Estate administration - Your Local Blue Mountains' Solicitors

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With our extensive experience in estate administration, we can remove the burden of administering a deceased estate, supporting you through a difficult period.

Estate Assets vs non-estate Assets

Property that you can distribute by the terms of a Will are referred to as estate assets.

Not all property you own may be dealt with by your Will. If property is not an estate asset, it is not distributable by a Will. It could be it passes to another person automatically or is distributable according to the discretion of a third party.

Set out below are the most common types of assets to be distributed after your passing, with estate assets distinguished from non-estate assets.

Real Estate

Property you own in your sole name is, subject to any mortgages or charges registered against it, an estate asset.

Property you own as joint tenants with someone else is not an estate asset and will automatically transfer into the name of the surviving owner upon your passing. Jointly owned properties cannot be dealt with by a Will: once notified of your passing, NSW Land Registry Services will transfer the property to the surviving proprietor(s).

Where you own the property as ‘tenants-in-common’ with someone else, you can own your share solely or as joint tenants. If you own it solely, the share you own is an estate asset and is distributable by Will.

Superannuation

Where you have completed a binding nomination in favour of your legal personal representative (LPR) (i.e. your executor or administrator), on your passing your superannuation will become an estate asset. Your LPR will distribute your superannuation in accordance with the terms of your Will.

Where you have not nominated your LPR as the beneficiary of your superannuation, your superannuation will be a non-estate asset and cannot be distributed by the terms of your Will.

To nominate your LPR, you will need to sign a Binding Death Benefit Nomination (BDBN) in their favour. These forms (accessible online) vary depending on the superannuation fund.

BDBNs generally will need to be renewed every three years or else they may become non-binding.

Some Public Services funds do not accept BDBNs and have strict rules about who is to receive your superannuation entitlements on your passing.

Alternatively, you can sign a BDBN in favour of a particular beneficiary to apply outside the terms of your Will. Superannuation funds vary in their requirements as to who you can nominate as a beneficiary. Check with your superannuation fund as to whom they deem a validly nominated beneficiary.

Bank Accounts

The balance of a bank account is an estate asset where you are the sole owner . Banks will require your LPR to complete forms before they will release account balances to the estate.

Where you own the bank account jointly, the balance is not an estate asset. Upon notification of your passing, the bank account become solely owned by the surviving owner.

Shares you own solely are estate assets. They may be transferred directly into the name of a beneficiary as per Will, or sold, with the proceeds of sale forming part of the estate.

Shares you own jointly with someone else are not estate assets. Upon being notified of your passing, the share registries will transfer the shares into the names of the surviving holder(s).

The surviving joint holder will also inherit the costs base for those shares.

Motor Vehicles, Personal Effects, Household Goods and Pets

Where you own them solely, your personal effects, motor vehicles, household goods and pets are estate assets.

Digital Assets and Cryptocurrency

Increasingly people are making money from their digital presence or from storing valuable assets online. Their digital presence may be valuable, particularly if it does not depend on their ongoing and direct involvement.

These websites all have different rules for accessing their services set out in their terms of service. When someone dies, the terms of service may block your family’s access to the account if they do not have access to your passwords.

Nowhere are passwords more important than for cryptocurrencies. If your PLR cannot easily access your digital wallet then those potentially valuable assets may be lost forever. It is important that you give your executor your usernames, passwords and the like.

Who pays the estate’s fees and expenses?

A deceased person’s estate pays funeral expenses, legal and accounting fees, any outstanding debts, and any accounts that become due, such as utilities and phone.

Obliging people often accept the role of executor when close friends or family are creating their Will with little further thought. Nothing is required of them until the death of the Will-maker years or decades later.

Unless the deceased is a spouse or partner, the executor is unlikely to have access to the deceased person’s bank account numbers and utility providers.

While the estate must pay all expenses in the long run, the executor must satisfy all financial demands in the short term.

Possible expenses

If the deceased had a large and complex estate or individual ownership of assets, it may be necessary to apply to the Supreme Court of NSW for probate.

Probate:

gives formal validity to the Will, and
authorises the executor to administer the estate.

