Nature of Estate

Rural farm enterprises may be conducted through a series of companies and family trusts, or land that is jointly owned as joint tenants with spouses or children.  Older rural farm enterprises may still have “Gorton style” companies, which were used to limit death duties, where one person (usually the parent) owns control shares and another (usually the child) owns equity shares. 

It may come as a surprise to a testator that he or she cannot deal with these assets in their will.  The testator’s advisors may attempt to resolve these issues, but they may be expensive and may not be effective.  For example, a solicitor may prepare a “statement of wishes” to the trustee of the family discretionary trust to be attached to the will.  However, these are not binding and the trustee may ignore the statement.1 The testator may arrange for the trusts to be collapsed, the joint tenancy to be severed and re-transferred, and/or the companies to be dissolved during his life time, or direct the executor to do so after he passes away, but this will incur punitive capital gains tax and stamp duty.  In Ireland v Retallack [2011 NSWSC 846, the testator’s will provided

“I DECLARE that my said executors will be entitled to manipulate the assets of my estate in order to transfer real property detailed in Schedule One from Glengowan (Moorilda) Pty Ltd to SANDRA JANE RETALLACK and any other real property from Glengowan (Moorilda) Pty Ltd to GORDON FAMILY CORPORATION.”

This simple direction led the executor to incur significant costs obtaining accounting and legal advice about the tax and stamp duty consequences of different scenarios, that led Pembroke to say that the estate was being treated as a milch cow.

The testator may consider that creating a discretionary trust may limit the testator’s estate from family provision claims. In Flinn v. Fearne [1999] NSWSC 1041, Master McLaughlin did not designate a discretionary trust as notional estate where the testator was the settlor and appointed the trustees because the trustees were independent and had fiduciary duties to the beneficiaries.  However, in Kavalee v Burbidge (1998) 43 NSWLR 422, the NSW Court of Appeal designated a Liechtenstein stiftung (similar to a discretionary trust) as notional estate because the trustee was required to act in accordance with the testator’s instructions. This suggests that a discretionary trust may be regarded notional estate for the purposes of Chapter 3 Succession Act if the testator was the trustee.

Advisers should inform clients that creating a family discretionary trust or company may provide asset protection and be tax effective, and may limit the estate’s exposure to family provision claims, but it may limit the client’s ability to dispose of their assets as they wish.

Inter-generational Transfers

A rural family may also take advantage of stamp duty and capital gains tax concessions for inter-generational transfers.  However, this may have unexpected consequences.  In Alexander v Jansson [2010 NSWCA 176, the testator and his mother owned a rural property as tenants in common. His 94 year old mother had lived on the property for 73 years.  Unfortunately, the testator died before his mother, and his children wanted to sell the property to obtain their inheritance, and force the mother to move.  The testator’s mother was compelled to bring family provision proceedings so she could remain living on the property.

Family Provision Claims

Even if the testator has engaged advisers to do considered and comprehensive estate planning, this may be upset by family provision or other legal claims. 

First, there may be claims by the child or children who worked on the farm.  The child may have been paid less than award or nominal wages, and may not have pursued higher education or obtained trade qualifications because they were working on the farm. Their claim may be framed as a family provision claim,2 or may also be framed as a proprietary estoppel or promissory estoppel claim on the basis that the testator made a representation that they would receive the farm, or a particular parcel, and they relied on the representation to their detriment.3 However, it is not enough to show that the child worked on the farm.  In Vigolo v Bostin (2005) 221 CLR 191, the applicant worked on the family farm since he was 16 until he had a falling out with the deceased.  However, he could not demonstrate the deceased had left him without adequate provision for his proper maintenance and advancement, because of his strong financial circumstances and the competing situations and claims on the testator’s bounty of the other beneficiaries.

Alternatively, the testator may leave the farm to the child who stayed behind, but may impose difficult conditions.  In Couch v Couch [2002] VSC 502, the will provided that the deceased’s dairy farm be held on trust until the deceased’s widow’s death, and then to the applicant son subject to paying his brother a third of the net estate.   The applicant son was concerned that the trustee would encumber or sell the farm during the widow’s lifetime.  Ashley J did not order that the farm be immediately transferred to the son, but ordered that the trustees could not sell the farm, could not encumber it except to raise capital for infrastructure improvements, and that the applicant son would pay a proportion of any interest on such loan.

Second, there may be claims by the child or children who left.  The courts acknowledge that the testator has no obligation to treat the testator’s children equally.  As stated above, the child who stayed behind has often sacrificed part of his life to the rural enterprise, and has provided much of the support to the parents.  In Dobra v Brennan [1999] WASC 98, Commissioner Martin QC said

“Whilst Thomas had chosen his way of life as a farmer, that decision had been somewhat thrust upon him, by the difficult circumstances concerning James' ill health that had prevailed when Thomas was a boy of 15. Thomas has obtained no formal or professional qualifications, unlike his sisters. His whole livelihood and existence is based upon his capacity to derive an income from the Calingiri Properties, as he has been doing with varying success since 1970.”

