Promises made during your lifetime may bind your estate long after you die

Victoria’s family provision legislation was substantially amended by the introduction of the Justice Legislation Amendment (Succession and Surrogacy) Act 2014.

This Act had the effect of reducing the classes of claimants that may make a claim for provision from a deceased estate, and it also reduced the number of claims being filed in Victorian courts against estates.

As of 1 January 2015, a person must fall within the definition of an “eligible person” as defined in section 90 of the Administration and Probate Act 1958 in order to bring a claim against an estate seeking further provision. In simple terms, this includes a spouse, domestic partners, children and step children. There are additional classes however they must prove they were dependent on the deceased.

This legislation does not, however, preclude a person from bringing a claim against a deceased estate by claiming that a particular property held by the estate is held on a “constructive trust”. Such a claim can be powerful, as it can result in a court ordering that the subject property owned by the deceased person now belongs to the claimant.

The court’s orders are retrospective in effect, so the property is considered to have belonged to the claimant prior to the death of the deceased person. This means that the subject property does not form part of the deceased person’s estate, and cannot be subject to any claim brought against the estate for further provision.

What is a constructive trust?

A constructive trust arises from the law of equity, in basic terms, it is created by a Court wherever the title of property is held by a person who in fairness should not be allowed to keep it.

What ultimately gives rise to the legal rights to a successful claimant is the conduct of the parties during the ownership of the subject property.

It is this conduct of the respective parties in connection with the property that enables the court to “construe” a trust from the underlying circumstances.

The two main forms of constructive trust

The law recognises two main forms of constructive trust:

1. The common intention constructive trust; and
2. The constructive trust that is construed because of an unconscionable denial of an interest.

The common intention constructive trust requires a claimant to show that there was a common intention between the parties as to the property. The intention need not be certain, such as where a contract or written agreement is entered into by the parties, but if one party relies on the intention to their detriment, then a trust will be construed. Common examples include:

1. 1. Where the parties jointly make contributions to the repayment of a mortgage on the understanding that the property will be jointly enjoyed; and
   2. Where the parties jointly make contributions towards the renovation or improvement of a property on the same understanding.

Unconscionable denial of an interest – what is the conduct that needs to be proved?

The claimant must prove to the satisfaction of the court that:

1. The deceased person made a promise to them during their lifetime;
2. They relied on that promise (or series of promises);
3. They suffered detriment as a consequence of relying on the promise of the deceased person, and that the detriment they suffered was reasonable in the circumstances; and
4. Given the reliance on the promise, it would be unconscionable if the deceased’s estate was not bound by the promise.

The Turners and the Grahams

The decision of the Victorian Court of Appeal of McNab v Graham [2017] VSCA 352 illustrates the application of these legal principles.