Costs include substantial Supreme Court of NSW filing fees.

Until probate is granted, which generally takes several months, there may be immediate demands on the executor to settle outstanding accounts.

Estate accounts may have to be paid from the executor’s personal funds if payment cannot be delayed until after a grant of probate has been obtained. Executors should keep a clear paper-trail of all costs and outgoings with invoices and receipts.

While an executor may have lived close to the deceased when they accepted the role, they may since have moved, potentially requiring the estate to pay the executor’s travel and accommodation expenses.

Right of survivorship

If the deceased has a surviving spouse or partner, a bank account in joint names will automatically pass to the surviving account holder on provision of a death certificate. This gives the executor access to funds immediately.

Transferring land in a deceased estate

What is a Transmission Application?

The executor of a deceased estate dealing with land where there is a Will may have to apply for a grant of Probate from Supreme Court of NSW authorising them to administer the estate in accordance with the Will.

If there is no Will, the next of kin applies to the Supreme Court of NSW for a grant of Letters of Administration, appointing them as administrator and authorising them to administer the estate according to the intestacy rules.

Land in NSW can be held by a person three ways:

as an individual
jointly with another person, and
as tenants in common with one or more persons.

All these holdings are dealt with separately on the death of the landowner.

Transmission to the executor

If a deceased’s Will did not leave the land to a beneficiary, it must be transmitted to the executor using an electronic lodgement network operator (ELNO) by registering a Transmission Application with NSW Land Registry Services (LRS) . The executor can then sell the land and distribute the proceeds of sale to the beneficiaries.

Transmission to a beneficiary

If the deceased’s Will leaves a property to a beneficiary, it is transferred direct to the beneficiary using an ELNO by a Transmission Application to Beneficiary and payment of $100.00 stamp duty and LRS registration fees.

What is a Notice of Death?

If the deceased held the land jointly with another person, the surviving landowner becomes the registered proprietor. Registering a Notice of Death form with evidence of the death certificate with NSW Land Registry Services via an ELNO’s platform transfers the land to the surviving joint ‘tenant’.

Superannuation and Estate Administration

How do I give my superannuation away when I pass away?

Superannuation doesn’t normally form part of your estate. It can’t be included in your estate and or left to someone in your Will. It usually goes to the person that you nominate to receive the benefit from your superannuation.

Why can't I include my super entitlements in my Will?

The money in your superannuation account is not owned by you personally. It is owned and managed by the trustee of your superannuation fund who holds it on trust on your behalf. Only they can distribute the money in your account to your beneficiaries, but not as part of your Will.

What is a death benefit nomination?

A death benefit nomination is a non-binding nomination made by you advising the trustee of your superannuation fund who you would like to receive your death benefit on your passing.

A binding death benefit nomination is a binding nomination made by you directing your superannuation fund trustee to distribute superannuation in your account to your nominated beneficiaries . You can only nominate certain types of people, including a spouse, a de facto partner, children, dependents, inter-dependents, and your estate.

A traditional binding death benefit nomination lapses after three years if it has not been renewed. However an increasing number of funds now allow non-lapsing binding nominations.

How do I ensure that my super is distributed according to my wishes?

Complete a binding nomination and insert in your Will a clause stipulating who is to receive the benefits of your superannuation account. Nominate your legal representative as the beneficiary of your superannuation, who then distributes it according to your Will.

make a binding death benefit nomination with your superannuation fund, which will distribute the money to the named beneficiaries on your passing.

What if I don't make a binding nomination?

If you don’t make a binding nomination or at the time of your passing it has expired, the superannuation fund trustee has the ultimate discretion about who receives that benefit. They can either pay the money directly to your estate or decide which of your beneficiaries should receive it.

Superannuation Death Benefit

A superannuation death benefit is a payment to a dependent beneficiary or to the trustee of a deceased estate. The form of the payment and the recipient are dependant on the rules of the superannuation fund and the requirements of the Superannuation Industry (Supervision) Regulations 1994. Superannuation differs from other assets in that it does not automatically form part of a deceased estate.

