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Estate Group update: Blended families and Will challenges

Feb 20, 2012

Blended families and Will challenges — the rights of step-children

One of the most common concerns raised by clients is, “what happens if my spouse re-marries after I die and then our kids miss out?”

This reflects the increasingly complex family structures in today’s society of which people have either a personal or second-hand experience and this fuels their concern.

Few people realise how widespread this concern is, however the courts have recognised it and provided a recourse (albeit a somewhat limited one) to disappointed step-children to challenge the will of the step-parent.

It should be noted that careful planning with an experienced estate planning lawyer can ensure that a challenge will not be necessary. Avenues to avoid the need for a challenge will be discussed towards the end of this article. Unfortunately, however, a relatively small proportion of people have proper estate planning in place, and so challenges will inevitably arise.

The concern

The specific concern addressed in this article is the rights of a child where:

  1. Their natural parent has passed away and left the entire (or substantial portion) of the estate to the step-parent; and
  2. Their step-parent has then passed away and the child has received nothing (or little) under the step-parent’s will.

Although, the word ‘child’ is used, there is no inference of the child being a minor. Indeed, in all of the cases considered the ‘child’ is an adult, and so the term is merely a reference to relationship, not age.

The Legislation

In Victoria, challenges to a will are governed by Part IV of the Administration and Probate Act 1958 (the Act).

In applying this section, the courts have long recognised a three stage process:

  1. Did the deceased have a moral responsibility to make provision for the applicant?
  2. If so, did the deceased’s will make adequate provision for them?
  3. If not, what is the provision that should be ordered for them?

The Act does not impose any restrictions on who can apply to challenge a will, as long as they can show they were owed a responsibility to be provided for.

In s91(4), the Act sets out a substantive list of factors which the court must take into consideration when determining the first and second questions. These factors include matters such as the length and nature of the relationship and the level of support between the deceased and the applicant. The final listed factor is a ‘catch-all’ clause which allows ‘any other matter the court considers relevant’ to be taken into account (s91(4)(p)).

The case law

The Foundation Case: McKenzie v Topp (McKenzie)

In 2004, the Victorian Supreme Court handed down a landmark decision which established the rights of step-children in these situations. In that case, an adult son was making a claim against the estate of his step-mother. His father had previously passed away, leaving everything to his wife, the applicant’s step-mother.

Nettle J held that the step-mother had a moral obligation to provide for the adult son in these circumstances. He noted that it was appropriate for the father to provide for his wife (the step-mother) above the son, but that “upon the death of the widow, and as it were in the event of a surplus, most would surely say that the children of the first marriage should rank for their fair share”.

In this case, Nettle J was careful to note that the amount left by the father to the step-mother “may be relevant to the question of whether she is responsible to provide [for the adult son]” (emphasis added). In other words, he did not make a sweeping principle, but noted that this dynamic was one that should be considered under the “catch-all” of s91(4)(p).

The extending cases

Since McKenzie, there have been two predominant cases that have relied upon and possibly extended McKenzie.

In James and Day v Anor (James), two adult daughters challenged their step-mother’s will. The step-mother’s assets could be almost entirely traced to her inheritance from her husband, (the daughter’s father). Cummins J upheld the daughters’ claim “by reason of the derivation of the deceased’s financial position”. In that case, the court awarded one half of the estate to the daughters, and the other half to the named beneficiaries of the step-mother’s will.

In Keets v Marks (Keets), a similar factual situation presented itself, albeit reversed so that the natural parent was the mother and the step-parent was the step-father. Balmford J determined that, “[the mother] had a responsibility to make provision for the [adult son], and that responsibility transferred itself, as it were, to [the step-father] on the receipt by him of her money”. Arguably, the court in this case created a broader statement of principle than was contemplated in McKenzie.

The limits

From the above cases, it can be concluded that children do have rights to challenge the estate of their step-parent where their natural parent has gifted their estate to the step-parent.

However, it is also clear from judicial comment in subsequent cases that this right does have its limits, and those limits may be difficult to overcome.

Transfer of responsibility follows transfer of money

In order to make a claim on this ground, a child must show that their step-parent’s wealth (at least to the extent of their claim) resulted from an inheritance of wealth from the natural parent.

It must also be shown that the child “stepped aside” in order for the step-parent to inherit. In Freeman v Jaques , an instructive Queensland case, the father had segregated his assets acquired by him alone and left these assets directly to his children on his death. The assets, he acquired together with his wife (the step-mother) were owned jointly and naturally went to her. The court found the children had no claim on those jointly owned assets on the step-mother’s death.

It should be noted that a child may have a claim against a step-parent as an individual, in other words against the step-parent’s own assets on the basis of a relationship of dependence. This claim would arise directly from the child-step-parent relationship, unlike the cases mentioned previously where the foundation of the claim is not the relationship, but a transfer of responsibility from the natural parent.

Only one factor

Even where it can be shown that a child has “stepped aside” in favour of their step-parent, this does not guarantee success. Judicial comment in more recent cases has emphasised that this is merely one factor to be considered in determining if there was a responsibility to provide and whether adequate provision was indeed made. The other factors in s 91(4) are also relevant to these questions, and the “stepping aside” is not determinative. Accordingly, it seems that the judicial trend is winding back to the “limited principle” originally set out by Nettle J, where the stepping aside “may be relevant” to determining a responsibility to provide.

It is also important to note that “financial need” remains a critical factor to be proved by the applicant. In each of McKenzie, James and Keets, the child(ren) could show some form of financial need or difficulty. It is fairly well established that without financial need, the claim is unlikely to be successful.

Principle does not extend

It is worth noting briefly that the court has made it clear that this principle does not extend beyond the child/ parent/ step-parent paradigm. In Peterson v Micevski the plaintiffs tried to apply the principle to a parent/ sibling dynamic and the court clearly refused to re-cast it to apply to these facts.

Avoiding the issue

Given the stress, pain and cost of mounting a challenge, it should be seen as a last resort by parents. Proper estate planning while the parent/ step-parent is alive can go a long way to eliminating the need for any challenge providing certainty for the child and leaving the memory of the parent unsmirched.

It is not the scope of this article to explore the planning option in any detail, but some of the schemes often employed include:

  1. Incorporating a life interest in the family home (often a major asset) for the surviving spouse, with the house reverting to the children upon the step parent’s death. It is important that the ownership of the home is structured correctly.
  2. Segregation of assets acquired prior to the second marriage, and those acquired after, and affording each set appropriately different treatment in the will.
  3. Carefully structured testamentary trusts which balance the needs of the step-parent and the children – one example might be a trust which provides income and a small percentage of capital to the surviving spouse, with the balance preserved for the children on the step-parent’s death.

It is worth noting that some practitioners prepare mutual wills, which essentially contractually restrict each party from amending their will. However, it is advisable to steer clear of preparing these on the basis that they can be evaded through clever structuring, and so provide a potentially false sense of security.

There is no one solution that will suit every client. Inevitably determining what solution suits is a balance between flexibility for the surviving spouse, and certainty for the children. Each client falls differently along this scale, and it is only through thorough, competent and personalised advice that the right answer can be found for them.

Finding the right answer for them can go a very long way to avoiding the need for a challenge.

More information

For more information, please contact a member of our Estate Group on (03) 8600 8885.

Note: This update is a guide only and is not intended to constitute legal advice.