Agreements for Mutual Wills by TurksLegal

Agreements for Mutual Wills A PAPER BY PAUL ANDERSON AUGUST 2010

Agreements for Mutual Wills

Summary A recent WA Supreme Court decision highlights the difďŹ culties arising from mutual Wills Agreements.

Who Does This Impact? Any person contemplating making a Will.

What Action Should Be Taken? A person making a Will should consider the implications of the decision and available alternatives, eg life estates.

Contents:

TURKSLEGAL

Facts

Legal Principles

Survivorâ&#x20AC;&#x2122;s Power of Disposal During her Lifetime

Decision

Comment

Conclusion

PAPER

Agreements for Mutual Wills by Paul Anderson

The recent WA Supreme Court case of Fazari v Cosentino highlights the difﬁculties with agreements to make mutual Wills. Not infrequently, a husband and wife will make a Will in favour of each other with the ‘understanding’ that on the death of the survivor all assets will pass to the couple’s children. However, in its very nature, a Will can be changed at any time, or a new Will made. Human nature being what it is, the survivor not infrequently meets a new partner, makes a new Will in his or her favour and thereby deprives the children of their inheritance. One legal solution has been to have a contract between husband and wife (as distinct from an ‘understanding’) that Wills will be made in a certain form. Does this solve the problem?

Facts On 18 June 1997, Domenico and Immacolata, who were husband and wife, each made a Will in identical terms. Each appointed their daughter Maria as executrix and left the whole of his or her estate to the other, but if the other predeceased the testator, then the whole of his or her estate was to be divided equally between Maria and their son, Antonio, who was the only other child. Each Will contained a clause in the following terms: I declare that this Will is made on the understanding that [my spouse] will prepare and execute a Will in substantially identical terms on the same date as myself and that [his/her] Will cannot be revoked or varied save with my written consent during my lifetime and after my death only with the written consent of my executor. Domenico died and probate of his Will was granted to Maria. Domenico and Immacolata owned a number of properties as joint tenants or tenants in common, including the family home at 53 Osborne Place. All of the properties passed to Immacolata. On 21 February 2005, Immacolata executed a new Will appointing Maria and Antonio as executors and leaving the whole of her estate to Maria and Antonio equally. On 9 July 2007, Immacolata gifted 53 Osborne Place to the trustees of the A Cosentino Family Trust, a trust effectively controlled by Antonio. This gift effectively deprived Maria of any interest in the property. Maria argued that: •

Each property was held by Immacolata as constructive trustee on the terms of her 1997 Will; and

•

The transfer of 53 Osborne Place was in breach of the agreement for mutual Wills made by Domenico and Immacolata and constituted an equitable fraud on Domenico.

Immacolata’s response was that the effect of the mutual Wills agreement was not to crystalise the assets of Domenico as at the date of his death. The effect of the agreement was that she was obliged to leave her assets to Maria and Antonio equally (as distinct from assets inherited from Domenico) and in any event, the agreement did not prevent her from disposing of assets in her lifetime. Her obligation was to leave her Will unchanged and to leave her property as at the date of death in accordance with such Will. The agreement did not require Immacolata to retain any property she owned at Domenico’s death or received from his estate.

TURKSLEGAL

PAPER

Agreements for Mutual Wills by Paul Anderson

Legal Principles It was conceded that there was an agreement for mutual Wills but to what property did the agreement apply? Le Miere J of the WA Supreme Court considered the three High Court decisions which are the leading cases in this area. In Birmingham v Renfrew (1937), the High Court held that an agreement created a constructive trust that was enforceable in equity. The obligation on the survivor was a ﬂoating obligation suspended during the lifetime of the survivor which descends upon his assets at his death and crystalises into a trust. In Barns v Barns (2003), the High Court held that the subject matter of the constructive trust is the property passing to the survivor under the Will of the party ﬁrst dying. However, academic writers and the English Court of Appeal have reached different conclusions. It is primarily a question of construction to determine what property is bound by the trust. In this case, the trust attaches to the whole of Immacolata’s property and not just the property that passed to her under Domenico’s Will.

