Estate planning: what are the consequences of dying without a valid will?

Dying without a will can mean:

• the distribution of your assets may not reflect your wishes;
• you are not able to put structures in place that can assist your beneficiaries to minimise risk of third parties (including creditors) accessing their inheritance;
• the cost of administering your estate can be greater, particularly if there are difficulties locating beneficiaries; and
• more tax being payable on the distribution of your assets.

Overview of 'intestacy'

Dying without a valid will is known as dying 'intestate'. Intestacy arises:

• where the deceased dies without a valid will; or
• where the deceased leaves a valid will, but the will does not effectively dispose of all the person's estate.

Intestacy means that the deceased's estate will likely be distributed other than as the deceased intended. Instead, how the estate is distributed will be determined by legislation, with the estate being distributed among the deceased's nearest blood relatives. This can lead to bitter and costly disputes over inheritances that inevitably reduce the size of the estate.

Intestacy also means that the will does not appoint an executor, so an administrator must be appointed. Applying to the court for letters of administration is similar to applying for probate of a will, but does often lead to additional costs and complexities.

Distribution upon intestacy – the default rules and how they may affect you

If you die without a valid will, then your estate will be distributed according to intestacy rules. These are default rules which:

• determine to whom the estate is distributed and in what proportions; and
• are complicated and vary depending on the value of the estate, the relevant jurisdiction and the type and number of family members you leave behind.

The default rules mean that you will not be able to:

• ensure your assets are distributed to close friends or remote relatives – that is, those not covered by default rules; and
• exclude certain individuals from receiving distributions.

Differences between intestacy laws in states and territories

Location of assets

When a deceased's estate is located in more than one jurisdiction, two statutory schemes may govern distribution of the estate. Generally:

• movable property (for example, motor vehicles, pets and personal effects) is governed by the default rules in the place where the deceased resided; and
• immovable property (for example, land, a house, property rights) is governed by the default rules in the place where the property is located.

Spouses

The definition of 'spouse or partner' varies between the states and territories – as do their entitlements under law.

For example, if the deceased has no surviving children then:

• the laws in New South Wales, Victoria, Queensland, South Australia, Tasmania and the Australian Capital Territory provide that the surviving spouse is entitled to the entire estate;
• the laws in Western Australia and the Northern Territory provide that a surviving spouse is only automatically entitled to the entire estate if the deceased has no surviving parents or siblings.

Simultaneous death of spouses

Different state and territories will also treat the simultaneous death of spouses in different ways.

In Victoria, the method of seniority is used to determine who died first. This means that:

• the older spouse is assumed to have passed away first and their estate is then administered before the younger spouse's estate – which can be a problem where the spouses own an asset jointly; and
• if there is no valid will, then the jointly owned asset forms part of the younger spouse's estate, and will be dealt with through intestacy laws.

In that example, if the couple has no children, then the family home passes to the younger spouse's parents, effectively diverting the relationship assets to one side of the family.

Risk of access to the estate by third parties

If the deceased dies without a valid will, then they will have lost an opportunity to put in place appropriate structures (such as a will with a testamentary discretionary trust) to minimise the risk that third parties will gain access to the estate. Common scenarios where a third party may gain access to a deceased's estate include where:

• a beneficiary is a party to Family Court proceedings: rather than assets being released progressively to the beneficiary over time (and after the Family Court proceedings end), the beneficiary may receive their distribution while the proceedings are continuing. The assets may then become part of the marital asset pool to be divided.
• a beneficiary is insolvent: similar to the above example, rather than assets being released to a beneficiary some time in the future (and after the beneficiary is discharged from bankruptcy), the beneficiary may receive their distribution while bankrupt. The assets could then fall under the control of the trustee in bankruptcy and become available to creditors owed money by the bankrupt beneficiary.

You can read an earlier ClearLaw article about the advantages of discretionary testamentary trusts here.

Administration of the estate

Who administers the estate where the deceased dies intestate?

It is not simple to determine who is most eligible to apply for administration. The court has a very wide discretion as to whom it will grant administration, but in most cases whoever is entitled to the largest share in the estate is considered the most suitable.

Why is it important?

Administration is an important role because administrators are in charge of splitting and distributing the assets. This can be done in many different ways, including where it is in the administrator's own interests rather than the interest of all beneficiaries. While this situation can be disputed by contesting the estate, it can cause greater administration costs and will also increase the time required to distribute the estate.

Efficient and timely administration of the estate is important because, until an administrator is appointed, the beneficiaries of the estate will not have access to any estate assets, including cash in the deceased's name. This may be a problem in single income households, where members of that household may have to wait until Letters of Administration are granted before they can access the deceased's assets.

Taxation and other expenses

Tax is a major consideration in the estate planning process to ensure that the potential taxation impact of distributing particular assets is reduced to a minimum. Where a person dies intestate, it is much more difficult to plan for, and effect, distributions in a tax effective way.

Depending on the marginal tax rates of different beneficiaries, an intestacy could potentially lead to an overall imbalance in the distribution of an estate due to higher rates of tax payable by some beneficiaries.

In contrast, when preparing a will, the will maker and their advisers can assess opportunities to manage, and reduce, the tax implications of assets passing to the deceased's beneficiaries.

Conclusion – make a will and make sure it is valid

Among the many benefits of making a valid will, a will maker can:

• elect to transfer assets to relatives in greater or lesser proportions than would result from the default rules;
• elect to transfer assets to a close friend or a remote relative (or an organisation which is important to the will maker) who would otherwise be excluded from any benefit under the default rules;
• limit the risk of access by third parties to the will maker's estate;
• save their beneficiaries a great deal of administrative work and expense and minimise the likelihood of disputes; and
• better manage how the will maker's estate is distributed and taxed.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and as to speak to a member of the Private Client Services team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of estate planning topics here.

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