What is a deed of family arrangement?
The following article is restricted to the law applying in NSW.
A deed of family arrangement (DFA) legally changes the division of a deceased person’s assets between the beneficiaries. It can either change the terms of a will or change the distribution under the rules of intestacy (e.g the way assets are divided if the decease person had no will).
The Rules of Intestacy
The rules of intestacy are set out in the Succession Act 2006. They set out the way in which the assets of a deceased person no will (an intestate estate) are distributed based.
Under the formula, the deceased’s spouse is entitled to the majority of assets, including an amount of money taken from the estate and gifted to the spouse (a ‘statutory legacy’).
The spouse will be entitled to the statutory legacy ($350,000 adjusted by the CPI) regardless of how much the estate is worth. If the value of the estate is under $350,000, the spouse receives the whole estate.
A DFA can also give the legal personal representative of the estate (i.e. the executor if there is a will or the administrator if there is no will) protection against future claims.
A DFA is valid only if it:
- is signed by the legal personal representative and all the beneficiaries; and
- has the consent of all the beneficiaries (over 18 years of age) entitled under the will or the intestacy rules.
When might I need a deed of family arrangement?
A DFA allows the beneficiaries to change the distribution of assets to better suit their needs. Circumstances in which it may be used include:
- When the beneficiaries wish to change the terms of the Will.
Situations in which a deceased person’s Will may have to be changed to suit the circumstances of the beneficiaries include:
- if the Will is old and so doesn’t take into account births and deaths that have occurred since it was made; and
- if the person entitled to inherit most of the assets wants to pass their share on to other beneficiaries in the will (e.g. give their share to their children).
- When there is no will and the beneficiaries agree to change the way in which the rules of intestacy would distribute the estate assets.
If the deceased’s adult children with their own families would benefit from a share of the estate, a DFA could ensure that all of the deceased’s immediate family are left something.
- When someone wishes to challenge a will
If an “eligible person” (a spouse, a child, a former spouse or a dependent) is aggrieved that they have received nothing or not enough from a deceased estate, they may be able to challenge the distribution in Court (a ‘family provision’ claim). If mediation does not resolve a family provision claim, it may have to be heard by the Court. This can take years to resolve, parties to the application can become estranged from each other, and it can be very expensive.
Court proceedings can be avoided by completing a DFA. It allows the aggrieved person to come together with the other beneficiaries and design a new plan for the distribution of the assets which is acceptable to all parties.
When can a deed of family arrangement not be used?
A deed of family arrangement cannot be used to reduce the entitlement of someone under 18 years, or for a person with an intellectual disability. That requires a Court order.
Capital Gains Tax (CGT) Considerations:
Under Income Tax Assessment Act 1997 (Cth) (s. 128.20), the passing of an asset to a beneficiary of a deceased estate is exempt from capital gains tax (CGT).
A DFA may be covered by this exemption only if it is used to settle a claim to participate in the estate (such as a family provision claim). The ATO ruling ‘TR 2006/14’ provides further guidance as to this exemption. If the deed does not meet the requirements of the above ruling, CGT may apply.
Transfer Duty:
There may also be transfer duty (formerly called ‘stamp duty’) issues to consider when drafting a DFA.
Transfer duty payable on the transfer of estate assets is minimal (currently $50). Legislation governing transfer duty is State based: there is no Australia-wide set of rules. In NSW, transfer duty on the transfer of assets following a DFA is payable on the value of assets over and above what the beneficiary would have received under the will or intestacy rules. (s63 Duties Act 1997 (NSW))
Need a Deed of Family Arrangement?
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