Nominating a beneficiary

If a super fund’s rules allow, a person can nominate a beneficiary, and the nomination can be binding or non-binding. A beneficiary must fit the definition of “superannuation dependent”, including a spouse or de factor partner, a child of any age, or someone who was financially dependent on, or in an “interdependency relationship” with the deceased at the time of their passing. An interdependency relationship exists between two people who live together in a close personal relationship, where one relies on the other for domestic support, personal care or financial support.

If a nomination is not made, a superannuation fund trustee may use their discretion to decide who should receive the payment, regardless of what is indicated in a will, or to make a payment to the deceased’s legal personal representative (the executor) to distribute the payment in accordance with the deceased’s will.

Binding nomination

For a binding nomination to be valid, it must be in writing, signed by the superannuation holder, and witnessed by two adults not mentioned in the nomination. The proportion payable to each beneficiary must be certain and beneficiaries must meet the definition of a superannuation dependent.

Some binding nominations can be indefinite and others must be renewed after 3 years. A binding nomination increases the likelihood of the benefit passing to an intended beneficiary and a superannuation death benefit is paid faster than if payment of the benefit is left to a trustee’s discretion or it is directed to an estate.

A binding nomination can be challenged in certain circumstances.

Non-binding nomination

Some superannuation funds do not allow members to make binding nominations.

A non-binding nomination means a superannuation fund trustee will consider the nomination as an indication but has full discretion to pay the benefit to an individual(s) or an estate they believe is the most appropriate beneficiary. Alternatively, the trustee can make a payment to the deceased’s legal personal representative to be distributed in accordance with the Will.

If a dispute arises over who is to be a beneficiary, it can be resolved through the Australian Financial Complaints Authority or through the courts. If the superannuation death benefit is paid to an estate and the deceased’s Will does not provide for it, or the deceased died without a Will, the benefit may be distributed in accordance with the NSW intestacy laws.

Tax returns

If a superannuation death benefit is received through a deceased estate, the estate will have paid tax on the beneficiary’s behalf, so the death benefit is not included as assessable income on a tax return.

If you receive a superannuation death benefit directly from a superannuation fund, the fund will provide an income stream payment summary to assist you to do a tax return.

Life Insurance and Estate Administration

The purpose of life insurance is to provide a cash payment for your loved ones if you pass away.

Life insurance can be held through a policy taken out personally or through a superannuation fund.

Should I hold policy in my own name?

If you name a beneficiary in the policy, they will receive the proceeds after your passing. Otherwise, the proceeds will go to your estate and be dealt with according to your Will.

If your Will does not specify who receives the life insurance proceeds, they will form part of your “residual estate” and be paid to your residual beneficiaries.

If you have outstanding debts or other claims against you when you pass away, the proceeds from the policy may be used to pay them.

What is a "testamentary trust?

If you want your life insurance proceeds to be paid to your estate, you may wish to the inclusion of including a testamentary trust in your Will.

A testamentary trust:

ensures that the proceeds are passed to your intended beneficiaries, as and when you direct;
gives your beneficiaries capital gains and income tax advantages; and
gives some protection for assets in the event a beneficiary becomes bankrupt or divorced.

Insurance held through your super fund

If you hold a life insurance policy through your super fund, your options as to who receives the proceeds are more restricted and the tax considerations are more complex than for a policy you own.

In that event:

You may nominate your estate or a person who qualifies as a “dependent” for superannuation law purposes to receive the super proceeds; and
if the beneficiary is not also a “dependent” for tax law purposes, there may be an additional layer of tax on the payout to the beneficiary.

Selling deceased estate shares (NSW)

Private company shares vs public company shares (stock exchange)

Private Shares

Privately held company shares are not traded publicly via a stock exchange. They require private transactions based on securities legislation and (usually) a shareholders’ agreement containing the procedures, conditions and rules about the transfer of shares. Proprietary Limited (Pty Ltd) companies have at least one share issued.

Public Shares

Public company shares are traded on an established stock exchange (e.g. the ASX), which allows anyone to buy and sell shares in the public market.

What happens to shares when a shareholder dies?

When there is a Will and probate has been granted, the executor complies with the deceased’s instructions and any shareholder conditions.

The deceased’s instructions are usually that shares be:

gifted; or
transferred to beneficiaries; or
sold.

Gifting shares

The deceased may transfer the shares to a beneficiary as a gift. The executor notifies the broker (for public company shares) or the company (for private company shares) of the shareholder’s death. The executor may be advised what supporting documentation is required and details about the shares and potential dividends.

Different types of securities and shares have different applications and requirements.

If the shares are to be transferred to the executor who is also a beneficiary, the executor must provide a separate application and usually a certified copy of the grant of probate.

Transferring shares to beneficiaries

The executor and beneficiaries may agree to transfer shares as part of the inheritance, rather than selling them and distributing cash.

Any beneficiary inheriting estate assets should keep a record of the transfer of shares for the purpose of capital gains tax.

Selling shares of a deceased person

The deceased may specify that their shares are to be sold and the distribution of the proceeds of sale. Specific applications and requirements would need to be fulfilled.

The executor or administrator completes a ‘Transmission Application Form’ which identifies the legal representative and allows the shares to be transferred to the estate before being sold.

What if there is no Will?

If the shareholder died without a Will (i.e intestate), an eligible person (such as the deceased’s spouse or de facto partner or a close relative) must apply to the Supreme Court of NSW for a grant of Letters of Administration. The applicant then becomes the administrator of the estate.

The administrator takes care of funeral arrangements, collects and records assets, and pays off any debts. The Succession Act 2006 (NSW) determines how the estate is distributed.

The documentation and application requirements to sell or transfer shares is the same as when there is a Will.

What happens when a sole director/shareholder dies?

If the sole director/shareholder of a business dies, an executor can rely on the company’s constitution and the Corporations Act 2001 (Cth). Section 201F(2) of the Corporations Act 2001 provides that if a company’s sole shareholder and director dies, the deceased’s personal representative (i.e the executor, administrator or trustee) may appoint another person as a director of the company to continue business operations (unless the company’s constitution specifies otherwise).

If there is a Will, the executor can appoint an interim director to run the business pending for a grant of probate, following which the beneficiaries can take control of the company.

If there is no Will, once they the administrator is granted letters of administration, they manage the transfer or sale of shares.

What happens to jointly held shares?

Shares held jointly or co-owned usually do not form part of the deceased estate and pass to the surviving co-owner.

Common documentation requirements

To sell or transfer shares from a deceased estate, the following documents are usually required:

Death Certificate: This serves as proof of the investor’s death.
Will or Will extract and probate: For a small number of shares to be disposed or transferred and where probate isn’t required, the broker might ask for a certified copy of the Will. But if there is a significant number of shares, the broker will require a certified copy of the Will and a certified copy of probate.
Letters of Administration: letters of administration are required for larger sums if the deceased died intestate.
Small Estate Indemnity. This needs to be completed if there is no grant of probate. Determined on a case-by-case basis, share registries specify the general guidelines with shareholding thresholds varying between $15,000 and $25,000.
Intestacy Request and Indemnity form: Administrators may be required to fill out an Intestacy Request and Indemnity form with the share registry and/or broker if there is no Will and letters of administration is deemed unnecessary.
Executor’s Identification: An executor or administrator must provide proof of their identity.
Deceased Holder’s Identity Form: The executor or administrator will need to provide this form if the shareholder’s share registration details and legal documentation don’t match.
Section 1071B Statement: This form must be submitted if the grant of probate or letters of administration are issued in an Australian state or territory different from where the shares are registered.

What happens to your debts when you die?

Death does not extinguish a deceased person’s debts. The deceased’s creditors can still pursue repayment from the estate. Rules govern the order in which asset types can and cannot be used to repay debt.

Executor’s obligation to pay deceased’s debts

the Probate and Administration Act 1898 (NSW) provides that, if there are sufficient assets, the executor is to pay the deceased’s debts from the estate assets before distributing the estate . Failure to fulfil that responsibility can expose the executor to a personal liability to unpaid creditors.

