounds for invoking anti-avoidance measures, so that interfering with settled property rights does not become commonplace. Furthermore, this approach is in line with the Law Commission’s proposals
128 Law Commission, above n 20 at [345].
129 Banks v Goodfellow, above n 4 at 563.
and with the original justifications behind the enactment of family protection legislation in New Zealand, which was to protect the economically vulnerable.
Although a dual standard for provision may be unwieldy and will take some time to fully develop, there are some precedents that could be adopted for this purpose. Firstly, the new standard could be modelled on the approach in Re Hilton, where the court had to consider what amounted to ‘proper maintenance and support’ for a widow who had already received property pursuant to a matrimonial property settlement.130 In these circumstances, the threshold for provision was higher. Another option would be to borrow jurisprudence from the ‘reasonable needs’ assessment for spousal maintenance. Either of these possibilities provide a starting point for a narrower, needs based approach that is better suited to the application of anti-avoidance measures.
Property available for reclamation
The other matter of general application is deciding how to identify property that can be brought into the enlarged estate. New South Wales followed the English approach, which makes available any property held by the donee, recipient or beneficiary of a relevant disposition or omission. Although the New South Wales Law Reform Commission had originally proposed tracing as the appropriate method of identification, it was considered to be an overly complicated yet inadequate approach, as there would be no prospect of recovery once the relevant property had been dissipated. This is not a problem under the current approach, as property against which an order can be made need not be related in any way to the property that was originally disposed of by the deceased.131 As explained in Richardson v Rearden, this broad discretion exists to ensure that ‘practical justice’ can be done as between the various claimants and beneficiaries of the deceased’s estate.132
New Zealand should adopt the same approach to identifying property against which an order can be made, but subject to a change in position defence for recipients. Whereas in England and New South Wales there are protections available, they are wholly at the discretion of the court. I consider that more substantive protection is warranted in New Zealand, both because the New Zealand circumstances demand that there be no time limit on how far back the court can look into inter vivos transactions, which will be discussed below, and for consistency with similar powers in other areas of law. For example, there is a change in position defence available for recipients of dispositions made with the intent of defrauding creditors under the Property Law Act 2007 and for recipients of a distributed estate under the Administration Act 1969.133 This prevents, or reduces, the liability of a person who received the property in good faith and has altered their position in the belief that the transaction was valid.
130 Re Hilton [1997] 2 NZLR 734.
131 Charnock v Handley [2011] NSWSC 1408
132 Richardson v Rearden, above n 119 at [23].
133 Property Law Act 2007, s 349; Administration Act 1969, s 51.
I also recommend that property should be able to be reclaimed from a subsequent transferee, where they did not give full valuable consideration for the property. Like in New South Wales, this would enable the court to follow a ‘chain’ of transactions. Otherwise, it would still be relatively easy to structure dispositions in a way that avoids the reach of the Act, for example by passing property to a donee through a company, a trust, or a willing third party. Although this increases the potentially unsettling effect of these provisions, subsequent transferees would be protected by the change of position defence. Ultimately, the court has the discretion to decline to make an order in the circumstances of any particular case, which would likely include considering how closely a transferee is associated with the original transaction.
Interrelationship with the Property (Relationships) Act 1976
Unlike in England or New South Wales, matrimonial property legislation in New Zealand applies upon death. It is therefore important to consider how the Property (Relationships) Act 1976 will interact with anti-avoidance measures under the Family Protection Act, in order to prevent any inconsistencies.
