Worrall Moss Martin News

Issue 20,  June 2020
Strings Attached - Can a Gift in a Will be Conditional?
To my grandson Jimmy, I leave my entire fortune, on the condition that he is married by 6:05pm on the day of his 30th birthday.   If he is not, then he receives nothing under my Will.

So begins the 1999 film The Bachelor starring Chris O’Donnell and Renée Zellweger.   If you think that sounds ridiculous, the critics certainly agreed.  The movie holds a dismal 9% rating on Rotten Tomatoes, with one of the kinder reviewers musing “A pretty lame premise for a movie”.

As terrible a movie The Bachelor turned out to be (one critic laments “From the moment the credits roll … you’ll wish you were somewhere else less painful, like perhaps getting your gums scraped by an aluminium hand shovel.”), the concept of conditional gifting by Will is not, in fact, farfetched.   It is very common for gifts to children to be conditional on their reaching adulthood, or another age, and this is entirely uncontroversial.

But what happens when Willmakers try to get a little creative?   Can unusual conditions attached to gifts in Wills be lawful?

Common “Unusual” Conditions on Testamentary Gifts:   Although it is not usual for Willmakers to want to attach conditions to gifts in their Wills, the following categories are amongst the most commonly requested by our clients:
  • Conditions of Influence:   Willmakers may wish to encourage or influence their beneficiaries to do a positive act, like attempt (or complete) tertiary education, or learn a new skill, in order to qualify to receive their gift.   If they do not do the positive act, the gift fails.
  • Conditions of Use:   Some Willmakers wish to specify that a particular gift must be used for a certain purpose.   This is more common with gifts to charitable organisations, where a Willmaker wants their gift to be used for some, but not all, of that charity’s undertakings.
What Makes a Conditional Gift Void?   In the case of Carolyn Margaret Hickin v Robyn Patricia Carroll & Ors (No 2) [2014] NSWSC 1059, the Supreme Court of New South Wales recently considered the terms of a Will which included a condition “in restraint of religion”.   The Court set out, in great detail, the relevant factors in determining whether a condition on a testamentary gift will be effective.
  • Facts:   The deceased made a Will that gifted shares in his residuary estate to each of his four children, “subject to and dependent upon them becoming baptised into the Catholic Church within a period of three months from the date of my death and such gifts are also subject to and dependent (sic) my children attending my funeral … in the event that they should neither convert to Catholicism or attend my funeral then the share given to them under this my Will shall be void”.  

    Although they each attended his funeral, none of his children, who were Jehovah’s Witnesses, converted to Catholicism.

    The Court reviewed previous cases on conditional testamentary gifts, and confirmed that a condition will be upheld, provided that it is not:

    • uncertain.   That is, the condition must describe with certainty everything that the intended recipient must do in order to receive the gift.   If the language is so vague that the test cannot be ascertained, the gift will fail;
    • impossible.   A condition is impossible to satisfy if it requires a state of facts which does not or cannot exist.   It is a strict test, and a condition is not impossible merely because its performance is highly improbable, or because it is out of the power of the Willmaker, or even out of any human power, to ensure its performance.   It is not enough that the intended recipient would not, as a matter of choice, have complied with it; or
    • contrary to public policy.   A condition will be void if it is found to be inconsistent with, or to violate “public policy”.   Conditions which require an illegal act fall within this category.   Conditions “in restraint of religion” are not presumptively against public policy.   These conditions have been upheld in Australia, provided that they are not uncertain, impossible, or do not infringe some other aspect of public policy which the courts consider should take precedence over freedom of testation (for example, interference with a parent’s exercise of parental duty over the religious instruction of their child or children).
  • Decision:   The Court concluded that the requirement for each of the deceased’s children to become a Catholic (specifically a Roman Catholic) was a condition precedent to their gift under his Will.   The condition was not void for uncertainty, was not impossible, and nor was it contrary to public policy.   As none of the children became a Roman Catholic within three months of his death, they were not entitled to a share in the deceased’s residuary estate.
United States (US) Examples:   Although US decisions are not binding in Australia, the following are examples of conditions on gifts, which have found their way into the public sphere (whether before a court, or have attracted media attention) in the US.   They are interesting, because they demonstrate some of the more novel conditions Willmakers have considered attaching to gifts:
  • A Texas man left all of his assets in trust, to be used to care for his widow, in a “home care environment” until the money ran out, after which his beneficiaries would receive the remaining assets.   Any beneficiary who tried to put the widow in a nursing home would not inherit.   Eventually, the widow’s guardian did have her placed in a nursing home, on her doctor’s recommendation, where she died several months later.   The Court ruled that by violating the condition, that beneficiary gave up his right to inherit.
  • A Tennessee man established by his Will a trust for the young daughter of his deceased son.   The Will specified that if the girl was adopted by another man, and her name changed, she would not inherit.   The grandfather seemed to be looking ahead to the possibility that the girl’s mother (his son’s widow) might remarry, and that the new stepfather would adopt the child, which did subsequently happen.   The Court held that, although it meant that “an innocent child” would lose an inheritance, it was clearly her biological grandfather’s intention (and not contrary to public policy) that, if the child were adopted out, she would no longer inherit.
  • Frank Sinatra (Ol’ Blue Eyes himself) inserted two interesting conditions into his Will: he gifted the master recording of his 1980 album Trilogy to his wife Barbara, provided that she remained married to and living with him at the time of his death; and he stipulated that anyone who contested his Will would be automatically disinherited.   Unfortunately, we will never know if these conditions – particularly the non-contention condition – would have been upheld, because any dispute that may have arisen over his Will did not make it to a court.
Non-Contention Conditions:   Sinatra’s Will is particularly relevant because we are frequently asked “Can I say in my Will that no one is allowed to challenge it?”.

