Estate Planning Tasmania News

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1 Estate Planning Tasmania News Issue 47 April 2015 Case Note Horvat Obligations of an Executor A recent Victorian case, Horvat, highlights the fiduciary obligations of an Executor to act in the best interests of beneficiaries to achieve the best price for a property owned by an estate. In Horvat, the Executor was instructed to sell the deceased s home. The Inventory of Assets and Liabilities of the estate filed with the Supreme Court recorded the value of the home at $290, The Executor sought an appraisal from a local real estate agent. The appraisal indicated the property was worth between $290, and $300, Importantly, the Executor did not obtain a valuation of the property. Following this appraisal, the Executor sold the property for $290, by private sale. At hearing, the market value of the property was accepted to be $325, In selling the property at $290,000.00, it returned approximately $25, to the estate less than if it had been sold at auction at market value or sold at a private sale with a sale price reflecting the true value. By failing to obtain a valuation of the property or selling the property by auction at market

2 value, the Executor failed to take all reasonable steps to obtain the best price on realisation of the estate s asset. Doing this amounted to a breach of the Executor s fiduciary duties to the beneficiaries of the estate to act in their best interests. The key points for Executors are: 1. prudent Executors should obtain good legal advice about how to act; 2. prudent Executors should obtain a valuation of real property where the real property is to be sold [real property is any form of real estate]; and 3. the duty of an Executor is to act in the best interests of the beneficiaries and that duty includes obtaining the best price reasonably obtainable for estate property. Kate Moss Jacquie Goodwin The Importance of Disposing of Chattel Items in a Way that Avoids Disputes Disputes over chattels are frequent. The death of someone often brings out challenges about who gets what amongst the objects available to be distributed. Doing this process well as part of your Estate Planning is an important social as well as legal issue, and lowers the risk of tensions in your family once you have died. In this issue we use the estate of Martin Luther King junior, the famous civil rights identity in the United States, to illustrate the point. Martin Luther King junior died on 4 April 1968 and the dispute over the objects (chattels) in his estate continues, as reported in The Age newspaper on 14 January This dispute highlights the importance of dealing with important chattel items in your Will, and what can happen if you do not. It was reported in The Age that more than 45 years after Dr King s death, his bible, and the 1964 Nobel Peace Prize Medal, remain the subject matter of litigation. The objects are said to be worth up to $US10 million, so it is a larger estate, but nevertheless strong sentimental value and attachment to family objects can lead to similar disputes. This is why having a Will that specifically deals with important chattel items in the way that you wish is essential to reducing the risk of disputes and possible litigation between the Executors and beneficiaries. In order to give some clarity to the position about some aspects of this area of the law, we note the following: 1. Gifts of Items that No Longer Exist at the Date of Your Death Problems can arise when an item that is the subject of a specific gift no longer exists, has changed significantly in nature, or is no longer owned by the willmaker, at the date of their death. Where this occurs, the gift is said to have adeemed. If a specific gift is destroyed, and that gift was insured as a general rule, the beneficiary of that gift is not entitled to the insurance funds in lieu of receiving the specific gift itself. The insurance funds instead usually become part of the Page 2

3 residuary estate or perhaps may fall under a special insurance claim clause. Another example is of a specific gift of shares in a particular company (X Company Pty Ltd), that has subsequently been taken over by another company (Y Company Pty Ltd). While changes in name and form only will not substantially change the nature of the specific gift, if the change is substantial the gift will be adeemed (for example, where the two companies are of a different nature: Re Slater [1907] 1 CH 665). Further problems arise where the provisions of the Will dealing with the residuary estate are not drafted so as to catch all of the willmaker's assets. Assets that do not fall within the asset pool to be distributed as part of the willmaker's residuary estate as defined in the Will, may be distributed under the relevant Intestacy provisions [i.e. as if there was no Will]. 2. List of Items that are Not Testamentary Documents Documents external to a Will, such as a list, purporting to leave items to certain beneficiaries are also problematic. A list must be specifically referenced in the Will in order to be incorporated into the Will and admitted to Probate. Relying on the principle of incorporation by reference can be risky, and requires careful drafting of the incorporating provision to ensure that the document referenced is described with certainty. Further, in the time after the Will is executed, a willmaker may be tempted to amend the list or even create a new list. These changes would not be effective, resulting in the willmaker s true wishes for their personal property not being followed after their death. Whilst the informal Wills provisions of the Wills Act 2008 (Tasmania) could in some circumstances be used to have the changed documents admitted to Probate as a Codicil, that can be a costly, time consuming and uncertain process. Willmakers may consider the use of non-binding memorandums of their wishes about what is to happen to their property, such as a letter or other document. These documents, which are not testamentary in nature, are more flexible and can be amended and changed over time to reflect the willmaker s most current wishes, but are reliant on the good behaviour of the beneficiaries rather than the law. 3. Recording of Gifts Made During Life It can be important to record gifts of personal property that you make during your life, especially with regard to items of significant sentimental or monetary value. Often, these gifts made during life are recorded in the Will in the form of acknowledgments that they are owned by someone else. The purpose of doing so is to demonstrate, if it is ever questioned, that a willmaker understood how they were distributing their assets. An acknowledgement like this sets out that although the Willmaker remains in possession of an object, it has in fact and law been the subject matter of a gift to someone else even though possession has been retained. Acknowledgements also set the tone and circumstance of distribution and give the Will context, which assists in avoiding disputes after death. 4. Executor s Obligations It is the duty of an Executor to collect all assets of the estate, and to preserve them Page 3