Survivor’s Power of Disposal During her Lifetime In Birmingham v Renfrew Renfrew, Dixon, J said that the survivor may deal as absolute owner during his lifetime with the property of the party first dying. A consequence is that the party may convert the property and spend the proceeds subject only to the obligation to bequeath what is left when he or she dies in accordance with the agreement. Academic writers have pointed out that there must be a limit to this ability because otherwise the entire purpose of the mutual Wills agreement could be easily defeated. Even Dixon J said: No doubt gifts and settlements, inter vivos, if calculated to defeat the intention of the compact could not be made by the survivor and his right of disposition, inter vivos, is, therefore, not unqualified. However, in another High Court case of Palmer v Bank of NSW (1975) Barwick, CJ said that the provision there under consideration was at best a promise to leave the appellants by Will the deceased’s estate at death and such a promise does not include an obligation not to part with any property during life. However, His Honour also said that such a promise does mean that no property will be disposed of in the testator’s lifetime by ‘a transaction which in substance if not in form, is testamentary.’ If the parties intend to limit the survivor’s power to use his property in his lifetime, an express contract to that effect is necessary. Barwick, CJ gave an example of a transaction that was in substance testamentary: A transaction by which the promisor has placed his property in the name of another and for the benefit of that other on his death, whilst fully retaining it for himself in his lifetime, is for the purpose in hand a testamentary transaction which would be in breach of a promise to leave by Will.

TURKSLEGAL

PAPER

Agreements for Mutual Wills by Paul Anderson

Decision Was the transfer of 53 Osborne Place testamentary in nature in the sense used by Barwick, CJ? There had been no change in the use or enjoyment of 53 Osborne Place. It had not been developed and it had not been rented. In about 2000, Immacolata began sleeping at another address but still spent the daylight hours at 53 Osborne Place. However, Immacolata had divested herself of any beneﬁcial proprietary interest in the property. Every case relied upon by Barwick, CJ involved an instance where the covenantor had retained at least an equitable life interest in the property for himself. Because Immacolata had divested herself of any proprietary beneﬁcial interest in the property, the gift of 53 Osborne Place was not testamentary in nature and was not a breach of the constructive trust imposed on the property by the mutual Wills Agreement. Immacolata was free to dispose of any property during her lifetime providing that she did not do so to defeat the intention of the mutual Wills Agreement by a transaction that is of testamentary nature.

Comment It seems a strange result that by giving away all of her interest in 53 Osborne Place, Immacolata was not in breach of the mutual Wills Agreement but if she had retained a proprietary interest she would have been in breach. The case highlights the difﬁculties in this area of balancing competing interests, namely: •

The deceased has a legitimate interest in seeing that his children ultimately receive at least a signiﬁcant part of the estate. Although not relevant in this case, the surviving spouse may remarry and make a Will in favour of the new spouse. Not infrequently, following the death of the parent, there is a falling out between the children and the new spouse, who changes his or her Will so as to deprive the children of any beneﬁt.

•

On the other hand, a total restriction on the ability of the surviving spouse to dispose of assets in his or her lifetime is not practicable. Circumstances change. For example, the surviving spouse may need to enter a nursing home or may need to sell assets because of a cash shortage.

•

Another problem is jointly held assets which pass to the survivor regardless of Will.

•

A blanket rule that all of the dividing spouse’s assets should pass in accordance with the mutual Wills Agreement on his or her death is not necessarily fair either. Surely the surviving spouse should be free to dispose of any assets acquired or accumulated after the death of the ﬁrst spouse in any manner he or she thinks ﬁt.

TURKSLEGAL

PAPER

Agreements for Mutual Wills by Paul Anderson

Conclusion The case highlights the difďŹ culties in this area and the failings of mutual Wills Agreements. One alternative is for the deceased to leave his estate to the surviving spouse for life with the remainder to his children. This can only apply to his estate and does not deal with the problem of jointly owned assets. However, at least the surviving spouse has no ability to dispose during her lifetime of property the subject of the life estate. Any injustice resulting to the surviving spouse can be dealt with through the Family Provision Act Legislation.

For more information, please contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

www.turkslegal.com.au This Pap er is cur rent at i t s d ate o f p u b l i c at i o n . Wh i l e eve r y c a re h a s b e e n t a k e n i n t h e p re p a rat i o n o f t h i s Pa p e r i t d o es not constitute legal advice and should n o t b e re l i e d u p o n fo r t h i s p u r p o s e. Sp e c i f i c l e g a l a dv i ce s h o u l d b e s o u g ht o n p a r t i c u l a r m atters. Tur ksLegal do es not accept resp on s i b i l i t y fo r a ny e r ro r s i n o r o m i s s i o n s f ro m t h i s Pa p e r. Th i s Pa p e r i s co py r i g ht a n d n o p a r t m ay b e repro duced in any for m without th e p e r m i s s i o n o f Tu r k s Le g a l . Fo r a ny e n q u i r i e s, p l e a s e co nt a c t t h e a u t h o r o f t h i s Pa p e r. ÂŠ Tu r k s Le g a l 2 01 0