• In 1973, Mr Turner, aged 64, and his wife, aged 58, lived in their home in Moonee Ponds. They didn’t have any children. The property consisted of two dwellings on the block; the Turners lived in number 75 while they rented out number 73.
• Mr Turner was a member of a local social club, and it was there that he met Mr Graham, who was then aged 31. Mr Graham was married to Mrs Graham, then aged 28. The Grahams didn’t have any children of their marriage. 
• The Grahams lived in a one-bedroom flat in Essendon where they paid $120 per week in rent. 
• In late 1973 Mr Turner proposed to Mr Graham that he and Mrs Graham move into number 73 and live there rent-free in exchange for looking after Mr and Mrs Turner. Mr Turner promised that if Mr Graham and his wife did this, then he would leave number 73 to them on his death. No written agreement was ever prepared or executed.
• Despite Mr Turner’s offer to live in the property rent-free, the Grahams insisted on paying rent. It was agreed that the Grahams would pay $80 per week towards rates and the cost of routine maintenance on number 73. This was a low rent for the area and the property was larger and of better quality than the Essendon flat in which the Grahams had been living.
• The Grahams lived in number 73 and looked after the Turners. Mrs Turner died in 1980 while Mr Turner died in 1997.
• Mr Turner’s last Will appointed Mr Graham as one of his three executors, with the other two executors being partners of the law firm that drew the Will. Under the Will:
  • The executors were instructed to subdivide the property so that separate titles were created for numbers 73 and 75;
  • Number 75 was to be transferred to Mr Turner’s sister;
  • A life interest was granted to the Grahams so that they could continue living in umber 73 up until their deaths;
  • The Grahams were permitted to reside in number 73 rent-free, provided they continued to pay the outgoings for the property, and didn’t remain away from the property for more than three months;
  • Following the deaths of the Grahams, number 73 was to be given to the Freemasons Hospital; and
  • The residue of the estate was to be given to Mr Turner’s sister.
• After learning of the terms of the Will, Mr Graham told the solicitor that Mr Turner promised to leave the property to him and his wife, and that as the Will failed to do so he wished to challenge the Will. The solicitor told Mr Graham that he had no hope of success and that if he made such a claim, it would be defended. As a consequence, Mr Graham took no steps to challenge the Will or take action against Mr Turner’s estate.
• The Grahams continued to reside in the property and all the requirements in Mr Turner’s Will were fulfilled. In 1999 Mr Graham became ill and ceased working, and in 2002 he was diagnosed with cancer. Mrs Graham ceased working in order to care for him.
• In 2013 Mr Graham sought legal advice after seeing an advertisement in a newspaper, as he incorrectly believed that under the Will Mrs Graham wasn’t entitled to continue living in number 73 after his death.
• In August 2014, after in excess of 16 years had passed since Mr Turner’s death, Mr Graham commenced a legal proceeding against the estate, on the basis that number 73 was held on constructive trust for he and his wife.
• At first instance the Court found in the Grahams favour and ordered that steps be taken to effect the property transfer. The executors appealed this decision, and on 30 November 2017 the Victorian Court of Appeal dismissed the appeal. The court held:
  • Mr Turner had repeated his promise to the Grahams that if they cared for and looked after the Turners then they would inherit number 73 upon Mr Turner’s death.
  • The nature and degree of the detriment suffered by the Grahams was considerable and profoundly personal, but it was reasonable in the circumstances.
  • The Court does not engage in an assessment of what is ‘fair value’ for devoted conduct. Instead, it focuses on the fact that all of the care given by the Grahams was carried out in expectation that the promise would be fulfilled.
  • The Court interpreted the circumstances as providing sufficient grounds for imposing a constructive trust over number 73. The Court construed the circumstances as obliging Mr Turner’s estate, in good conscience, not to retain its beneficial interest in number 73, and to convey title to the Grahams.

When does a constructive trust start?

In circumstances where the conduct of the parties is sufficient for the court to order a constructive trust over real property, then that trust comes into existence before a court makes any such order. The trust comes into existence at the time of the conduct which gives rise to the trust, and the court’s orders confirm the existence of the trust. In this case, the trust came into effect when the Grahams began caring for the Turners.

Consequently at the date of Mr Turner’s death number 73 did not form part of his estate. In these circumstances, the nature of the constructive trust imposed over number 73 were that the executors of Mr Turner’s Will held the property on trust for the benefit of Mr and Mrs Graham.

Constructive trust vs. equitable compensation

The courts may not always order that a constructive trust be imposed over real property. The circumstances may be such that it would be inequitable or unjust to make such an order. This may be because such an order will affect the interests of third parties in the property.

In such a case the Court will grant relief to the claimant by ordering payment of compensation. The Court attempts to calculate the amount of compensation to be paid by estimating the full value the claimant would have received if the promise had been fulfilled.

Take aways

1. The decision in McNab v Graham emphasises the importance of the estate planning process and the need to assess all of your circumstances before the preparation and execution of your testamentary documents. Without giving due attention to your circumstances and those of the people in your life, your attempts to deal with your estate assets following your death might ultimately be frustrated.
2. Being able to identify potential claims against your estate provides the best available opportunity to strategically deal with them via appropriate means. It may ultimately prevent litigation following your death, which will avoid significant delay and cost involved in the administration of your estate, and considerable anxiety and stress for your executors and beneficiaries.
3. If you find yourself in a situation similar to the Grahams and you don’t receive the property as promised on the death of the property owner, don’t be distressed by the fact that you are not an eligible person to challenge the will, there may be other remedies available.

For further advice or assistance, please contact our Wills, Trusts & Estates team.