At present, a surviving spouse or partner is entitled to apply for the division of relationship property upon death.134 Should they elect this option, they forfeit their right to inherit in accordance with the deceased’s will, unless the will makes specific provision for that eventuality.135 On the other hand, there is no automatic right to apply for the division of relationship property on behalf of the estate. Instead, leave will only be granted under s 88(2) of the Property (Relationships) Act if ‘serious injustice’ would otherwise result. These claims are generally brought on behalf of children who wish to reclaim property that passed to their deceased’s parent’s spouse or partner by survivorship. In Public Trust v Whyman, the Public Trust was appointed administrator of the deceased’s estate on the grounds that it was likely an application under s 88(2) would be successful considering the strength of the children’s family provision claim.136 However, in Horne v Public Trustee leave was refused because the claimants, as independent adult children of the deceased, had ‘little or no chance of success’.137
In Re Williams, Hammond J held that the claimant daughter was entitled to provision amounting to
$40,000, which could not be satisfied out of the estate as it stood.138 However, he refused to grant leave under s 88(2) because he did not consider that serious injustice would result. It is possible that one of the factors operating in the background of this case was the injustice that would be caused to the surviving spouse if relationship property was divided. The deceased’s half share in the relationship property was $410,000, ten times the amount of property required to satisfy the
134 Property (Relationships) Act 1976, s 61.
135 Section 76.
136 Public Trust v Whyman, above n 25.
137 Horne v Public Trustee, above n 26 at [28].
138 Re Williams [2004] 2 NZLR 132.
daughter’s provision claim. However, under s 88(2) there is no discretion to order against only a part of the relationship property. The deceased’s half share would have been brought back into the estate and the wife would lose her entitlement to inherit in accordance with the will. The only way she could reclaim any of that property would have been to bring her own family provision claim. From this point of view, the outcome of Re Williams is more understandable.
However, the result was criticised by the Court of Appeal in Public Trust v Whyman, which considered that the daughter’s inability to recover an award of $40,000 did amount to ‘serious injustice’:139
In this context it is important to recognise that the ‘serious injustice’ contemplated by s 88(2) will always (or perhaps almost always) be to a person other than the surviving spouse or partner, as a surviving spouse or partner can issue proceedings without leave.
Thus, any adverse effects for the surviving spouse or partner are not a relevant consideration under s 88(2).
Because anti-avoidance provisions under the Family Protection Act would only permit recovery of assets to the extent that they are required to satisfy a family provision claim, it is easy to see how a surviving spouse or partner might be comparatively disadvantaged by the operation of s 88(2). Whereas other donees or recipients of property would be ordered to provide only such property as is required to satisfy a family provision claim, a spouse or partner might be required to provide the deceased’s share of the relationship property, which as demonstrated in Re Williams is likely to be significantly more. If the whole share is not required to satisfy a claim, the remainder will not return to the spouse or partner, but will fall into the estate and be distributed in accordance with the will, under which the spouse or partner is no longer entitled to inherit.
Thus, there will clearly be an inconsistency between the proposed anti-avoidance provisions and s 88(2). In my view, the problem does not lie with the anti-avoidance provisions, but rather in the way that the Property (Relationships) Act applies upon death. It forces a surviving spouse or partner to choose between their relationship property rights and their right to inherit. However, these are two very different systems of entitlements which need not operate to the exclusion of each other. The inconsistency arises here when a surviving spouse or partner loses their right to inherit anything but their own property upon a successful application under s 88(2). However, when the anti- avoidance measures are invoked against another kinds of gratuitous transferees, we recognise that although their rights are subordinate to a family provision claim, their underlying right to inherit remains intact.
One option would be to abolish s 88(2) altogether so that the only way to reclaim relationship property would be through the anti-avoidance provisions. That way, a spouse or partner could not
139 At [48].
be forced into completely surrendering their right to inherit. However, this option leaves those who are unable to claim under the Family Protection Act without a remedy.
The crux of the issue appears to be that, when it comes to the deceased’s relationship property, there is no way to hear and determine claims as between a surviving spouse or partner versus family protection claimants versus other interested parties. This is because, in relation to the surviving spouse, section 88(2) operates in an ‘all or nothing’ manner. Thus, I believe the best solution would be to make the deceased’s share of relationship property potentially available for division as between all claimants, including the surviving spouse or partner. Possibly, the surviving spouse or partner should even have the ‘paramount’ claim, as they do under the Family Protection Act. Section 88(2) could then be removed. This would mean that there would be consistency with the anti-avoidance scheme, as a surviving spouse or partner would be no worse off than other gratuitous transferees of the deceased’s property.
