A statu­to­ry will can stop a mur­der­er But can it stop your cred­i­tors and the tax man?

In brief

On 13 Feb­ru­ary 2005, Maria Korp was found uncon­scious in the boot of her car in sub­ur­ban Vic­to­ria. Her hus­band Joseph and his mis­tress were almost imme­di­ate­ly charged with her attempt­ed mur­der. Whilst Maria was in a coma, her daugh­ter applied suc­cess­ful­ly to the Vic­to­ri­an Supreme Court for a new will for her moth­er. The effect of this appli­ca­tion was the removal of Joseph as execu­tor and ben­e­fi­cia­ry of Mari­a’s estate. It remains the most well-known case on the emerg­ing legal con­cept of statu­to­ry wills.

A statu­to­ry will is a will made by a court for a per­son lack­ing the capac­i­ty to make a will for them­selves. It was intro­duced in New South Wales as part of the Suc­ces­sion Act in 2006. It is now well-estab­lished that a court can cre­ate a statu­to­ry will where there would be an unsuit­able out­come on intes­ta­cy or where the tes­ta­tor’s inca­pac­i­ty was caused by a ben­e­fi­cia­ry (as was the case for Maria Korp).

What is not as well-known is that the courts are warm­ing to the idea of mak­ing statu­to­ry wills for the pur­pos­es of asset pro­tec­tion and tax minimisation.

In this arti­cle, we consider:

• what the test is for mak­ing a statu­to­ry will
• how a statu­to­ry will may help ben­e­fi­cia­ries for the afore­men­tioned purposes
• what recent cas­es can tell us about how the courts may reach a decision

What is the test?

After it has been estab­lished that a per­son does not have the capac­i­ty to make a will, the court must be sat­is­fied that the statu­to­ry will is or is rea­son­ably like­ly to be one that would have been made by the per­son.

Crit­i­cal­ly this does not nec­es­sar­i­ly require that the will be in the best inter­ests of the ben­e­fi­cia­ries or even in the best inter­ests of the per­son. It sim­ply means, is it like­ly that the per­son would have made the pro­posed will if they had the capac­i­ty to do so?

The court must addi­tion­al­ly be sat­is­fied that that the appli­ca­tion is or may be appro­pri­ate. A non-exhaus­tive check­list of the infor­ma­tion required to estab­lish that an appli­ca­tion is or may be appro­pri­ate is set out in the Suc­ces­sion Act.

Statu­to­ry wills with tes­ta­men­tary trusts

When writ­ing a will under nor­mal cir­cum­stances, the best way to pro­tect your assets from cred­i­tors and to min­imise the tax bur­den on your ben­e­fi­cia­ries is to utilise tes­ta­men­tary trusts. The same prin­ci­ple holds for the cre­ation of statu­to­ry wills. Tes­ta­men­tary trusts have three impor­tant advantages:

1. the abil­i­ty to split income and stream dif­fer­ent types of income to min­imise tax
2. assets are afford­ed a gen­er­al lev­el of pro­tec­tion from loss by virtue of being trust assets
3. vul­ner­a­ble or inca­pable ben­e­fi­cia­ries can be guid­ed by an appoint­ed trustee

With this in mind, there could be sig­nif­i­cant ben­e­fits for the intend­ed ben­e­fi­cia­ries of a tes­ta­tor if a statu­to­ry will cre­ates tes­ta­men­tary trusts instead of gift­ing assets absolutely. 

Recent cas­es

In Haus­feld v Haus­feld & Anor [2012] NSWSC 989, the New South Wales Supreme Court refused to alter the will of a tes­ta­tor whose son was fac­ing the pos­si­bil­i­ty of bank­rupt­cy. The son had approached the court request­ing that his father’s will be altered to sub­sti­tute his wife as a ben­e­fi­cia­ry instead of him­self. The Court agreed that it was rea­son­ably like­ly that the will would have been made by the father if he had capac­i­ty. How­ev­er, the pro­posed alter­ation was still reject­ed because the Court did not believe that it was appro­pri­ate to autho­rise an alter­ation to a will in order to pass a debt from one per­son to anoth­er with the inten­tion of avoid­ing creditors.

The Queens­land Supreme Court did allow tes­ta­men­tary trusts to be incor­po­rat­ed into a will (by way of a statu­to­ry cod­i­cil) in the case of Re Mat­sis; Char­alam­bous v Char­alam­bous & Ors [2012] QSC 349. Here the resid­uary estate was left by the tes­ta­tor to his three grand­chil­dren absolutely.

The Court con­sid­ered in this case that two of the grand­chil­dren ran a busi­ness togeth­er and could be exposed to risk in an insol­ven­cy sit­u­a­tion of the tes­ta­men­tary trusts were not cre­at­ed. More­over, the tes­ta­tor was a self-made man who would like­ly have been in favour of any action that would have helped his grand­sons pro­tect their business.

The issue of ​‘appro­pri­ate­ness’ was not con­sid­ered by the Court although an obvi­ous point of dif­fer­ence to the Haus­field case is that in this instance the threat of cred­i­tors was only a pos­si­bil­i­ty, where­as in Haus­field cred­i­tors were already ​‘knock­ing on the door’.

The Queens­land Supreme Court also autho­rised the mak­ing of a statu­to­ry will includ­ing tes­ta­men­tary trusts in Doughan v Stra­guszi [2013] QSC 295.

In this case, one of the ben­e­fi­cia­ries was a part of dis­cus­sions with receivers of com­pa­nies of which he was involved. How­ev­er, Haus­field was again dis­tin­guished because in this case using tes­ta­men­tary trusts was not intend­ed to pass on the ben­e­fi­cia­ry’s poten­tial liability.

The tes­ta­men­tary trusts were instead approved because they would pro­tect a much wider array of fam­i­ly mem­bers and their future interests. 

Take­away

The statu­to­ry will is one of the most sig­nif­i­cant estate plan­ning devel­op­ments Aus­tralia has seen in the past decade. The New South Wales Supreme Court has stopped just short of using statu­to­ry wills as a ​‘get out of jail’ card with cred­i­tors. How­ev­er, it is now clear that a statu­to­ry will can be made to cre­ate tes­ta­men­tary trusts for the tax and asset pro­tec­tion ben­e­fits they pro­vide to beneficiaries.