In Australia, freedom of testamentary intention – your right to give away your assets as you see fit – is tempered by the application of testator’s family maintenance (or family provision) legislation, that allows eligible applicants the right to apply for further provision from a deceased estate.   Accordingly, a condition that disinherits a beneficiary if they choose to challenge a Will is void for being contrary to public policy (and legislative entitlement), and will be unenforceable.

There are however a number of creative estate planning strategies that can be put in place to limit the risk of a successful challenge to your estate, or to deter a person from making a claim.   Some of these are straightforward, simple, and relatively inexpensive, but rely on your trust in others to carry out your wishes.   Other strategies are more extreme, and can be complex and costly, however they can provide much greater protection for your assets against a potential claim.

How Can We Help?   Conditional gift provisions must be carefully drafted to be valid, and Willmakers are encouraged to obtain specific advice about the enforceability of their particular wishes.   Worrall Moss Martin Lawyers has specialist skills and experience in estate planning, estate administration and estate litigation, and can help you with any enquiries.  

Please contact our Estate Planning & Trusts lawyers
(Peter Worrall, Kimberley Martin, Casey Goodman or Ashleigh Furminger) if you, or your client, need expert advice and guidance about preparing a comprehensive estate plan, including a Will that contains a conditional gift or gifts.   Alternatively, please contact our Estate Administration lawyers (Kate Moss, Thomas Slatyer or Megan Bird) for expert advice and guidance about administering a Will that contains a conditional gift.
Wait, I Might Have to Pay Tax on a Gift?
Succession planning is not simply ‘making a Will’.   It is about planning for how, when, and in what circumstances the assets that you own are transferred to your intended beneficiaries.   It is also about ensuring that the assets and entities that you control, and the controlling roles you hold, pass to your successors in accordance with your wishes.

But in its simplest form, succession planning includes preparing for your death, and gifting your assets by Will.   There are a number of tax concessions for property received from a deceased estate, including exemptions from capital gains tax (“CGT”) and duty.   But sometimes it can be more appropriate to gift your assets during your life, in which case the question arises, “Do I have to pay tax on a gift?”.

Although gifting is an inherently generous exercise, it is important to know that taxes and other detrimental consequences may flow from your generosity.   Proper advice is important, in order to avoid some of the most common pitfalls of gifting during life.

What is a Gift?   A “gift” is a voluntary transfer of money or property, without the expectation of receiving something in return.   Property and other assets are considered to be ‘gifted’, wholly or partially, when they are transferred for less than their market value.   Some of the more common circumstances of gifts during life occur when parents provide assistance to their children, or when money or property is gifted to a trust to sit outside a person’s estate.

If something is provided in return for consideration (whether that be money, services or something else), it is less likely to be considered a gift.   It is necessary to examine the circumstances surrounding the transfer, including the consideration between the giver and the gift recipient, to ascertain if it is a true ‘gift’.

Are Gifts Taxable?   The short answer is “no”, in the sense that the recipient of a gift will not be required to include that gift as part of their taxable income, and you as the giver will not be taxed on having made a gift.   The long answer is “it depends what type of tax,” because when making a gift, you may need to consider CGT and duty.
  • Capital Gains Tax:   If you gift property that is a ‘CGT asset’ (for example, real property, shares, and certain collectible items), you are deemed to have ‘disposed’ of that asset at its market value.   If that market value is higher than what you paid to acquire the asset, then you are liable to pay CGT on that capital gain.

    There are a number of CGT exemptions that may be available.   The timing of a gift of a CGT asset may also have an impact on the amount of tax payable.  

  • Duty:   If you gift property that is ‘dutiable property’ (for example, real property, or shares in ‘land rich companies’), then the person receiving that gift is liable to pay duty.   Although duty is usually assessed as a percentage of the purchase price of an asset, a gift will attract duty calculated on the valued market rate or, for real property if no recent valuation has been made, the adjusted government valuation.

    You should exercise caution when gifting dutiable assets.   There are very few circumstances where a transaction of this nature could be exempt from duty.   It would be unfortunate for your generous gesture to end up costing thousands in unexpected duty.
Will Making a Gift Affect Your Pension?   If you are thinking about helping family members by gifting money, and you are in receipt of social security benefits (for example, the age pension), Centrelink gifting rules apply.   These rules allow individuals and couples to give up to $10,000.00 each financial year, with a limit up to $30,000.00 over five consecutive financial years.   Gifts made in excess of these limits are treated as ‘deprived assets’, and will be assessable as an asset for five years from the date of the gift.   These Centrelink gifting rules prevent people from giving away assets or income over a certain level to meet means testing eligibility requirements, or increase their current entitlements.  

There are some limited, specific types of gifts that can be made which do not attract the operation of the gifting rules.   If you receive social security benefits, and are considering gifting your assets, it is important to obtain proper advice about the effect that gift may have on your entitlements.

Treating Your Children ‘Equally’ in your Will:   If you decide to make a gift to one or more of your children during your lifetime, this gift can be accounted for and ‘equalised’ in your Will, by making a comparable gift to your other child or children, before equally dividing your remaining estate.   If it is not, it will result in your having ‘gifted’ more to some of your children than others, which is not an uncommon cause of estate disputes.

Equalising gifts to children can reduce the risk of a disgruntled child making a family maintenance claim after your death.   It can also reduce the risk of your family falling into conflict with one another, if they feel that you have not treated them fairly or equally.

Gifting and Relationship Breakdowns:   Parents choose to give gifts to their children for a variety of reasons, whether it be for reaching milestones, like university or marriage, or simply to provide ongoing financial support.   However, it is also necessary to safeguard your own, and your children’s, financial wellbeing.  

Problems may arise if you make a gift to an adult child, and that child subsequently separates from their spouse or partner.   Gifts that you made to your child may fall within the assets to be divided between your child and their spouse or partner in a Family Court financial settlement.   This is because a monetary gift can be classified as a ‘financial contribution’, or a ‘financial resource’, that your child brings to the relationship asset pool.

Financial agreements between your child and their partner can go some way toward ‘quarantining’ any gifts you give your child, but these agreements can be notoriously difficult to negotiate, enter into, and enforce.

The good news is, there are things that you, as the gift giver, can do to ‘shield’ your gifts from the Family Court.   You can even put these arrangements in place after the fact, even once the money has been gifted to (and spent by) your child.   These strategies are also part of a fully realised estate plan, because by properly documenting the assistance you have provided to your children, you can ensure that your estate will recognise and equalise those gifts.   

How Can We Help?   The simple act of gifting touches on several complex areas of law, including CGT, social security, and estate planning considerations.   We strongly recommend that you obtain legal and financial advice before making any gifts during your life, and that you consult with us about the advantages and disadvantages of various succession strategies.   This will help you to decide on whether, or when, to gift your assets in the way best suited to your personal circumstances.

Worrall Moss Martin Lawyers has specialist skills and experience in estate planning, property and commercial law, and can help you with any enquiries.   Please contact our Estate Planning lawyers (Peter Worrall, Kimberley Martin, Casey Goodman or Ashleigh Furminger) or our Property and Commercial Lawyers (Peter Worrall or David Bailey) if you, or your client, need expert advice and guidance about gifting, both during your life and after your death.   Alternatively, please contact our Estate Litigation lawyers (Robert Meredith or Eve Hickey) if you, or your client, need expert advice and guidance about the estate litigation process, including making a claim.
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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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