A deed of family arrangement legally changes the way a deceased person’s assets are divided between the beneficiaries. It can either change the terms of a Will or change the distribution under the rules of intestacy (i.e. a formula which determines the division of assets of a person who dies without a Will).
A deed of family arrangement can also provide the personal representative of the estate (i.e. the executor or administrator) with protection from any future claims.
To be valid, a deed of family arrangement must be:
- Signed by the legal personal representative; and
- Signed by and have the consent of all the beneficiaries (over 18 years of age) entitled under the original Will or under the intestacy rules (if there is no Will).
When would I need a deed of family arrangement?
A deed of family arrangement might be used:-
1. When the beneficiaries wish to change the terms of the Will.
A deceased person’s Will may sometimes need to be changed to suit the beneficiaries’ circumstances.
For example:-
- If the Will is old, it may not take into account the births and deaths in the years since it was executed; or
- The person entitled to inherit the majority of the assets may wish to pass their share on to other beneficiaries in the Will (e.g. their children).
A deed of family arrangement allows the beneficiaries to change the distribution of assets to better suit their needs.
2. When the beneficiaries are not happy with the distribution of an estate under the ‘intestacy rules”.
Where the intestacy rules apply, the spouse of the deceased will be entitled to the majority of assets, including a ‘statutory legacy’. This is a sum of money taken from the estate and gifted to the spouse.
The spouse is automatically entitled to this regardless of how much the estate is worth. If the estate is valued under the value of the statutory legacy, the spouse will receive everything from the estate.
What if the deceased has adult children with families of their own who would benefit from estate assets? Agreement could be reached using a deed of family arrangement leaving something to all the deceased’s immediate family.
3. When someone wishes to challenge a Will
If an ‘eligible person’ has received nothing or feels that they have not received enough from a deceased relative’s estate, they may be able to challenge the Will in Court.
This is known as a family provision claim and it can be made by a child, a spouse, a former spouse, or a dependent.
A family provision claim is heard by the Supreme Court of NSW. It can take years to resolve and can be very costly.
A deed of family arrangement can avoid court proceedings by allowing the aggrieved people to meet with the other beneficiaries and design a new compromise plan to distribute the assets.
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 without mental capacity (e.g. with an intellectual disability).
To do this would require a Court order.
Capital Gains Tax (CGT) Considerations:
The passing of an asset to a beneficiary of a deceased estate is exempt from capital gains tax (s 128.20 Income Tax Assessment Act 1997 (Cth)).
A deed of family arrangement can 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) (ATO ruling TR 2006/14).
If the deed does not meet the requirements of the above ruling, CGT may apply.
Contact us to discuss how CGT could affect your estate.
Transfer Duty (commonly called ‘stamp duty’)
Stamp duty is legislated by State governments with no Australia-wide set of rules.
Stamp duty payable on the transfer of an asset from an estate in NSW is nominal.
In NSW, stamp duty arising from the transfer of assets using a deed of family arrangement is payable only on the value of assets exceeding what the beneficiary would have received anyway applying the Will or intestacy rules. (s63 Duties Act 1997 (NSW))
Stamp duty and its exemptions can be quite complex, and we recommend that you discuss your specific situation with a tax advisor.
Where to now?
Contact us to prepare a deed of family arrangement for you.