Insolvent estates

If the estate assets are insufficient to meet all it’s debts, the estate is insolvent. The executor may have to advise creditors that the debts cannot be repaid and ask for the debts to be written off. However, creditors are not obliged to write off debts, and if they amount to more than $10,000 or they believe the estate assets are insufficient to pay all the deceased’s debts, they may ask the Court to appoint a bankruptcy trustee to the estate.

Secured vs unsecured debts

Secured Debts

A secured debt is fixed to one or more of the deceased’s assets. An unsecured debt is not attached to any asset. If a secured debt is not paid, the mortgagee will exercise their right to sell the property to recover the debt, so the executor will generally pay secured debts before unsecured debts.

If a beneficiary is bequeathed an asset securing a debt, they are receiving only the equity the deceased held in that asset. Provided the Will does not instruct that the debt is to be paid from the deceased’s other assets, to retain the asset the beneficiary must take on the debt attached to the asset. They must either repay or refinance the debt before the asset will be transferred to them.

Unsecured Debts

All unsecured debts have equal standing so no unsecured debt can be paid in priority to any other unsecured debt.

Are any debts passed on to beneficiaries?

If the deceased’s assets are insufficient to pay out the debts, beneficiaries will only be held liable for satisfying the deceased’s debts if:

the debt was jointly incurred by the deceased and the beneficiary; or
the beneficiary personally guaranteed the unsecured debt; or
the debt was secured against an asset owned by the beneficiary.

Order in which assets are used to pay debts

The executor must pay the deceased’s debts in the following priority:

Secured debts from the assets securing them; then
Funeral expenses; then
Testamentary and administration expenses; then
Unsecured debts.

Where the estate is solvent, the Probate and Administration Act sets out the order in which assets should be applied to pay debts.

If the will contains specific monetary gifts, the executor must set that money aside from the estate assets that have not been specifically left to a beneficiary.

What assets can’t be used to discharge debts?

The following assets do not form part of the estate and are not available to the executor to pay the deceased’s debts.

Assets owned by the deceased as a joint tenant will not form part of their estate. They pass by way of survivorship to the surviving joint tenant(s).
If the deceased has life insurance or superannuation and has nominated a death beneficiary, they are paid directly to that beneficiary.

If the deceased did not nominate anyone as the beneficiary of their life insurance or superannuation benefits, the benefits may be paid to the estate. The executor can only use such benefits to pay for the deceased’s funeral and the estate’s testamentary and administration expenses. They cannot be used to pay any of the deceased’s other debts unless the Will specifically permits that.

Does your intended beneficiary live overseas?

A beneficiary named in an Australian Will classed as a ‘foreign person’ must apply to the Foreign Investment Review Board (FIRB) for approval before they can inherit certain assets.

FIRB reviews acquisitions by foreign persons and determines whether the acquisition will benefit Australia’s national interests and economy.

If you wish to leave part of your estate to foreign beneficiaries, you should consider the impact of the FIRB. The assets impacted include substantial interests in securities in an Australian entity and Australian land.

‘Foreign persons’ are generally persons who are not ordinarily resident in Australia., which can include Australian citizens living overseas. Companies incorporated outside Australia or controlled by foreign trusts or foreign persons may also be affected.

Applying for FIRB Approval

Seeking FIRB approval is not generally one of the executor’s duties. However, once the legal interest has been transferred in accordance with the terms of the Will, foreign beneficiaries must apply to FIRB for approval. Strict timeframes require an application to be made within 30 days after acquiring the interest. Non-compliance with the legislative requirements can attract significant civil and criminal penalties.

FIRB application fees are significant. Unless the Will states otherwise, the beneficiary is usually liable to pay the application fee. The beneficiary may also incur legal fees if they require a lawyer’s assistance to make the application.

FIRB approval is not guaranteed: each application is assessed on a case-by-case basis. The FIRB usually takes about 30 days to consider whether the acquisition is contrary to Australia’s national interest. If approval is not granted, FIRB may impose conditions around ownership or the asset may have to be sold.

Vacancy fees

In addition, foreign owners of residential property may be liable to pay a vacancy fee if their property is unoccupied or unavailable for rent for at least 183 days in a 12-month period.