This proposal does involve quite a major reform of the Property (Relationships) Act. Many of the issues involved are outside the scope of this paper and would require much more careful attention than I have given them here. However, these larger questions could be considered by the Law Commission in its current, wide ranging review of the Property (Relationships) Act.
How to Deal with Different Methods of Passing Property
It is a common theme that assets that were available to the deceased immediately before death should be treated differently from those which were disposed of during the deceased’s lifetime. In both England and New South Wales, there are minimal jurisdictional limitations in respect of property passing upon or after the deceased’s death. The fact that the property does not vest absolutely in another person until after the deceased’s death means that the operation of these provisions will not undermine certainty of title. On the other hand, reopening transactions that occurred during the deceased’s lifetime might have much greater ramifications and therefore the discretion should be more limited by a requirement to prove intent to defeat a claim and possibly by a time limit.
I agree and consider New Zealand should adopt a similar split approach, as was also suggested by the Law Commission. However, I consider that property not brought into the estate as the result of an omission should form a third category. In New South Wales, it is parcelled in with property that passes upon death. I believe that there are good reasons why this category should be treated differently. This will be explained in greater detail below.
A: Property that passes upon or after the death of the deceased
This category will include donationes mortis causa, superannuation schemes, life insurance policies and contracts to leave property by will. Property passing by these methods should be available for provision at the discretion of the court, without any further jurisdictional requirements.
A donatio mortis causa is a conditional gift made in contemplation of death. Property in the gift passes upon the death of the deceased, so it does not form part of the deceased’s estate. Nor is it an inter vivos transaction. Donationes in New Zealand are already deemed to be part of the deceased’s estate for the purposes of the Family Protection Act.140 If anti-avoidance measures are inserted, this provision should be abolished and donationes should be dealt with in the same way as all other property that passes upon the death of the deceased.
Superannuation schemes and life insurance policies
Most life insurance policies and some superannuation schemes permit the holder to nominate a person to receive the fund upon their death. The money ‘passes’ upon the deceased’s death, but is not a part of the estate because the deceased did not own the property. In New Zealand, KiwiSaver does not operate in this way because it directs the funds to be paid into the contributor’s estate upon their death.141 Nevertheless, there are numerous private superannuation schemes that operate in the traditional way and could therefore be used as an avoidance mechanism. Although superannuation entitlements are not as significant an asset as they are in Australia, there is no reason to exclude them from the ambit of the anti-avoidance provisions.
In New South Wales, both nominating and failing to nominate a beneficiary constitutes a ‘relevant property transaction’. In contrast, the English provisions only catch ‘statutory nominations’, which has the curious result of making public superannuation schemes available for provision but not private ones. Money paid out under a life insurance policy is also not available to meet family provision claims. I propose that, in line with the New South Wales approach, both money paid out under a life insurance policy or a superannuation scheme should be available to meet family provision claims, provided the deceased had the power to nominate a beneficiary.
Contracts to leave property by will
Contracts to leave property by will are rare in New Zealand, probably because their efficacy as a will substitute is uncertain. It is a complicated issue involving priority disputes as between family protection claimants, testamentary promise claimants and those with a contractual claim.142 The current position appears to be that where a contract has not been fulfilled, the contracting party has a legal claim for breach of contract which then supersedes the moral claim for family protection.143 The contracting party is a creditor of the estate, but family protection orders are paid out only after the estate’s liabilities have been discharged. However, where the contract is performed and property is left by will, the contracting party is merely another beneficiary of the estate and their entitlement
140 Family Protection Act 1955, s 2(5).
141 KiwiSaver Act 2006, Schedule 1, cl 9.
142 The Law Reform (Testamentary Promises) Act 1949 enforces a deceased’s promise to make testamentary provision in reward for services provided to them during their lifetime.
143 Schaefer v Schuhmann [1972] AC 572; McCormack v Foley [1983] NZLR 57.
is susceptible to a family protection claim.144 Further complicating the matter is recent case law that suggests that testamentary promises enjoy priority over a contractual claim, regardless of whether or not the contract was performed.145 But family protection claims are on at least equal footing with testamentary promises.146 The result is a paradoxical hierarchy of uncertainty.
