When you make your Will, a major consideration is who will receive a gift of some or all of your estate. Once you have identified these individuals (being your beneficiaries), there are different gifting options available to the will-maker.
Many will-makers choose to leave all of their estate to one or more beneficiaries. That is, they do not differentiate between assets in their estate and their beneficiaries receive part of their estate at death, regardless of what is in it.
However, when there are special items or specific property that a will-maker wants to pass to a named individual, these are usually made by way of a ‘specific gift’. We have seen all kinds of specific gifts – real property, jewellery, artwork, collectibles, and even beloved family pets.
So – what happens when to a specific gift in a Will if the will-maker no longer owns the asset when they die?
The principle of ‘ademption’
A gift of property that is no longer in your estate when you die automatically ‘fails’ (or ‘adeems’) in accordance with the legal principle of ademption. This means that the beneficiary is not entitled to a replacement or equivalent gift, even if the proceeds of the failed gift can be traced. For example, if you have left your house to your brother and your house burns down, your brother does not automatically receive the insurance money in substitution for the house.
The assumption is that you do not intend for the beneficiary to receive something in place of the failed gift, because you could have either made a new Will or provided for the beneficiary another way.
This rule can lead to unfairness and unintended consequences. Obviously, there are many instances where people forget to update their Will, or lose the capacity to do so.
Lost capacity
A common example is when property the subject of a specific gift is sold under an Enduring Power of Attorney before you die. This can happen when you are no longer able to make decisions for yourself, and the person you have appointed to look after your finances sells your home to fund alternative high-care accommodation.
In this case, it would be unfair for a beneficiary to miss out on the gift of the house because you are not able to make a new Will, and probably would not have wanted your house to be sold anyway.
In most states of Australia, legislation has come to the rescue when specific gifts have been sold under an Enduring Power of Attorney. These rules either:
- Allow the beneficiary to receive all or part of the proceeds from the sale of property that is the subject of a specific gift in your Will (NSW and Tasmania); or
- Give the court the power to remedy an injustice caused by such a sale (SA, Victoria and Qld). This is usually done by giving the beneficiary cash or other assets of an equivalent value to the failed gift.
Fraud
Further, if your enduring attorney (or someone else) has acted fraudulently, negligently or outside their authority in disposing of your property, the court has the power to give an ‘equitable’ remedy to any beneficiary that has lost their gift this way, for example awarding cash in place of the gift.
Gifts given in your lifetime
On the other hand, you may in fact intend that a gift made in your Will should fall-away in certain scenarios. Two scenarios courts often consider concern gifts made during your lifetime in substitution for gifts made under your Will. They are:
- Whether a gift of money to your child during your lifetime is intended to take the place of a gift of the same amount of money given in your Will; and
- Whether a property settlement made under a binding financial agreement between you and an ex-spouse is made in ‘anticipation and fulfilment’ of a gift in your Will.
In these cases, the court will presume that you did not intend both gifts to be given (known as the rule against ‘double portions’). However, the evidence must show that beneficiary had knowledge of your intention to replace the gift under your Will with the gift made during your lifetime. A written acknowledgement of the terms of the lifetime gift, or a properly drafted binding financial agreement, will assist greatly.
Takeaways
When making your Will, consider what you would like to happen if a specific gift is no longer in your estate when you die.
Be clear about your intentions when making gifts to beneficiaries during your life time – and ideally document this.
Keep your Will updated, and try and keep the terms relatively general in relation to specific gifts, so that the gifts do not fail as you replace assets.
If selling property under an enduring power of attorney, ensure the remaining proceeds of sale can be identified with sufficient certainty.
To have your Will reviewed and updated, call us on 1300 654 590 or email us.
The information contained in this post is current at the date of editing – 6 July 2023.