Foreign owners of residential dwellings in Australia must lodge a yearly vacancy fee return. The vacancy fee is generally the same as the application fee paid for the property, but some exemptions apply (e.g. if the dwelling is damaged or is being substantially renovated).

Exemptions to the FIRB approval requirement

There are limited exemptions available where FIRB approval is not required even if a beneficiary is a non-resident. For example, an exemption applies where an asset is acquired as a legal consequence of an involuntary act (e.g. where there is no Will and real estate is distributed according to the rules of intestacy).

Establishing a testamentary discretionary trust (TDT) in your Will may avoid the FIRB requirements; however, a TDT is only likely to be effective if none of the trust’s potential beneficiaries are foreign persons. Unless the TDT expressly prohibits foreign persons becoming beneficiaries of the TDT, the trustee will need to monitor the potential beneficiaries and notify FIRB should any of them become foreign persons while the TDT is being administered (which may be up to 80 years).

Other estate planning considerations

Other factors which may affect estates with foreign beneficiaries include:-

Capital gains events

In most circumstances, an asset passing from a deceased estate to a legal personal representative or beneficiary does not trigger a capital gains tax (CGT) liability. But an asset passed to a beneficiary who is a foreign resident would no longer be taxable Australian property and the estate must pay CGT on the transfer.

However, there are conditions and exemptions around triggering a ‘CGT event K3’, so seek tax advice if you’re thinking of leaving an asset to a foreign resident.

Foreign death duties

If an asset is gifted to a beneficiary who is a foreign resident, Australian taxes aren’t the only consideration. Many countries have death duties and inheritance taxes that the beneficiary may have to pay.

Depending on the country, these taxes may be based on the value of the asset(s) inherited or the value of the estate.

Additional taxes for trusts

Testamentary discretionary trusts with foreign residents as potential beneficiaries may be subject to surcharge land tax (on the holding of residential land) and foreign person surcharge purchaser duty (on the acquisition of residential land).

Death and taxes: deceased estates and tax returns

If you’re unsure whether and when you should lodge tax returns on behalf of a deceased person and their estate, ask yourself this: if these were my personal financial affairs, would I have to lodge an income tax return? The deceased person (and their LPR) has the same requirements to lodge a return as you.

The tax-free threshold applies to a date of death return and to an estate return but after three years an estate loses access to the tax-free threshold.

Ask yourself:

Is the taxable income above the tax free threshold?
Did the deceased person or the estate pay, or have tax withheld?
Was the deceased person conducting a business?

If the deceased person has either paid tax in any form or has had tax withheld, and had income above the tax free threshold, it indicates that the executor may have an income tax obligation.

The deceased person and estate are treated as separate taxpayers. Each will have their own tax file number (TFN) and each is entitled to the full tax free threshold in the year of death.

Estate returns are excluded from the Medicare levy on any undistributed income.

A taxpayer who was in business has an automatic obligation to lodge a tax return regardless of the business’s income levels, excluding business income generated from a private trust or a company.

Date of death return

This return is prepared for the period from the beginning of the taxpayer’s financial year (normally 1 July) to their date of death.

The executor or administrator should check whether income earned during this period is greater than the tax-free threshold. If they determine that there is no obligation to lodge an Income Tax Return, they should lodge a Non-Lodgement Advice with the ATO.

This form and the date of death return (also called a ‘final tax return’) advise the ATO that the taxpayer is deceased and that no further returns are required.

At this time, the executor or administrator should also determine and address any outstanding tax obligations the deceased had at the time of their passing.

Deceased Estate Return

An estate return relates to the administration period of the estate and is required if the estate has derived any income during the year. The executor or administrator must determine if the estate has or will have any tax obligations, then meet these obligations.

If the estate has tax obligations, the executor or administrator must apply for a separate TFN to that of the deceased person.

A deceased estate will be taxed using standard adult marginal rates for up to three years. The Commissioner can remove this concession if they believe that the estate administration is being unnecessarily delayed.

Taxpayers in receipt of fully franked dividends could be eligible for a refund of franking credits.

Should I lodge anyway?

