In its recent judgment in McElligott v Public Trustee of Queensland(1) the Queensland Supreme Court considered a matter that had arisen out of the disputed construction of a deceased's will. The court paid particular attention to the entitlement to proceeds from the sale of estate assets.
The estate of the deceased primarily comprised a property in Ninderry, Queensland, which had an estimated worth of between A$700,000 and A$800,000. The estate owed liabilities of between A$350,000 and A$400,000, including loans totalling more than A$250,000, which were secured by a registered mortgage over the property. The estate's debts could not be paid without the sale of the property.
On June 25 2012 a daughter of the deceased and a beneficiary of the estate, Lorain McElligott, was made bankrupt. McElligott had two young children – a girl, Takarli, aged six years and a boy, Tarson, aged three years (the grandchildren).
The public trustee of Queensland had drafted the will of the deceased and was later appointed to represent the grandchildren in the matter.
The court was asked to consider whether:
- the grandchildren were given an equitable estate for a term of five years or merely a personal right to occupy the property for that period; and
- McElligott was a person 'under a legal disability' as a result of her bankruptcy, and therefore if the executor should hold on trust the share to which she was entitled.
Of material importance was Clause 6 of the will, which stated:
"I GIVE my house and land at… together with all my household furniture and household effects (other than motor vehicles) therein at my death ('the property') TO my Trustee ON TRUST to permit my granddaughter TAKARLI and my grandson TARSON both presently living at the property to have the full use of the property for a period of five years from my death TOGETHER with the full use of my household furniture and household effects as a personal right...
The income actually produced by the property is to be applied as income under my Will.
ON the failure or termination of this life interest my Trustee is to hold the property ON TRUST to form part of the residue of my estate."
The applicant – the sole executor and son of the deceased – submitted that the true construction of Clause 6 entitled the grandchildren to a personal right to occupy the property. In turn, the public trustee submitted that the grandchildren had an equitable estate in the property.
If the grandchildren had an estate, then they had an equitable entitlement to the income from the net proceeds of sale for the balance of that period of five years. If instead they had a personal right to occupy the property, they would have no entitlement to any of the proceeds of sale.
The public trustee had conceded that there was at least one drafting error in the will, that being the description of a 'life interest' in the last sentence of Clause 6. In applying Section 33C of the Succession Act 1981 (Qld), the court accepted extrinsic evidence to aid in the interpretation of the clause, due to the ambiguity caused by the drafting error.
In hearing evidence from the public trustee, it was declared that the conditions regarding 'income actually produced by the property' and 'life interest' were automatically inserted by software used to create the will and not at the behest of the deceased. These mistakes were left uncorrected.
The court further heard that in the course of creating her will, the deceased had stated that she was going to "farm her property with [McElligott], and that she thought the property would generate income". Evidence was given that the deceased "wanted [McElligott] to have the income from the property and not just a place to live" and that McElligott was to "have the full use of the property". There was no discussion as to what would happen if the property had to be sold.
Use and occupy
In determining the interest held by the grandchildren, the court considered several cases regarding a right to 'use and occupy' – in the majority of instances, it was held that such a phrase indicated an ownership of property, because the 'use' of property would include a right to receive rents.
Turning its mind to whether the grandchildren had an equitable interest in the property, the court found that:
- the deceased did not intend for the grandchildren to let the property, or part of it, or to conduct some commercial venture themselves on or from it;
- extrinsic evidence regarding McElligott conducting business on or from the property was irrelevant, as under the will McElligott was given no right in relation to the property;
- as the property was left to the executor on trust to permit the grandchildren to have the full use of the property, the entitlement of the grandchildren derived from the permission of the executor, rather than the will, by way of an express grant of an estate in land; and
- it had not been established that the deceased intended to provide all of the rights, such as a right to let all or part of the property, which the holder of an estate for five years would have, to the grandchildren.
The court determined that the intention of the deceased was for the grandchildren to enjoy a mere personal right to occupy the property for a period of five years.
Finally, the court did not accept that McElligott's bankruptcy had caused her to be "under a legal incapacity". The application of the Bankruptcy Act 1958 (Cth) caused the share of the residuary estate to which McElligott, but for her bankruptcy, would be entitled instead to vest in the official trustee in bankruptcy.
This case highlights the importance of carefully drafting a will to ensure that the true intentions of the testator are fulfilled. Life interests and rights of residence clauses have different legal consequences and it is important to clearly distinguish between them in the terms of a will.
If the estate had had sufficient funds to satisfy the liabilities without the need to sell the property, this issue may not have arisen. However, while it is impossible to know the exact financial circumstances of an estate when a person passes away, it is important to give consideration to how liabilities may be met.
For further information on this topic please contact Donna Benge at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email (email@example.com). The Piper Alderman website can be accessed at www.piperalderman.com.au.
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