Recently, there has been growing attention on the concept of early inheritance, where adult children ask their parents (or grandparents) for an advance on part or the whole of their inheritance. As people are living longer, this social phenomenon is more common, especially due to the high cost of housing. Many parents are willing to help their children advance in life, by giving them a lump sum of cash for a business venture or for a deposit on a house. However, from a legal perspective, it is important that both generations carefully consider the risks of giving or receiving early inheritance.
Should I give Early Inheritance?
Typically, a beneficiary receives an inheritance after the death of a testator. Early inheritance allows a parent or grandparent to see their child or grandchild enjoying the gift, but it is definitely not something that should be done without careful consideration and expert advice.
Before giving an early inheritance, a person should ask themselves a number of questions, including:
- Will I have enough left over to live on and enjoy myself for the rest of my life?
- Is the gift in the form of land or shares that will attract stamp duty and probably also capital gains tax liability that would not usually apply?
- Will the gift have consequences for any of my current social security benefits?
- Should the inheritance be in the form of a loan instead of an outright gift?
A financial planner may be able to offer an objective view on some of these questions; others may require the advice of a solicitor.
Early Inheritance As A Loan
Giving an early inheritance in the form of a loan may be the best approach as it can help ensure that all children ultimately benefit in a fair and equal manner. The testator’s will can specify that the loan is forgiven in place of a bequest, and provide appropriate compensatory gifts to the other beneficiaries in order to equalise the distribution of the testator’s assets. A loan is also preferable in that the funds would not be vulnerable to a Family Court property settlement or a claim from creditors.
Problems With Early Inheritance
While some parents or grandparents are happy to advance an early inheritance, others worry that if they do not acquiesce then they will lose contact with their children or grandchildren. There is, therefore, growing concern that Early Inheritance Syndrome lends itself to financial elder abuse. The child might feel justified thinking that their parent no longer needs the money and that they will inherit the property anyway. If a parent is not willing to give an early inheritance, the child might even resort to emotional and physical abuse. Problems relating to Early Inheritance Syndrome especially arise when an adult child has financial power of attorney over an elderly parent.
Financial Elder Abuse
Financial elder abuse occurs when someone takes or misuses the money, assets or property of a family member for personal gain. An abuser might use undue influence to persuade a family member to change their will or pressure the person to release an early inheritance. There is little legislative protection for vulnerable elderly people unless the family member commits fraud or embezzlement, and even then it can be difficult to prove the illegal act as the vulnerable person may be unaware or unwilling to report the abuse.
Another complication that can arise from giving an early inheritance is that a testator may wish to change the terms of their will to equalise the inheritance to be fair to their other children. In that case, a general reading of the will would suggest that the testator unfairly neglected to provide for one child in their will. Indeed, if an early inheritance has been exhausted by the time the testator dies, the beneficiary of the early gift may well have a claim against the estate for further provision, regardless of any inequity between themselves and other beneficiaries.
In the case of Sgro v Thompson , a parent gave an early inheritance of a house to their younger daughter on the understanding that the family home would be given to their older daughter in the will. The parents made it clear that it was their wish to treat their children fairly and to give each a home. The younger daughter subsequently sold the home and lost the money in investments. When the parents died, the will left the family home to the older daughter with nothing left over after the payment of debts and expenses. The younger daughter made a claim under the Succession Act 2006 for further provision from the deceased estate.
The Supreme Court of NSW found that the testator had left inadequate provision for the younger daughter given her financial need, and ordered that she receive 40% of the proceeds of the sale of the family home. The elder daughter appealed the decision to the NSW Court of Appeal, who noted that there was a clear understanding in the family that the terms of the will were designed to fairly equalise the early inheritance. The Court of Appeal found that the lower court’s assessment of the claim was flawed, as there are other factors apart from financial need that have equal weight in such a case. The court needs to evaluate all relevant factors, including the significance that the testator placed on the early inheritance. The court restated a common principle that consideration should be given to a capable testator’s judgment if it is evident that the testator duly considered claims on the estate.
The Court of Appeal unanimously agreed that the Supreme Court judgment should be set aside and that the claim for provision should be dismissed. The court also ordered that the younger daughter should pay the legal costs of both parties, which amounted to over $90,000.
If you have any questions about early inheritance or the implications for your will, the experienced solicitors at Armstrong Legal can help. