Early inheritance is given when parents or grandparents give an advance on part or the whole of the inheritance to the children or grandchildren while they are still alive. As people are living longer, this phenomenon is becoming more common, especially due to the high cost of housing in Australia. Many parents want to help their children advance in life, by giving them a lump sum of cash for a deposit on a house or to fund a business venture. However, from a legal perspective, it is important that both parties involved in a gift of early inheritance carefully consider the risks involved.
Should I Give Early Inheritance?
The beneficiary of an estate typically receives their inheritance after the death of the testator. Early inheritance allows a person to see their child or grandchild enjoying the gift, but it is not something that should occur without careful consideration and legal advice.
Before giving an early inheritance, a person should ask themselves the following:
- Will I have enough funds left over to enjoy myself for the rest of my life?
- Will the gift attract stamp duty or capital gains tax liability that would not usually apply?
- Will the gift have consequences for my current social security benefits?
- Would the inheritance be better given in the form of a loan instead of as an outright gift?
A financial planner may be able to offer an objective view on some of these questions while others may require a solicitor’s advice.
Early Inheritance As A Loan
Giving an early inheritance as a loan is sometimes the best approach as this can help ensure that all the children ultimately benefit in a fair and equal manner. The testator’s will can set out that the loan is forgiven in place of a bequest and provide appropriate gifts to the other beneficiaries so as to equalise the distribution of the estate. Furthermore, a loan is not vulnerable to property settlement proceedings or claims from creditors.
Problems With Early Inheritance
While some parents and grandparents are happy to give an early inheritance, others may feel that they need to acquiesce or lose contact with their children or grandchildren. There is growing concern that Early Inheritance Syndrome leads to financial elder abuse. The child might feel that their parent no longer needs the money and that they will eventually inherit the property anyway. If a parent is not willing to give an early inheritance, the child may resort to emotional and physical abuse. Problems relating to Early Inheritance Syndrome may be particularly likely when an adult child has financial power of attorney over a parent.
Financial Elder Abuse
Financial elder abuse occurs when a person takes or misuses the money, assets or property of an older person, usually a family member, for personal gain. An abuser might use undue influence to persuade someone to change their will or pressure them to release an early inheritance. There is little legislative protection for vulnerable elderly people unless there is fraud or embezzlement involved, and even then it can be difficult to prove the illegal act as the vulnerable person may be unaware of the abuse or unwilling to report it.
Another complication that can arise from early inheritance is that a testator may wish to change their will’s terms to equalise the inheritance so that their other children receive an equal share. If that occurs, a general reading of the will would suggest that the testator unfairly neglected to provide for one of their children. If an early inheritance has been used by the time the testator dies, the beneficiary may well have a claim against the estate for further provision, regardless of any inequity that creates between themselves and other beneficiaries.
In the case of Sgro v Thompson , a parent gave an early inheritance in the form of a house to the younger daughter on the understanding that the family home would be left to the older daughter in the will. The parents made it clear that they wished to treat their children fairly and to give a house to each. The younger daughter subsequently sold the house and lost the money in investments. When the parents passed away, the will left the family home to the older daughter with nothing left over for the younger daughter after the payment of debts and expenses. The younger daughter made a claim for further provision under the Succession Act 2006.
The NSW Supreme Court found that the testator had left inadequate provision for the younger daughter given her financial need and made an order that she receive 40% of the proceeds of the sale of the family home. The elder daughter appealed this decision to the NSW Court of Appeal. The Court of Appeal found that the lower court’s decision was flawed, as there are other factors apart from financial need that are to be given equal weight. The court deciding such a case needs to evaluate all relevant factors, including the significance placed by the testator on the early inheritance. The court restated a common principle that consideration should be given to the judgment of a capable testator if it is evident that the testator duly considered claims on the estate.
The Court of Appeal unanimously agreed that the judgment should be set aside and the claim dismissed. The court also ordered the younger daughter to pay the legal costs of the elder daughter, which amounted to over $90,000.
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