I think there is a strong argument that even where a contract to leave property by will is unperformed and constitutes a liability of the estate, it should not automatically override the Family Protection Act. Where the contract was made for less than full valuable consideration, it is clear that the debt on the estate does not correspond to a benefit that was received. Thus, there is an element of ‘unjustifiable bounty’.147 I consider that property subject to a such a contract, whether performed or not, should be available for provision at the discretion of the court, so that the court can choose between the competing claims, taking into account any consideration provided under the contract. This is in line with the New South Wales approach and the Law Commission’s recommendations.
B: Property not brought into the estate as a result of an omission
Property that was not brought into the estate because of an omission to exercise a power of appointment or to sever a joint tenancy is different from other property that passes upon or after the deceased’s death. This is because such an omission does not tend change how property is held upon the death of the deceased, rather, the beneficiary of such an arrangement retains the same entitlement as they always had, albeit with the added benefit that the property can no longer be removed in favour of the deceased. Thus, expectations in relation to the property are likely to be stronger and longer standing.
Correspondingly, the justification for interfering with such arrangements is weaker. A higher standard should apply. This was recognised by the England and Wales Law Commission when they formulated their approach towards joint tenancies, which unlike other property passing upon or after the death of the deceased, is not automatically a part of the estate. While it would be too onerous to prove intent in respect of an omission, perhaps an obligation to consider the reasonable expectations of the parties, the relative claims of the donees or recipients, the nature of the property and whether it might have to be sold in order to realise a claim, would suffice.
Many family homes and bank accounts in New Zealand are held by joint tenancy. At this point in the paper it is well established that joint tenancies pass by survivorship and are therefore not
144 Re Gubbins [1997] NZFLR 883; Breur v Wright [1982] 2 NZLR 77; W M Patterson Law of Family Protection and Testamentary Promises (LexisNexis NZ Wellington, 2013) at 97.
145 Bristow v Smith [2013] NZHC 2866.
146 Dillon v Public Trustee [1941] NZLR 557; Hamilton v Hamilton [2003] NZFLR 883.
147 McCormack v Foley at 73.
available to meet family provision claims. At present, applying for the division of relationship property is the only way to access joint tenancies for the purpose of making family provision orders. We have seen how this works in both Public Trust v Whyman and Horne v Public Trustee. However, this remedy is only available if the joint tenant was a spouse or partner of the deceased. While the Australian cases demonstrate that most claims regarding joint tenancies are brought by children against a surviving spouse or partner, joint tenancies as between other family members or friends are not unheard of. Thus, anti-avoidance provisions are necessary to extend the remedy to all joint tenants, regardless of their relationship to the deceased. As discussed above, it is also beneficial to limit the order against a joint tenant to the amount required to satisfy a claim. Under this approach, the daughter’s family provision entitlement in Re Williams could have been satisfied out of the property held on joint tenancy by her deceased father’s wife, without needing to prove ‘serious injustice’.
In New South Wales and in England, the deceased’s share in property held by joint tenancy is available for provision. This approach has not generated any points of difficulty. I propose that, in line with both the international positions and the Law Commission’s suggestions, the same approach to joint tenancies be adopted in New Zealand.
Reclaiming property that was the subject of an unexercised power of appointment is one possible way of recovering assets from a family trust. This method has the advantage of not being subject to a test of intention. It is also easy to identify the property against which an order could be made. The simplicity of this approach is probably why it has become the surest route for accessing trust assets in order to satisfy family provision claims in New South Wales.
In New Zealand, there is currently no way to access property that is the subject of a power of appointment for the purposes of the Family Protection Act. In Clayton v Clayton, a power of appointment was held to amount to ‘property’ within the meaning of the Property (Relationships) Act.148 However, it unlikely that a similar argument would be successful under the Family Protection Act because the fact that Mr Clayton could still exercise the power was crucial to its characterisation as ‘property’. A deceased person cannot exercise a power of appointment, thus there is little chance of success.
I propose that we adopt the New South Wales approach towards powers of appointment. The case law shows that the term has been generously interpreted and has expanded beyond traditional conceptions of what a power of appointment is. In New South Wales, any legal ability to compel an appointment is sufficient, even if it operates indirectly or requires multiple acts.149 For example, in Wardy v Salier the deceased was one of two directors of the sole corporate trustee of a
148 Clayton v Clayton, above n 125.
149 Kavalee v Burbridge, above n 98 at 451; Stern v Sekers; Sekers v Sekers above n 104 at 59.
discretionary trust, which held a power of appointment over trust assets.150 Because the deceased was also the major shareholder of the corporate trustee, he had the power to remove the other director, thus enabling him to appoint the whole of the property to himself without objection. The court held that this amounted to a ‘power of appointment’ within the meaning of the Act.
Compare the New Zealand case of Penson v Forbes, where the deceased settled most of her assets on trust in favour of all her five children, but later removed one of her daughters as a beneficiary.151 The disinherited daughter was not well off and there was little in her mother’s estate against which to make a claim. Her claim for breach of trust also failed. However, if the court could have ordered against property which was subject of the deceased’s power of appointment, the daughter would have had a remedy. The deceased, Mrs Jack, was both settlor and trustee and had wide ranging powers to appoint trust property, to appoint and remove beneficiaries, including herself. There was also a clause permitting self-dealing. In totality, it is likely that this would amount to a power of appointment for the purpose of reclaiming property for family provision.
The New South Wales approach towards powers of appointment is consistent with the New Zealand trend towards trust busting, which prioritises substance over form and does not permit the façade of a trust to obscure where ‘de facto control’ lies.152 A wide formulation will be effective in bringing many family trusts within the ambit of the Family Protection Act, as often the settlor of these trusts is either a trustee or retains the power to appoint trust property or the power to appoint and remove trustees. However, it would not be difficult to work around this provision by requiring a minimum number of trustees. As the power would have to be exercised jointly, the deceased would not have the legal ability to reclaim the trust property, as in Finn v Fearne.153 Therefore, while this approach is the simplest way to recover trust property, it is important to also adopt alternative methods, such as reopening inter vivos dispositions into a trust. Multiple lines of attack will provide the best protection for claimants.
C: Inter vivos dispositions
As already discussed, the abolition of gift duty has made it easier, faster and less expensive to dispose of property inter vivos, either outright or into a trust. Thus, this particular loophole needs to be closed with urgency. Of the three categories discussed in this paper, reopening inter vivos transactions will have the greatest impact on settled property rights and certainty of title. In an attempt to limit this impact, both England and New South Wales have strict jurisdictional requirements in respect of inter vivos transactions. Both require that the disposition was made with the intention of defeating a family provision claim. In England, the jurisdiction is limited to
150 Wardy v Salier, above n 102.
151 Penson v Forbes, above n 33.
152 Clayton v Clayton, above n 125 at [75], [86] and [125].
153 Finn v Fearne, above n 105.
dispositions made within six years before the deceased’s death. In New South Wales, the limit is three years.
However, considering the prevalence of trusts in New Zealand and the fact that those trusts are often established early in life, imposing a jurisdictional time limit would severely handicap the efficacy of the anti-avoidance provisions in New Zealand. The low volume of litigation in respect to inter vivos dispositions in New South Wales and England also indicates that the time limits are too restrictive.154 I propose that in New Zealand, the jurisdiction to reopen inter vivos dispositions should not be temporally limited. This is in line with s 44 and s 47 of the Property (Relationships) Act, which do not impose time limits in respect of transactions that can be set aside because they were made for the purpose of defeating a creditor’s claim or a spouse or partner’s rights to relationship property. The Law Commission in its proposed Succession (Amendment) Act also recognised this as being the appropriate option in the New Zealand climate.
The onus of proving that the deceased disposed of the property with the intention of defeating a family provision claim will serve as an adequate safeguard. The question is what such an ‘intention’ should entail. Because the international examples have not been widely litigated, no particular meaning or test for intention has emerged. Fortunately, there is existing jurisprudence in New Zealand that could be adopted for this purpose.