4 until distribution. The duty to preserve can include a duty to secure and insure the items, and to maintain the items and their value. 5. Ways to Avoid Disputes To minimise the risk of a dispute arising after your death, it is critical that a willmaker seeks proper Estate Planning advice. If you would like any further information, or have any concerns or questions in this area, please contact us by telephone on or by Peter Worrall peter.worrall@pwl.com.au Sam McCullough sam.mccullough@pwl.com.au Kate Hanslow kate.hanslow@pwl.com.au Kate Moss kate.moss@pwl.com.au Kimberley Martin kimberley.martin@pwl.com.au Peter Worrall Director Jacquie Goodwin Is Executor s Commission paid to an Executor for the pain and trouble that they have endured as an Executor assessable income? A recent ATO Interpretative Decision (ATO ID 2014/44) has confirmed that Executor s Commission paid to a non-professional Executor for the pain and trouble that they have endured as an Executor is assessable income. The payment of Executor s Commission to non-professional Executors is payment included within section 15-2(1) of the Income Tax Assessment Act 1997 (Commonwealth) ( the Act ), as it is a benefit provided for the services rendered by the Executor of the estate (ATO ID 2014/44): Other characteristics of income that have evolved from case law include receipts that: are earned are expected are relied upon, and have an element of periodicity, recurrence or regularity. The taxpayer may be said to have earned the Executor's Commission as it related directly to the services they performed. It is not clear, however, that the taxpayer could be said to have expected or relied upon the payment nor has the payment any element of recurrence or regularity. In these circumstances it is arguable whether the payment is income according to ordinary concepts and assessable under section 6-5 of the ITAA It follows that commission paid to a non-professional Executor for services rendered by them as an Executor is included in the Executor s assessable income under section 6-10 of the Act, as the commission is assessable income of the taxpayer under section 15-2(1) of the Page 4

5 Act (ATO ID 2014/44): The courts have consistently indicated that paragraph 26(e) of the ITAA 1936 is not limited to employment situations and that it can apply to payments for services rendered in the absence of an employer/employee relationship (FC of T v. Cooke and Sherden 80 ATC 4140; (1980) 10 ATR 696, FC of T v. Holmes 95 ATC 4476; (1995) 31 ATR 71; and Smith v. Federal of Commissioner of Taxation (1987) 164 CLR 513; 87 ATC 4883; (1987) 19 ATR 274). Accordingly, a commission paid to an executor or trustee of a deceased estate in respect of or for or in relation directly or indirectly to services rendered by them as executor or trustee would be included in the taxpayer's assessable income under section 6-10 of the ITAA 1997 as the commission is assessable income of the taxpayer under subsection 15-2(1) of the ITAA Non-professional Executors who wish to claim Executor s Commission should consider these provisions when making a final decision about whether they wish to peruse their claim for the pain and trouble that they have endured when acting as an Executor. Consideration may also be made to the timing of payment of Executor s Commission, or whether instalments of Executor s Commission may be paid throughout the administration of the estate, as agreed with the beneficiaries of the estate. A Will can be drafted (if the Willmaker wishes to achieve a different result) to ensure that an amount received by a non-professional Executor can be received in a tax-free form. For more information on this, please contact us by telephone on or by Peter Worrall peter.worrall@pwl.com.au Kate Moss kate.moss@pwl.com.au Kimberley Martin kimberley.martin@pwl.com.au This is particularly important where the Executor is a family member or friend. Being an Executor is not an easy task, and may properly be considered a burden. Consideration should be given to any remuneration you as a Willmaker wish your Executor to receive for the pains and troubles they endure as an Executor. Please contact us by telephone on or by Peter Worrall peter.worrall@pwl.com.au, Kate Moss kate.moss@pwl.com.au or Kimberley Martin kimberley.martin@pwl.com.au, if you wish to discuss claiming Executor s Commission or the drafting of appropriate and effective provisions in Wills to benefit an Executor. Kate Moss Page 5

6 Our Lawyers and s Peter Worrall Director Sam McCullough Director Kate Hanslow Trevor McKenna Senior Head of Family Law Kate Moss Maggie Keeling Todd Riley Hayley Mitchell Kimberley Martin Harpreet Gill Lawyer Bridget Caplice Silas Hoon Jacquie Goodwin Mardi Rhoden Further Information Our Website: Contributions: Caution: Subscribe or unsubscribe: A wealth of information in relation to estate and commercial matters can be found at our website Contributions and suggestions from Estate Planning News readers are always appreciated. us at mardi.rhoden@pwl.com.au This newsletter contains material for general educational purposes and is not designed to be advice to any particular person in relation to 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. To introduce or subscribe a client or colleague to the subscription list for Estate Planning Tasmania News, or to unsubscribe from this service, please us at info@pwl.com.au Page 6