There is an argument that the estate should not be unnecessarily burdened with the cost of preparing unnecessary tax returns. On the other hand there is an argument that it is hard to recover funds from beneficiaries to meet subsequent tax debts after the estate has been distributed. Any mistakes made in administering a deceased estate won’t become apparent until after it’s too late to fix them.

Income tax is assessed on a self-assessment basis. The Commissioner ordinarily accepts at face value the details of the return lodged, but has the right to undertake an audit on any return. The ATO’s right to audit is generally limited to either 2 or 4 years from the date a return is lodged. The two year amendment period generally relates to taxpayers with more basic affairs. Where a taxpayer is conducting a business, holds a rental property, or is a beneficiary of trust income, the audit period is four years. When the relevant time period elapses, unintended omissions or errors within the return are quarantined.

Given the uncertainty of the executor’s personal responsibility of income tax after an estate has been distributed, some executors avail themselves of the protection of this quarantined period by physically lodging a return even when the income is below the tax free threshold.

In the case of fraud or tax evasion, the Commissioner’s time in which to amend returns is unlimited.

Insolvent Deceased Estates (NSW)

Deceased estates refers to the assets and liabilities of a person who has passed away. When someone dies, their estate must go through a legal and financial process to distribute their assets to beneficiaries and pay any debts.

What is an insolvent estate?

Insolvent estates occur when the assets from a deceased estate are insufficient to pay out the liabilities and expenses, and money is owed to the estate’s creditors (a company or person who is owed money). The administrator/executor or the legal personal representative (LPR) is responsible for administering the deceased estate. These cases are managed differently from regular estates, with laws governing the priority and order in which a creditor is paid.

Administering an Insolvent deceased estate

The LPR administering the estate can choose how to proceed. Insolvent deceased estates in NSW are managed under the Probate and Administration Act 1898 (NSW) or the Bankruptcy Act 1966 (Cth).

The person administering the deceased person’s estate will need to apply to the court and distribute the estate as per the priority set out in the NSW administration laws.

The Bankruptcy Act

The Bankruptcy Act 1966 (Part XI) allows the Federal Circuit Court to appoint a bankruptcy trustee to administer an insolvent deceased estate.

The estate’s administrator can apply to the Federal Court for an administrator’s petition Order to make the estate bankrupt. The administrator may also be required to submit an affidavit, a statement of affairs, and proof that the deceased met the Australian connection requirements.

A bankruptcy trustee is appointed, assets are liquidated and are distributed to creditors in order of priority.

The creditor must be owed at least $10,000 (or, where the petition is being presented by multiple creditors, at least $10,000 must be owed to these creditors in total).

The bankruptcy regulations require the creditor to give the official receiver a copy of the administration order. The bankruptcy is then registered on the National Personal Insolvency Index.

If the deceased person was already bankrupt on their death, the official receiver may continue to deal with the bankrupt estate administration.

Bankruptcy rules on death

Debts are not discharged automatically when someone dies: all liabilities in the deceased’s sole name will have to be repaid from the estate.

Bankruptcy rules are applied when paying a creditor of When an insolvent estate. Administration of an estate under the Bankruptcy Act is similar to management of property of a living bankrupt. The executor/administrator must follow a specific order of priority to avoid being personally liable for mishandled money.

Creditors of insolvent estates can be secured, preferential or unsecured.

The order of priority for payments is:

Secured creditor;
Funeral expenses;
Testamentary and administrative expenses;
Preferential creditor;
Unsecured creditors;
Interest on unsecured loans;
Other debts;

Inheriting personal debt – what is your liability?

As a beneficiary of a solvent estate, the assets must first be used to pay any outstanding debts. Distribution to beneficiaries can occur if there is a surplus.

However, if the estate is insolvent and there are insufficient assets to cover all the debts, a person does not inherit the deceased person’s debt unless:-

the debts are held jointly, or
someone has guaranteed payment of the deceased person’s debt.

Whilst debts are not inherited by family members, exceptions to the rule are:

If the deceased’s loans had a third party guarantee, then the third party would be liable; and
If the deceased gifted money within seven years before death, it may be considered avoidance of paying creditors.

