Headaches with adjustment clauses in wills
BY JEN MCMILLAN – AUG 01, 2021 8:20 AM AEST
Snapshot
- Adjustment clauses in wills can seem deceptively simple, but often give rise to claims.
- Take particular care where there is to be an adjustment for a CGT liability.
Lawcover sees a number of claims against solicitors who have advised executors in relation to the distribution of an estate where the will contained an adjustment clause.
The problem can be a simple calculation error, for example where an amount to be adjusted for a $10,000 inter vivos gift to one of two children is added to the share of the other child, instead of added to the overall estate for division between the children. The result is that the other child receives $20,000 more than their sibling, rather than the $10,000 more which was intended.
More complex adjustment clauses are difficult to draft with clarity, and can also pose problems for executors. Will clients often want to make equal provision for their children but would also like a particular property to pass to one of their children. To avoid problems with fluctuating values and possible ademption it is often advised that clients avoid bulky specific gifts in their wills in favour of gifts of shares of residue. If the client insists on giving bulky specific properties, then it might be recommended that an equalisation or adjustment clause be used with the aim of achieving overall equality.
Accounting for Capital Gains Tax
Drafting an adjustment clause to take into account the impact of capital gains tax (‘CGT’) on the value of an asset is far from simple. It is impossible to calculate with certainty a CGT liability from the point of view of the beneficiary’s ultimate disposal of the property, as that may be many years in the future and at a time when neither the extent of the capital gain nor the beneficiary’s income level is ascertainable. For this reason it is usual to provide for the calculation of CGT which would be payable if the asset was disposed on a fixed date, often the date of death. As a result, true equalisation is approximated and sacrificed in the interests of certainty.
Some of these difficulties were highlighted in the recent Victorian decision of Craven v Bradley [2021] VSC 344. In this case, the late Mrs Craven had three sons Ian, Bruce and Neil. Her will left her residuary estate to her three sons equally but subject to Ian receiving a property at Point Lonsdale and Bruce receiving a property at Balwyn North, with the distribution of the remaining estate being equalised between the three sons (taking into account the different values of the properties). The Balwyn North property was the deceased’s main residence for the purpose of CGT, and the Point Lonsdale property was a holiday home and subject to CGT on disposal.
The drafter of the will had attempted to clearly address the issue of the CGT liability. For the purposes of the adjustment clause the will provided that ‘the value of the Point Lonsdale property should be determined by a registered valuer and on terms that would be granted to an arm’s length purchaser from my Estate less an amount equal to the capital gains tax liability my Estate would pay if the property were sold at the date of my death’. At first glance this provision seems fairly clear. However, a dispute arose as to whether the CGT liability should be calculated by reference to the deceased’s taxable income or the estate’s taxable income at the date of the deceased’s death. Because of the different rates of tax payable by the deceased and the estate, substantially different outcomes would result. Sensibly, in this case the Supreme Court was approached to construe the will adjustment clause and provide the executor with clear guidance and protection from liability for an incorrect distribution of the estate.
Risk tips for will drafters
- Darft adjustment clauses carefully, to ensure that an executor has clear instructions for the calculation of amounts to be adjusted as between beneficiaries.
- If an adjustment is to be made for a future CGT liability, be precise as to both the time of the hypothetical disposal and the entity to whose income the hypothetical capital gain is to be added.
Risk tips for solicitors advising executors
- Carefully read adjustment clauses in a will and ensure calculations adjusting entitlements reflect the wording in the will.
- If possible, have adjustment calculations checked by a second person.
- If an adjustment clause can be interpreted in more than one way, warn the executor that they are personally liable for the proper administration of the estate and recommend approaching the Supreme Court for a determination of the proper construction of the adjustment clause.
This article originally appeared on lsj.com.au