Under s 44 of the Property (Relationships) Act, the court can set aside any disposition of property that was made ‘in order to’ defeat a person’s claim or rights in respect of relationship property. Similarly, under the Property Law Act 2007 the court can set aside dispositions made by a debtor ‘with the intent’ of prejudicing a creditor.155 Although these powers appear in different contexts, the courts have adopted the same approach towards what amounts to ‘intent’ in both situations. There is therefore a strong argument that the same test should apply in a family protection context. The leading case is Regal Castings v Lightbody, which equates intention with foresight of consequences or foresight of risk.156 Defeating a claim need not be the primary motivator, so long as it is foreseen and “the risk of cheating someone else is accepted, perhaps regretfully, as a necessary incident”.157
The other option is to adopt a motive based test for intention, under which the deceased must have conscious desire to defeat a claim. That desire must be the aim or object of the relevant transaction. Pursuant to Coles v Coles, this was previously the prevailing test for intention under s 44 of the
154 In Ramsay v Schiller, above n 111, the property was disposed 3 years and 10 months prior to the deceased’s death, so was not available for provision.
155 Section 348.
156 Regal Castings v Lightbody [2009] 2 NZLR 433; [2008] NZSC 87.
157 At [53], citing with approval Swann v Secureland Mortgage Investment Nominees Ltd [1992] 2 NZLR 144 at 147.
Property (Relationships) Act.158 However, it was later rejected for being too difficult to prove and superseded by the Regal Castings formulation.159
I consider that the lesser standard for intention should be adopted, particularly given the difficulties involved in proving the intention of a deceased person. It will also bring the new anti-avoidance provisions in line with the anti-avoidance measures already in place in other areas of New Zealand law.
Consider the case of Beaven v Beaven, where George and Ann Beaven transferred the family farm into trust in order to prevent any family protection claim in respect of the farm:160
The evidence of all five is that the focus of these meetings was to devise a method by which the acquisition of the remaining two thirds of the land and farming business could be acquired by Ross [George and Ann’s son], secure from challenge by his two brothers and two sisters after George and Ann died.
Although the case was actually about the division of relationship property, it is a useful example to use for the purposes of this paper. At present, there is no prospect that the farm could be used to satisfy a family protection claim. However, this transaction would be easily caught under the proposed provisions, as an inter vivos disposition made with the intention of defeating a provision claim. It seems that both a motive and knowledge based test for intention would be satisfied on these facts. The trust property could then be used to satisfy a family protection claim. Considering that the transaction occurred in 2000, and George and Ann were still alive at the time of proceedings in October 2014, it also illustrates the importance of not imposing a time limit in respect of these provisions.
It is also helpful to demonstrate how the situation in Re Henderson could have been resolved using the proposed provisions.161 In that case, a deceased had settled a trust in favour of her son but not her daughter. Heron J stated:162
I have not seen a family trust used in circumstances such as these. The only satisfactory inference to be drawn is that it was designed, if it could, to defeat family protection claims.
It is therefore probable that had the option been available, Heron J would have made a family provision order out of the trust assets, because they were disposed of with the intention of defeating a claim. In this case, because the deceased had not yet completed a debt forgiveness program, the debt owed by the trust was an asset of her estate which could be used to provide for the daughter. Heron J cancelled the deed of forgiveness in the deceased’s will, but it was still not enough to fully satisfy the daughter’s family provision entitlement.
158 Coles v Coles [1987] NZCA 196; (1987) 4 NZFLR 621.
159 Ryan v Unkovich [2009] NZHC 2627; [2010] 1 NZLR 434 at [33].
160 Beaven v Beaven, above n 34 at [27].
161 Re Henderson, above n 30.
162 At 10.
Thus, allowing the court to order against the recipient of an inter vivos disposition will prevent many instances of avoidance under the Family Protection Act. Both dispositions into trust and outright gifts will be covered. Where the recipient of a disposition was a trustee, the claim will be limited to whatever assets remain held on trust, as it would not be equitable to order as against the trustee personally. If the trust assets have been distributed or resettled, it may still be possible to claim against the new trust assets or a beneficiary, if it can be proven that the distribution or resettlement was made with the intent of defeating a family protection claim. This is the benefit of including the subsequent transferee within the anti-avoidance scheme.