What about life insurance and superannuation?

Certain assets of a deceased estate are preserved and not available for the creditors. Life insurance policy proceeds are not allowed to be used to pay estate debts unless:

They are funeral or testamentary expenses; or
the Will of the deceased or previous contractual agreements directs otherwise.

If the deceased held superannuation benefits and life insurance funds, the payments are distributed as per:

the nominations in the policy; or
the deceased’s will directive, or;
the intestacy laws.

Disclaiming a gift

A beneficiary who rejects an inheritance usually has an understandable or valid reason.

Financial Reasons

A beneficiary may not want an inheritance for financial reasons.

A beneficiary may not want an inheritance because they are worried about how it will affect their eligibility for social security payments. However, they may want to rethink their decision, as Centrelink may view the rejection of a testamentary bequest as a disposal. Social security law allows a pension recipient to gift a maximum amount each financial year for a maximum of five years. Centrelink would most likely consider a rejected bequest a gift. If a beneficiary gives away assets or income over the set amount, it will count towards their income and asset test.

Personal Reasons

There may be a personal reason why a beneficiary does not want an inheritance. If a beneficiary has a painful or complicated history with the deceased, they may feel unable to take the bequest.

Inconvenience

A testator may bequeath a gift that is more trouble than it is worth.

When a testator leaves a beloved pet to a beneficiary in their Will, the beneficiary may reject the gift. The beneficiary may be unwilling or unable to take ownership of a pet. As a precaution, a testator should always nominate a secondary beneficiary for pets and consider leaving a cash bequest to this beneficiary to offset the costs of pet ownership.

How to decline an inheritance

A beneficiary who does not want an inheritance can reject their entitlement. This is known as a disclaimer. A person can disclaim a bequest by effective communication by any means.

When a beneficiary disclaims a gift, the executor can then pass the gift on to the next eligible beneficiary. A beneficiary who is considering refusing a bequest must be aware that they cannot:

disclaim the gift before the testator dies;
disclaim the bequest after they have accepted it; or
retract a disclaimer if other parties have relied on it.

To be effective, the disclaimer must:

constitute an absolute rejection;
be timely; and
be communicated to the donor or their agent.

What is a deed of family arrangement (NSW)?

A deed of family arrangement (DFA) legally changes the division of a deceased person’s assets between the beneficiaries. It can can redistribute the assets of an estate to reflect individual family members’ financial needs, changing the way assets are divided either under the terms of a Will or under the rules of intestacy. A beneficiary wanting to disclaim their inheritance can enter into a DFA.

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.

All interested parties must sign the deed. All parties to the deed must be adults with mental capacity who agree to the terms of the deed.

The rules of intestacy

The rules of intestacy are in the Succession Act 2006 (NSW). They set out the way in which the assets of a deceased person with no Will (i.e. an “intestate estate”) are distributed.

The rules provide that 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 is entitled to the statutory legacy ($350,000 adjusted by the CPI from 2005) regardless of how much the estate is worth.

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.

Do I need a deed of family arrangement?

A DFA allows the beneficiaries to change the distribution of assets to better suit their needs. It may be used when the beneficiaries wish to change the terms of the Will to suit their circumstances.

If an “eligible person” (a spouse, a child, a former spouse or a dependent) is aggrieved that they have received nothing or insufficient assets 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, it can lead to estrangement between parties to the application, and it can be very expensive. Court proceedings can be avoided by completing a DFA.

When can a deed of family arrangement not be used?

A DFA cannot be used to reduce the entitlement of someone under 18 years, or for a person with an intellectual disability. Those require a court Order.

A beneficiary cannot use a DFA against public policy (for example, to avoid a Family Provision Claim).

Capital Gains Tax (CGT)

The Income Tax Assessment Act 1997 (Cth) provides that passing 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). If the deed does not meet the requirements of ATO ruling TR 2006/14, CGT may apply.

Transfer duty

Transfer duty (a.k.a. stamp duty) payable on the transfer of estate assets is minimal. 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. (sec. 63 Duties Act 1997 (NSW))

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