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Going going gone Avoiding ademption when assets are sold

Feature Articles

Cite as: November 2012 86 (11) LIJ, p.48.

A three-pronged test allows beneficiaries to receive the proceeds from prior sale of an asset gifted to them under a will, but careful drafting of the will could prevent problems.

By Christopher Groszek

Ademption is the failure of a specific gift under a will because, at date of death, the deceased no longer owns the subject matter of the gift. The Victorian case of Simpson v Cunning1 establishes an exception to this principle where the asset is sold by the deceased’s attorney when the deceased lacks capacity and cannot amend their will to account for the change in circumstances.

Ademption – failure of a specific gift

The ademption principle operates as a rule of construction in relation to specific gifts of property by will, causing a gift to fail where the subject matter is not in the deceased’s estate at the date of death.

The objective of the principle is to give effect to the words of gift actually used in the will. Historically, ademption of a specific gift has been held to follow in all cases where a change has occurred in the nature of the property, other than a change “in name or form only” – Slater v Slater.2

In Brown v Heffer, the High Court of Australia restated the principle in broad terms:3

“Ademption of a specific gift by will occurs where the property the subject of the gift is at the testator’s death no longer his to dispose of . . . An obvious case of ademption is that in which the testator has completely divested himself of the property in his lifetime so that at his death there is in his estate nothing which even substantially . . . answers the words of gift. But ademption occurs also where the property has been so dealt with that by the rules of equity it must be considered . . . as having been converted into other property, such as money, which the words of gift are not apt to comprehend.”

Such a broad rule would result in the failure of a specific gift regardless of how the change of ownership of the subject matter was effected.

Narrow exception – United Kingdom

An exception to the principle was historically recognised in cases including Shaftsbury v Shaftsbury4 and Re Larking5 where a change in ownership was effected through the unauthorised action of an agent. The exception has continued to be read narrowly by courts in the United Kingdom, including as recently as 2005, as applying only where “the subject-matter is extinguished by fraud or by tortious acts unknown to the testator”.6

Since the recognition of this exception to the ademption rule in the early eighteenth century, improvements in living conditions have significantly increased life expectancies. Since the late 1800s, life expectancies for Australians have increased by approximately 30 years – from 50.8 years for an Australian female in 1881–90 to 83.9 years in 2007–09.7

As a result of people living longer, various mechanisms, including the enduring power of attorney (financial), have grown up to enable substituted decision-making where a person loses the capacity to make decisions. The narrow exception from Shaftsbury and subsequent cases does not protect a gift that is adeemed by the actions of such an attorney. In Banks, Judge Rich QC held that such a result would be “anomalous” and in conflict with earlier decisions in the United Kingdom made in the context of orders under the Lunacy Acts.8

Broader exception – Australia

By comparison, Australian courts have been more willing to uphold an exception capable of applying to circumstances other than where the sale was unauthorised or the result of a tortious act. In Re Viertel,9 Thomas J held “with some hesitation” that Jenkins v Jones,10 an earlier case than Slater, was authority for a broader exception to the ademption principle.

In Jenkins, Sir J Stuart VC held that if a will-maker had expressed their intention that specific property (in that case, farming stock) be given to a beneficiary and, having then lost the capacity to alter their will, that property was sold by their agent, the beneficiary should receive the proceeds of sale. The judgment suggests that Sir J Stuart VC actually misinterpreted the decision in Shaftsbury, stating (incorrectly) that “the testator was not aware how the subject-matter of the bequest had been dealt with [n]o act of his [having] interfered with the furniture there specifically given” (at [328]). However, having determined that the reasoning in Re Pilkington’s Trusts11 also applied in this case, Sir J Stuart VC held that the sale proceeds of the farming stock should pass to the beneficiary.

Thomas J in Re Viertel regarded Jenkins as “expressing a reasonable exception which ought to be followed” (at [116]), noting also that in the instant case, the sale was by authorised act of the deceased’s attorney. The reasoning in Re Viertel was subsequently applied in Western Australia,12 New South Wales13 and Victoria.14

A contrary position was adopted in New South Wales in Orr v Slender,15 where Nicholas J concluded that Jenkins provided a basis for an exception only in cases of tortious acts unknown to the deceased (at [18]). However, Nicholas J did not refer to Re Viertel or the cases which followed it. Additionally, the judgment appears to have been confined to whether the act was authorised and whether the result was to confer a benefit on the plaintiff (who received the residue of the deceased’s estate).

In Mulhall v Kelly,16 Kaye J expressed reservations about the limited authorities on this point and about making a decision in an unopposed application. However, having been persuaded by the reasoning in Re Viertel, Kaye J concluded that the principle was sound “and should apply to this case” (at [15]).

In Ensor v Frisby,17 McMurdo J again examined the authorities and held that, absent contrary authority, the reasoning in Orr should be followed. McMurdo J commented that the “main difficulty . . . is in seeing any justification for ignoring the words used . . . [where] they are incapable of meaning anything other than a gift of specific property” (at [19]). Ultimately, however, McMurdo J was persuaded to follow Re Viertel, noting the “relatively smaller step” involved in recognising an exception where the act is authorised under an enduring power of attorney but the deceased is unaware of the act.18

Victoria – Simpson v Cunning

The authorities being inconclusive, the Supreme Court of Victoria again had the opportunity to review the exception in Simpson v Cunning.19

The application was brought by the solicitor/executor for a declaration in relation to the proceeds of sale of the deceased woman’s residence in Doncaster East, Victoria. The will was prepared in 1998, approximately 11 years before the woman’s death, and was unaltered except by codicil made in 2003 appointing the plaintiff as executor. Clause 5(c) of the will provided for the residence to be given to her son. After various other gifts, the residue was to be divided equally among her grandchildren (clause 5(e)).

In November 2006, at the deceased’s request, the plaintiff was instructed to prepare an enduring power of attorney (financial) appointing him as one of three joint and several attorneys. At this time, the deceased was shown a copy of her will and codicil. She confirmed that she did not wish to make any amendments to them.

In December 2006, a decision was made in consultation with the deceased’s carer and general practitioner that the deceased should move permanently into aged care. In early 2007, the deceased was referred to a geriatrician for an assessment about her accommodation needs. Soon afterwards, the deceased’s general practitioner wrote to her carer expressing the view that the deceased “did not have sufficient cognitive function to appreciate [that she was unfit to live at home] or to make any other important decisions concerning her health”.

In May 2007, the Office of the Public Advocate (which had been appointed as her guardian) communicated the decision to move the deceased permanently into aged care to the plaintiff (as attorney). In that capacity, the plaintiff consulted with the deceased about her accommodation arrangements. Communication with the deceased was difficult. When asked whether her residence should be sold to fund her accommodation, the deceased responded, “Hold fire”. The plaintiff confirmed in a letter to the Public Advocate that the deceased had “expressed reservations regarding the sale of her home”.

The plaintiff again visited the deceased in July 2007. By then, she was living permanently in aged care and almost completely incapable of communicating. The plaintiff attempted to explain, but without success, that to fund the accommodation bond, it was necessary to sell her home. Having formed the view that she was unable to provide instructions, the plaintiff assumed the management of the deceased’s affairs generally from that time onward.

The deceased’s property was sold at auction in September 2007. The proceeds were held in a separate investment account and used to fund the accommodation bond and expenses. Having formed the view that the deceased lacked testamentary capacity, the plaintiff did not raise with her the possibility of amending her will to take into account the change in circumstances.

When the deceased died in 2009, it became necessary to determine what should become of the proceeds of sale of the property.

Trial

At trial, it was submitted for the plaintiff that the Australian authorities showed a trend towards recognising a broader exception than that accepted in Banks. It was submitted that Ensor had correctly identified that the broader exception was not within the ambit of the rule in Jenkins, but that this “relatively smaller step” was an appropriate one to take.

The court was also directed to the anomaly resulting from an exception that prevented ademption in cases of unauthorised acts but did not for a sale by attorney that was “necessary and beneficial” in the interests of the deceased (in the context of increased life expectancies). It was also submitted that a broad exception would help to bring the common law relating to attorneys into line with legislation relating to VCAT-appointed administrators.20

It was submitted that public policy also supported an approach to interpretation of the will that, so far as possible, maintained the status quo. This, it was argued, would best be achieved in such cases if the specific gift took effect as a gift of the sale proceeds.

For the defendant, it was submitted that the analysis of the Jenkins exception in Banks and Orr was to be preferred to Thomas J’s reasoning in Re Viertel. The result of applying Re Viertel, it was submitted, was to transplant the will-maker’s exercise of discretion relating to a particular holding of property to a time when the estate was fundamentally different in character. It was also submitted that it would result in an assumption about what the deceased may have intended to happen if the property was sold being substituted for the actual intention expressed in the will.21

Having received submissions, Hargrave J noted that he was not bound to follow any particular decision. He characterised the question as being whether allowing the exception to continue to develop would be the “right” outcome.

Judgment

Hargrave J held that Jenkins was not authority for an exception to the ademption principle as provided for in Re Viertel. Despite this, he held that such a further exception “constitutes a justified extension of the common law to reflect current circumstances”, including the fact that as people are living longer, “their physical health is outlasting their mental capacity” (at [45]).

The exception was formulated in the form of a three-limb test requiring proof of the following elements (at [46]):

1. The deceased lacked testamentary capacity.

2. The court is satisfied that the deceased, if possessed of testamentary capacity, would have intended the donee of the asset in the will to have the remaining proceeds of sale.

3. The remaining proceeds of sale can be identified with sufficient certainty.

Hargrave J confirmed that the attorney’s knowledge of the contents of the will was irrelevant.