Conclusions: A balanced solution
This Chapter outlines the main features of what is hoped will be an effective, practicable and balanced anti-avoidance scheme for New Zealand. These proposals have drawn heavily on the international examples and in particular on the Succession Act 2006 (NSW) as a template for change. Certain features have been adapted to suit New Zealand’s unique demands. In particular, the prevalence of trusts and joint tenancies, the death provisions in the Property (Relationships) Act and the repeal of gift duty have all influenced the overall shape of the scheme.
Under the proposed provisions, different mechanisms of passing property will be treated according to how invasive it would be to reclaim property in that category. It is hoped that in implementing different levels of sensitivity, the provisions will be effective but not overly unsettling. The scheme provides options for accessing trust property, severing joint tenancies and reclaiming inter vivos gifts and dispositions. In targeting these popular methods of conveying property, the scheme should be able to prevent most instances of avoidance in New Zealand. However, setting a higher jurisdictional bar for invoking the anti-avoidance measures should also ensure that interference does not become too commonplace. Finally, providing defences for donees and recipients of property should prevent fresh injustices from being created.
Conclusion
The Family Protection Act is in need of fortification. Significant gaps have begun to appear in its protective framework, leaving vulnerable family members with nowhere to go. This paper has set out to draw attention to these legislative loopholes by illustrating how will substitutes can be used to bypass the operation of the Act. It has also set out to establish that these loopholes ought to be closed in order to uphold the integrity of the Act and to protect vulnerable family members.
Drawing on international examples, this paper has endeavoured to find a practicable and balanced solution to avoidance. In doing so, care has been taken to ensure consistency with other areas of succession law. However, these proposals would be better considered as part of a comprehensive reform so that consistent and well thought-out solutions can be crafted. Short of a comprehensive consideration, in the interim, strengthening measures to better give effect to familial obligations should be a priority.
Bibliography
Allardice v Allardice (1910) 29 NZLR 959.
Auckland City Mission v Brown [2002] NZCA 33; [2002] 2 NZLR 650.
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Barker v Magee [2001] NSWSC 563.
Bosch v Perpetual Trustee Co Ltd [1938] AC 463 (PC). Cameron v Hills NSWSC BC8901539, 26 October 1989. Carr v Douglas [2016] NSWSC 854.
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Charnock v Handley [2011] NSWSC 1408.
Chu v Ngar [2015] NSWSC 1505.
Finn v Fearne [1999] NSWSC 1041.
Gregory v Hudson (No 2) (1997) ACL Rep 395 NSW 34.
Hughes v National Trustees Executors & Agency Co of Australasia Ltd [1979] HCA 2; (1979) 143 CLR 134
Kavalee v Burbridge (1998) 43 NSWLR 42.
Kennedy v Jvancich [2003] NSWSC 441.
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Legislation
Business Law Reform Bill 2003 (56-2).
Administration Act 1969. Destitute Persons Act 1894. English Laws Act 1858.
Estate Duty Abolition Act 1993. Family Protection Act 1955.
KiwiSaver Act 2006.
Law Reform (Testamentary Promises) Act 1949. Limitation of Power of Disposition Bill 1986.
Limitation of Power of Disposition by Will Bill 1987. Property (Relationships) Act 1976.
Property Law Act 2007.
Taxation (Tax Administration and Remedial Matters) Act 2011. Testator's Family Maintenance Act 1900.
Testator's Family Provision Out of Estate Bill 1898.
Inheritance (Provision for Family and Dependants) Act 1975 (UK). Inheritance and Trustees' Powers Act 2014 (UK).
Law Reform (Succession) Act 1995 (UK). Matrimonial Proceedings and Property Act 1970 (UK). Wills Act 1837 (UK) 7 Will 4 & 1 Vict c 26.
