Ademption: some issues for will makers and substitute decision makers to consider

Plenty has been written about the complications Australian society is experiencing and will continue to experience with an ageing population. With Australians living longer and longer, their physical health is often declining slower than their mental capacity, requiring close family members to assume the role of substitute decision makers for financial and legal matters, generally by way of a power of attorney.

This article addresses the issue of ademption and how actions of a substitute decision maker can impact on the distribution of a deceased will maker's estate.

 

What is ademption?

It is not surprising if you have never heard of 'ademption'. Ademption is a strictly legal term derived from the Latin word 'ademptio' meaning 'a taking away'.

Ademption occurs when property (either personal or real estate) gifted under a will is no longer in the will maker's estate when they die.

A classic example is where the will maker's main residence is gifted to a beneficiary in their will, but the main residence has been subsequently sold during their lifetime to fund the purchase of an accommodation bond for an aged care facility. In this circumstance, the specific gift of the main residence has been 'adeemed', generally meaning that the gift of the main residence to the beneficiary fails.

There is an assumption that if a specific gift of an item or property is no longer in the estate of the will maker, that it is their intention that the beneficiary of the specific gift will receive nothing in its place. So, ademption can lead to instances where the distribution of the estate leads to unfair or unexpected outcomes.

Some exceptions to ademption

Case law has developed some exemptions to ademption including:

  • a gift is presumed to be general rather than specific: that is a gift equal to a % of the value of an asset (that has been sold) is held to be an amount of money of that value rather than a share of the asset;
  • if property has changed 'in name and form only' and is substantially the same thing: for example, money held in a particular bank account has been moved to another bank account;
  • where a will maker ceases to own the property as a result of a wrongful act of a third party, unknown to the will maker.

The Victorian Law Reform Commission in its August 2013 report on Succession Laws considered that legislation is 'necessary to provide an exemption to the ademption rule where the gifted property is sold or otherwise disposed of by a substitute decision maker'.

The relevance of the substitute decision maker to ademption

There are some legislative exemptions (more limited in Victoria than NSW) in respect of substitute decision makers.

In Victoria, there is only one current legislative exemption to ademption.[1]

If an administrator appointed by the Victorian Civil and Administrative Tribunal (VCAT) to make financial and legal decisions on behalf of a person (known as the 'represented person') sells property, the represented person's beneficiaries have the same interest in any money or other property arising from receipt of the proceeds of sale of the property.

Legislation proposed to come into effect in Victoria in mid to late 2015,[2] provides no other exemptions.

In NSW there are legislative exemptions for actions of a person acting under an enduring power of attorney as well as administrators appointed by the Guardian List of the Civil & Administrative Tribunal. However, the Powers of Attorney Act 2003 (NSW) (PA Act)[3] goes further by saying that where the exemption would result in one or more beneficiaries 'gaining an unjust or disproportionate disadvantage' not contemplated by the will, a court may alter the effect of the legislation.

Issues for substitute decision makers

There are circumstances where an attorney will have to make a difficult decision that may ultimately impact on a beneficiary's interest following the death of a will maker.

Additionally, an attorney may at times be faced with conflicting duties and interests. On the one hand, the attorney has a duty to act in the best interest of their principal (donor of the power) which, if they require supported accommodation, may compel them to sell a specifically gifted main residence to fund an accommodation bond. On the other hand, the attorney may be a beneficiary of the donor's will.

This would be a material conflict if the attorney was a beneficiary of the residuary estate, if the main residence had been specifically gifted to another beneficiary. As a result of selling the main residence the attorney may ultimately benefit from the proceeds of the accommodation bond: an interest they would not have had if the estate had retained the main residence.

In these circumstances, there is the ability for an attorney to make an application to VCAT for an opinion whether they should make a decision whilst acting as a substitute decision maker under a power of attorney. There is a similar option in NSW to seek an opinion from the Civil and Administrative Tribunal or the Supreme Court of New South Wales.

Importance of substitute decision makers keeping proper records

It is essential that attorneys ensure that they keep their own money and property separate from the donor's money and property at all times.

Attorneys are also required to ensure that they keep proper accounts and records, which is vital when an asset that is specifically gifted in a will is sold, particularly in NSW where a court could make an alteration of a beneficiary's interest.

One solution — getting the will right

A properly drafted will can head off difficulties that an attorney or executor may experience down the track.

If, for example, the will maker is of advancing years and more likely to need to be placed in an aged care facility, it would be unwise to include in a will a specific gift of real estate (the main residence) if there are no other assets that could fund an accommodation bond and upkeep of the will maker for the remainder of their life.

Instead, if a will maker intends to make a specific gift to a beneficiary, they could instead consider:

  • making a gift of a percentage of their residuary estate; or
  • state that a beneficiary be gifted a particular property, the proceeds of sale of a particular property or any property bought in substitution.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask 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.

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[1] Section 53 of the Guardianship and Administration Act 1986 (Vic).

[2] Powers of Attorney Act 2014 (Vic).

[3] Section 23.