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 also 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.

This legislation does not, however, preclude a person from bringing a claim against a deceased estate on the basis of what is known as ‘equitable proprietary estoppel’. Such a claim can be powerful, as it can result in a court ordering that particular property owned by a deceased person now belongs to the claimant from the date of the circumstances giving rise to the claim. Because the court’s orders are retrospective in effect, the property is considered to have belonged to the claimant prior to the death of the deceased, and it means it does not form part of the estate of the deceased person. This means that the asset cannot be subject to any claim brought against the estate for further provision.

Equitable estoppel – what needs to be proved?

In order for a court to make an order binding property of a deceased person, the claimant must prove to the court that:

1. The deceased person made a promise to them during their lifetime;
2. They relied on the promise;
3. They suffered detriment as a consequence of relying on the promise, 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 estate was not bound by the promise.

Recent Case – The Turners and the Grahams

The recent 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 and his wife, 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. Mr Graham and his wife didn’t have any children and 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, live there rent-free in exchange for looking after Mr and Mrs Turner, and that Mr Turner would leave number 73 to the Grahams upon 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. 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:
  • Mr Turner granted a life interest in property he owned to the Grahams.
  • 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;
  • 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 met with the solicitor who prepared the Will and told him that Mr Turner promised to leave the property to him and his wife, and that as the Will failed to do so, consequently 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.
• More than 15 years after Mr Turner’s death, the Graham’s brought a claim against the estate based on equitable proprietary estoppel.
• At first instance the Court found in the Grahams favour and ordered that steps be taken to effect the property transfer. The executors sought leave to appeal that decision to the Court of Appeal.
• The Court of Appeal granted leave to appeal but dismissed the appeal and held as follows:
  • 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 focused 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.
  • 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. In this case, the trust came into effect when the Grahams began caring for the Turners.

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.

Our recommendations

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.

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.

If you or one of your clients is concerned about circumstances which may impact their estate planning contact one of Rigby Cooke’s Wills and Estates lawyers to discuss.