Testator's Family Maintenance and Guardianship of Infants Act 1916 (NSW).
Books
John de Groot and Bruce Nickel Family Provision in Australia (Lexis Nexis Butterworths, Australia, 2007).
Grant Duncan Society and Politics: New Zealand Social Policy (2nd ed, Pearson Education New Zealand, Auckland, 2004).
Anthony R. Mellows The Law of Succession (2nd ed, Butterworths, London, 1973).
R.D. Oughton Tyler's Family Provision (2nd ed, Professional Books Ltd, Abingdon, 1984).
W M Patterson Law of Family Protection and Testamentary Promises (LexisNexis NZ Wellington, 2013). Nazreen Pearce Inheritance Claims and Challenges (Callow Publishing, London, 2004).
Nicola Peart and Prue Vines "Will-Substitutes in New Zealand and Australia" in A Braun and A Rothel (eds)
Passing Wealth on Death: Will-Substitutes in Comparative Perspective, (Hart Publishing, Oxford, 2016). Sidney Ross Inheritance Act Claims (3rd ed, Sweet & Maxwell, London, 2011).
E.L.G Tyler Family Provision (Butterworths, London, 1971).
Journal Articles
Rosalind Artherton "New Zealand's Testator's Family Maintenance Act of 1900 - The Stouts, the Women's Movement and Political Compromise" [1990] OtaLawRw 2; (1990) 7 Otago LR 202.
J Caldwell "Family Protection Claims by Adult Children, What is Going on?" (2008) 6 NZFLJ 4.
J Caldwell "Where There's A Will... Family Protection Claims and the Court of Appeal" (2003) 4 BFLJ 155.
Rosalind Croucher "Law Reform as Personalities, Politics and Pragmatics - The Family Provision Act 1982 (NSW): A Case Study" (2007) 11 Aust J Leg Hist 1.
Hon D A M Graham "The Minister of Justice's opening speech" (1995) 25 VUWLR 3. L McKay "Historical Aspects of the Estate Tax" (1978) 8 NZULR 1.
Charles McLelland "Fifty Years of Equity in New South Wales - a Short Survey" (1951) 25 ALJ 344.
Nicola Peart "New Zealand's Succession Law: Subverting Reasonable Expectations" (2008) 37 C.L.W.R 356.
Richard Sutton and Nicola Peart "Testamentary Claims by Adult Children - The Agony of the "Wise and Just Testator"" [2003] OtaLawRw 6; (2003) 10 Otago LR 385.
Theses
Mary Foley "The Right of Independent Adult Children to Receive Testamentary Provision: A Statutory Interpretation and Philosophical Analysis of the New Zealand Position" (PhD Thesis, University of Otago, 2011).
Reports
England and Wales Law Commission Family Property Law (EWLC WP42, 1972).
England and Wales Law Commission Intestacy and Family Provision Claims on Death (EWLC CP191, 2011).
England and Wales Law Commission Second Report on Family Property: Family Provision on Death
(EWLC R61, 1974).
Law Commission Review of Trust Law in New Zealand: Introductory Issues Paper (NZLC IP19, 2009).
Law Commission Some Issues with the Law of Trusts in New Zealand: Review of the Law of Trusts Second Paper (NZLC IP20, 2010).
Law Commission Succession Law: A Succcession (Adjustment) Act (NZLC R39, 1997). Law Commission Succession Law: Testamentary Claims (NZLC PP24, 1996).
National Committee for Uniform Succession Laws Family Provision (QLRC MP28, 1997). National Committee for Uniform Succession Laws Family Provision (QLRC R58, 2004).
New South Wales Law Reform Commission Testator's Family Maintenance and Guardianship of Infants Act 1916 (NSWLRC WP86, 1974).
Other
W M Patterson "When is a Trust a Trust?" (paper presented at the Legal Research Foundation Seminar "A Modern Law of Trusts", Auckland, 28 August 2009).
Appendix 2: The Succession Act 2006 (NSW)
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URL: http://www.nzlii.org/nz/journals/UOtaLawTD/2016/30.html
