Worrall Moss Martin News

Issue 25,  February 2021

If You Take Care of Me, You Will Get the House When I Die ...
When Are Testamentary Promises Binding?

When a person says that they will leave you something when they die, they usually make provision for that in their Will.   But what happens when you have been promised something and discover after they die that the Will does not reflect those promises?   Or what happens if the person who promised to leave you some of their assets did so on the condition of you doing, or not doing, something for them? 

The usual remedy for a person who has been left out of an estate, or feels that they are entitled to more, is a family provision claim on the estate.   But what if you do not qualify as an eligible person to make a family provision claim, and you have already upheld your end of an agreement, only to be left with nothing?

The recent New South Wales case of Moore & Aubusson [2020] NSWSC 1466 answers this question and indicates that in certain circumstances, a person’s estate can be held accountable for promises made by the deceased, where another party has carried out their side of an agreement to their detriment.

The Facts:   The deceased was an elderly widow, who developed a relationship with her neighbours in 2001.   They became particularly close after the death of her husband in 2002.   The deceased had no children, and her siblings could not care for her.      

In 2004, the deceased promised to leave the neighbours two adjacent properties worth approximately $9,000,000.00, on the condition that they look after the deceased for the rest of her life and that they would not undertake any redevelopment of their neighbouring property that would ruin the deceased’s view of the Sydney Harbour.

The neighbours held off from renovating their property in accordance with the agreement, and cared for the deceased until 2015 when she died.   While administering her estate, they discovered that the deceased had left the entirety of her estate to her siblings, and that the neighbours were only to receive a gift of $25,000.00.      
The neighbours attempted to reason with the deceased’s siblings for a “redistribution” of the estate, but were unsuccessful in convincing them to give up the $9,000,000.00 they were promised (which was a majority portion of the $11,000,000.00 total estate).

The neighbours then commenced proceedings in the New South Wales Supreme Court, arguing that:
  • the promise made by the deceased amounted to an oral contract between them; or
  • the promise made by the deceased should be honoured by her estate (as the neighbours had relied upon it to their detriment); or
  • that a secret trust had been created between the deceased and the neighbours, with the properties being held for the benefit of the neighbours (although this argument was not pursued at trial).
The Law - Oral Contract:   An oral contract may be binding on the parties, and it is not necessary for the language used to be precise (or for all the contractual details to be considered or agreed) in order for it to be valid and binding.   However, the terms of a purported contractual arrangement must be sufficiently certain to establish a claim in contract.

The Law - Promissory Estoppel:   In simple terms, the doctrine of promissory estoppel applies where:
  • person A promises something to person B, in exchange for person B doing something;
  • person B then performs their part of the agreement;
  • person A does not fulfil their promise to person B, to person B’s detriment; and
  • person B can then apply to the Court to compel person A to adhere to the previous agreement if it is unconscionable not to fulfil the agreement.
Whether the doctrine of promissory estoppel can be relied on by a party to enforce a promise made to them will depend on many factors, including whether both parties have clearly identified the terms and conditions of the agreement, whether one party has performed their part of the agreement, and what detriment (if any) has been suffered.

The Decision:   Despite conflicting evidence in the case, the Court determined that the ‘agreement’:
  • did not amount to an oral contract, because the terms of the purported contractual arrangement were not disclosed with the sufficient degree of certainty; but
  • did amount to a promise capable of being enforced, because there was a sufficiently clear representation (promise) made between the parties to the effect that, if the neighbours looked after her, so that the deceased could stay in her own home for as long as possible, then the deceased would leave the properties to them.   The elements of proprietary estoppel were established by the plaintiffs as they demonstrated that they had relied on the deceased’s representations, to their detriment, and the Court determined that in all the circumstances of this case, it was unconscionable for the deceased to resile from the testamentary promises.   The Court emphasised that not only did the neighbours fulfil their obligations under the agreement, they also were prevented from socialising with friends and family, and were not able to visit family in the Netherlands.
The Court ordered that the two properties be transferred to the neighbours as tenants in common, fulfilling the original agreement.

Relevance in Tasmania:   Promissory estoppel is a legal concept that applies in all states and is a relevant factor to consider when making arrangements with friends or family about gifting certain assets.   If a similar situation occurred in Tasmania, it is likely that a Court would similarly rule in favour of a wronged party who has acted on the promise of another party, to their detriment.

How Can We Help?  It is not uncommon for people to make promises to neighbours, friends, or family that they do not think will have lasting consequences or will be enforceable after they die.   If there are any ongoing agreements or arrangements to gift assets to another party in exchange for some promise from the other party to do something in return, the doctrine of promissory estoppel is an important factor to contemplate to minimise the risk of costly estate litigation in the administration of an estate.

The outcome in Moore v Aubusson could have been mitigated (or possibly avoided) if the deceased had sought advice about the agreement she made with her neighbours, in relation to how this could affect her Will and the distribution of her estate.

Worrall Moss Martin Lawyers has specialist skills and experience in Estate Planning as well as Estate Litigation matters, and can help you with any enquiries.