He noted that it was largely the son’s efforts that resulted in the testator ultimately holding the valuable farming assets that he did.  In Carey v Robson [2010] NSWCA 212, the NSW Court of Appeal noted that the son had spent all of his working life building the value of the rural farm enterprise, with little remuneration, at first with the testator and then, increasingly, by his own efforts, and the sisters had contributed little if anything to the value of the estate, and the son had largely borne the burden of looking after the testator in his illness.

In Carey v Robson, the testator transferred a parcel to his son during the testator’s life time worth approximately $4.8 million, and the testator in his will left a parcel to his son worth approximately $4.5 million, and property and cash worth around $500,000 to each daughter.  The NSW Court of Appeal noted that the testator was not obliged to treat his children equally and dismissed each daughters’ claim. 

Further, the courts strive to ensure that the rural farm enterprise remains viable. This issue will become more acute as the strong Australian dollar damages Australian agricultural competitiveness and many of Australia’s rural properties move into drought.4  In Dobra v Brennan, the properties had always been worked as one farming unit, and the lands would not be sufficient to continue a viable farming operation. 

In Peters v Salmon [2013] NSWSC 953 (currently on appeal), two of the testator’s daughters were seeking two of the parcels of property.  Ball J noted that the property was marginal and was supporting two families - the beneficiary son and his family, and the testator’s widow. In addition, there was evidence that the rural farming enterprise could only be operated as an integrated whole.  

In any case, Ball J acknowledged that the viability of the farm may need to yield to providing provision.   He said at [92]

The effect of the order I have proposed gives Michael reasonable prospects of remaining on the farm in the long term. But if that is not possible, he will have adequate assets on which he can live. As I have said, the preservation of the farm cannot be a determinative consideration.

A further twist is when an applicant applies for provision from an estate in circumstances where the applicant already has an interest in an unrelated rural farm enterprise.  A family provision applicant must demonstrate need.  At first blush, it may appear that the applicant has no need when they have an interest in a rural farm enterprise.  However, the applicant may be asset rich and cash poor, or may be involved in a rural farm enterprise where they have little control.  In Lloyd-Mayfield v Williams (2005) 63 NSWLR 1, the NSW Court of Appeal (Bryson J, Giles and Stein JJ concurring) confirmed that the applicant was entitled to significant provision from her father’s estate to purchase a house in town notwithstanding her interest in her husband’s family’s property and an interest in the family discretionary trust.   Bryson J described many of the debits and credits in the rural farm enterprise as “fairy gold” because they were not readily enforceable.  The trial judge (White J) said that it was not unreasonable for the applicant and her husband not to sell the property to fund their retirement, because the property was being used to support a number of families in a rural farming enterprise and they intended to leave the property intact to pass on to the next generation.   Bryson noted at [12]

“In the present case, it is not solely in pursuit of financial advantages for themselves that the respondent and her husband participate in the Partnership and the Trust, and it cannot be expected that it will ever be; as is quite familiar in rural life, they are participating in a continuing enterprise involving the interests of several generations of closely related persons. Disrupting the arrangements would disrupt the pattern of family relationships upon which their lives and happiness are formed, and would also disrupt the interests, expectations and life plans of close relatives with whom they feel a sense of identity. “

Financial Information

The case may requires detailed evidence about the farm’s profitability and viability.  This may include balance sheets, profit and loss statements, livestock holdings, calving and weaning rates.  This may also include independent information such drought and flood projections and long term trends from Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) and the Bureau of Meteorology.  This may also include expert reports prepared by agricultural consultants and accountants.

However, litigants need to be advised that they will need to swear that their financial information is correct.  The other parties may issue subpoenas to third parties to cross-check information that the litigant has provided to third parties is the same as the information in the litigant’s affidavit.  The litigant must ensure that the financial information that forms part of their affidavit is consistent with information that they have provided to their bank, information that they have provided to the Australian Tax Office, information that they have provided to an ex-spouse as part of a property settlement pursuant to the Family Law Act, or information provided to a trustee in bankruptcy.  Further, they need to be advised that the information may be used against them in other contexts such as a property settlement.

Finance Facilities

Estate litigation may also affect the rural farm enterprise banking facilities.  The bank may require the person operating the rural farm enterprise to give personal guarantees even though the person does not have any of the estate’s assets because the executor may not distribute the estate pending a family provision claim because the executor is not protected.5 The bank’s covenants may require the rural farm enterprise to notify the bank of the litigation.  Estate litigation costs are personal expenses relating to the testator’s personal affairs.  Further, if a court orders provision, it takes effect as a codicil to the will.6 Therefore, the cost of borrowing to finance the litigation or the provision may not be tax deductible.