It had been submitted for the defendant that the medical evidence did not suffice to show that the deceased did not have testamentary capacity at the time of the sale. Hargrave J dealt with this argument summarily during the trial and, in his reasons for judgment, stated that the unchallenged evidence left him satisfied that “safe reliance can be placed upon the plaintiff’s opinion as to the deceased’s mental state at the relevant time” (at [19]).

Being satisfied that the deceased’s intention had not altered and the sale proceeds were identifiable, Hargrave J ordered that the deceased’s son should receive the balance of the proceeds of sale of the property.

Subsequent cases and proposed law reform

The decision in Simpson was approved in a subsequent Queensland decision,22 but was the subject of criticism in obiter dicta in RL v NSW Trustee and Guardian (RL).23 In RL, Campbell JA held that the decision in Simpson was supported by social policy, but was not a true statement of “what the law actually is” (at [187]). In the very recent Supreme Court of Queensland decision of Trust Co Ltd v Gibson,24 Mullins J considered the dicta in RL sufficiently persuasive to justify a departure from the Re Viertel approach.

The Victorian Law Reform Commission released its Guardianship report in February 2012. The report accepts a submission put to the VLRC by State Trustees that protection similar to that for administrators should extend to enduring financial attorneys.25 The VLRC has recommended that the new guardianship law should “[p]ermit a remedy from the estate to third parties for inequitable succession law consequences of the financial administrator’s actions” which is “not dependent on the knowledge or actions of the financial administrator, although consent of the represented person should be a relevant factor”.26

Practical guidance

The cases outlined above and VLRC recommendations suggest that legislative reform of some kind on the issue of ademption is both inevitable and highly desirable. In the interim, the decision in Simpson effectively permits the tracing into proceeds of sale of property that was the subject matter of a specific gift by will. This provides reassurance to will-makers and attorneys alike that where a sale of property that is the subject of a specific gift is forced in the circumstances, the attorney’s actions will not automatically prevent the gift from taking effect.

However, the principle is qualified, operating only in the limited circumstances where all three limbs of the test are satisfied. Practical steps can be taken at the will-making stage to avoid the question of ademption arising at all, including:

  • avoiding specific gifts – use general words of devise;
  • providing for contingencies – such as a gift of a property “or its sale proceeds or any substituted property purchased with the sale proceeds”;
  • giving a monetary gift (whether indexed or not) of equivalent value to the property;
  • providing specific directions to an attorney – such as a direction to fund an accommodation bond otherwise than by selling the property.


CHRISTOPHER GROSZEK is a lawyer in the Wills & Probate workgroup with Moores Legal, practising mainly in estate planning and estate disputes. Moores Legal acted for the plaintiff, a principal of the firm, in Simpson.

1. [2011] VSC 466.

2. [1907] 1 Ch 665 at 672, applying the principle of Oakes v Oakes (1852) 9 Hare, 666.

3. (1967) 116 CLR 344 at 348.

4. (1716) 2 Vern 747; 23 ER 1089.

5. (1887) 37 Ch D 310.

6. Banks v National Westminster Bank Plc [2005] EWHC 3479 (Ch) at [29].

7. Australian Bureau of Statistics, Australian Social Trends, Mar 2011 (28 June 2011), cat. no. 4102.0, <www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Main+Features10Mar+2011>.

8. Note 6 above, at [25].

9. [1997] 1 Qd R 110.

10. (1866) L.R. 2 Eq. 323.

11. Note 10 above (no citation provided).

12. In the matter of the affairs of Hartigan; ex parte Public Trustee (WASC, 9 December 1997, Parker J); Re Bearsby (WASC Civ 1919 of 1997)(no written reasons given).

13. Johnston v Maclarn [2002] NSWSC 97; Power v Power [2011] NSWSC 288; cf. Orr v Slender and ors [2005] NSWSC 1175.

14. Mulhall v Kelly [2006] VSC 407.

15. Note 13 above.

16. [2006] VSC 407.

17. [2009] QSC 268.

18. In Moylan v Rickard [2010] QSC 327 at [55]–[58], P Lyons J was prepared to apply the Re Viertel principle by analogy in a case where a gift under a will was to be calculated as a proportion of the value of a property held by the deceased when the will was made.

19. [2011] VSC 466.

20. Section 53, Guardianship and Administration Act 1986 (Vic).

21. For example, see Ensor,note 17 above, at [19].

22. Public Trustee (Qld), as Administrator of Estate of Richardson (dec’d) v Lee [2011] QSC 409.

23. [2011] NSWCA 39, per Campbell JA.

24. [2012] QSC 183 at [27] and [28].

25. Victoria Law Reform Commission, Guardianship, Final Report 24 (2012) 12.166-12.168: www.lawreform.vic.gov.au/projects/guardianship-final-report.

26. Recommendation 189.

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