Please contact Kate MossRobert Meredith or Eve Hickey if you or your client need expert advice and guidance about the merits of any potential or actual, claims against an estate.

Alternatively, please contact our estate planning lawyers, Kimberley Martin, Casey Goodman or Ashleigh Furminger if you, or your client, need expert advice and guidance about preparing a comprehensive estate plan, to mitigate the risk against any potential promissory estoppel claims against your estate.
‘Disability, Death, Separation and Divorce in Business’ ... Are You Prepared?

Finding a crystal ball that predicts the future is not an easy task.   Whilst the search continues, there are some things in life that are not ‘if’ scenarios but ‘when’ scenarios (the major one being death) and there are circumstances that are so common, that a crystal ball is not needed to realise the importance of considering the risk of those circumstances and the devastating effect they might have on your estate planning (the top contenders being disability, separation and divorce).   

In Issue 21, ‘Failing to Plan is Planning to Fail: Business Succession Planning’ we looked at the importance of business succession planning to maximise the chance of a successful transition.   In this issue, we discuss two more ‘what if’ events that should be considered.

Disability and Death:   The disability or death of the business owner (or controller) are key issues that must be addressed and planned for in the succession planning process.     

Specific questions to be addressed when contemplating the ‘what if’ of death or disability include:

  • who can take on the primary roles in the business?  
  • who knows the critical information about the business?  
  • how will the medical expenses and ongoing care of the business owner (or controller) be funded if they are unable to work in the same capacity (or at all)?
  • how will the value of the business be maintained if it is sold (either to a third party or a business partner)?
  • how will ‘fairness’ in the distribution of assets to the next generation be achieved?  
  • what are the expectations of family members (including the surviving life partner or spouse, their children who are involved in the business and the children who are not)?

It is not just the business owner’s (or controller’s) death or disability that should be planned for.   The premature death or disability of any person who is a party to the succession plan can have a drastic and detrimental impact on the business if it has not been contemplated or adequately planned for.   Too often in succession and estate planning, there is one option provided for: the usual case being ‘the business will pass to Person B on the death of Person A’.   But what if Person B dies first?  

Potential options/strategies that can assist with planning for the ‘what if’ of death or disability include:

  • the development of an operational guide to the running of the business, including key business relationships, clients, advisors, contracts, documents and day to day activities;
  • the development of a strategic plan with a description of the personal and business goals and expectations of the business owner (or controller) and each successor;
  • a training and development plan for the successor(s);
  • taking out insurance policies like total and permanent disability (TPD), death cover (life insurance) and income protection;
  • for family businesses, a distribution plan that sets out the transfer of assets during life (if applicable) and the distribution of assets on death that is discussed with all relevant family members;
  • the development of a contingency plan to provide what is to happen in the event of the disability or death of the potential ‘successor’; and
  • a buy/sell agreement that details how (and upon what terms) one business partner/shareholder can buy out the other partner’s interest in the business should specific ‘what if’ events like death or disability occur.                   

Divorce and Separation:   Despite the fact that both marriage and divorce rates are dropping, it remains the case that almost one in three first marriages will fail — on average, after 12 years.   For this reason, the divorce or separation of the business owner (or controller), their business partner and/or of their children is another key issue that must be addressed and planned for in the succession planning process.        

The impact of a divorce (or the breakdown of a de facto relationship) on a business can be disastrous, and can result in the forced sale of the business or its assets and, in the most serious cases, even result in the business becoming insolvent.   The challenge often lies in working out if each party can be provided for upon separation, without forcing the sale of any of the business assets.

Specific questions to be addressed when contemplating the ‘what if’ of divorce or separation include:

  • what non-business assets does each party have?
  • how will the business be dealt with in the event of separation or divorce of one of the business owners?
  • is it possible to provide for all parties in an equitable way?
  • are there particular ownership structures that will reduce the impact of divorce?  Who should be the Trustee?   Appointor?   Shareholder?   Should the spouse be involved?
  • is there a risk of separation or divorce that should be accounted for?   This is particularly relevant where a pre-death transfer of the business and/or assets is being contemplated.    

Potential options/strategies that can assist with planning for the ‘what if’ of divorce or separation include:

  • financial agreements that comply with the Family Law Act 1975 (Cth).   These can be put in place before, during or after a marriage or significant relationship.   If done properly, the provisions of the financial agreement can determine how the property of the parties, including business assets, is divided in the event of a separation; and
  • proper structuring of the business to reflect the personal circumstances (and contemplated ‘what if’ circumstances) of the business owner (or controller) and each family member.

How Can We Help?   If you are still looking for that crystal ball, and do not have answer to the above questions, perhaps it is time to make an appointment with one of our lawyers, Kimberley Martin, David Bailey or Casey Goodman to begin the process of securing your future, and the future of your business.

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This newsletter contains material for general educational purposes and is not designed to be advice to any particular person about their own affairs as it does not take into account the circumstances of the reader as an individual.  It is recommended that appropriate professional advice be obtained by each reader so that reliance can be taken upon that advice.

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