It’s common for a house, car or other item to be gifted to a beneficiary via a Will. However, there could be unintended consequences if that property is sold prior to death, or can’t be found.
Everyone owns something that has particular sentimental value. It could be anything, an item of jewellery, the family home, or an investment that has withstood the test of time. It’s only natural that when we die we might want these items to be passed directly to a loved one, rather than put into the general ‘pot’ of assets to be sold.
The key question is: What happens to a gift of specific property in a Will, if you no longer own the gifted item at the time of your death?
Amendments to the Powers of Attorney Act 2014 (Vic) and Administration and Probate Act 1958 (Vic) which commenced on 1 November 2017 have helped to clarify the answer to this question, but also raise new potential issues.
The general principle is that the gift of a specific item under a Will fails, if the item is not owned at time of death. This is called ‘ademption’ and it results in the Will being read as if the specific gift was never made. This can cause problems in a number of scenarios, for example:
In the Will, son Max is left the family home and daughter Maxine is left the residue of the estate. The Will-maker sells the family home before their death. What happens?
The answer is that Max misses out and Maxine gets the whole estate. The rationale for this rule is simple: in selling the property, the Will-maker ought to have been aware of their own Will, and must have intended that result.
But what if the Will-maker didn’t deliberately sell the property? What if the property was sold by an attorney who may not have known what the Will said? Worse still, what if the Will-maker lacked capacity and had no chance to update their Will accordingly?
Historically, it was bad luck for Max. In more recent years, however, the courts have attempted to address this issue by recognising a potential exception to the ademption rule.
Exceptions to ademption
In Simpson v Cunning  VSC 466, the Court recognised an exception to the ademption rule in the case of property intended to be gifted via a Will being sold by an attorney.
However, this exception could only apply if the Will-maker lacked capacity when the property was sold and the Court was satisfied the Will-maker would have intended the beneficiary (Max in the above example) to have a share of the remaining proceeds. Further, as this is not binding legislation, it is difficult for Will executors to rely on this exception without a costly application to the court seeking guidance to confirm that the exception applies.
A legislative exception has also existed under the Guardianship and Administration Act 1958 (Vic) but only applied where specifically gifted property had been sold or disposed of by administrators appointed by VCAT to act for disabled or incapacitated persons. This exception continues.
Exception to ademption for sale by attorney
Since 2017, Section 83A of the Powers of Attorney Act 2014 (Vic) introduced an exception to the ademption principle for any property gifted by a Will which is sold by an attorney. This section provides that a beneficiary under a Will has the same interest in any money or other property arising from a sale, mortgage, exchange, partition or other disposition of gifted property that they would have had if the disposition had not occurred.
Unlike the court recognised exemption, this legislative exception applies regardless of whether the Will-maker knew that the property was being sold and had the capacity to change their Will.
There is no requirement for the attorney (who may not even know what the Will says) to keep the proceeds of sale from a gifted item separate to the Will-maker’s other assets. However, if the sale proceeds are intermingled with other assets, it can be difficult at the time of death to trace the proceeds. Accordingly, it would be preferable for the Will to specify a backup or alternate provision for a beneficiary if the gifted asset (eg property) is sold during the Will-maker’s lifetime.
Where this exception causes unintended consequences, then a further new Section 50 of the Administration and Probate Act 1958 (Vic) allows a beneficiary of a Will to apply to the court to rectify this. This requires that a beneficiary under a Will gains an ‘unjust advantage’ or suffers and ‘unjust disadvantage’. We are yet to see exactly what this means but perhaps, using the initial example above:
The family home is sold and the proceeds paid towards a refundable accommodation deposit (RAD), while all other assets are used to cover the Will-maker’s daily living costs. Then it could be that Max would get the full proceeds of the RAD (applying Section 83A), while Maxine is left empty handed.
Perhaps the court would consider that an ‘unjust advantage’ and step in to rectify the distributions?
How could this impact you?
The new provisions impact on strategy and drafting for both Wills and Powers of Attorney. In particular:
- Specific gifts in your Will need to be drafted to contemplate whether you wish the gift to lapse or whether alternate provision is to be made if the gifted item is disposed of (eg sale of a house);
- It’s more important than ever before that your Powers of Attorney are carefully drafted and, if required, include special conditions to address the sale of specific items. This may include directions to your attorneys about which assets are to be sold first to fund care, or put them on notice that you want an item to eventually pass to a particular beneficiary; and
- You may need to consider how a sale of property could impact your Will where it is completed by an attorney (eg while you are overseas), even if done with your full knowledge and consent.
How we can help
For more information, please do not hesitate to contact us .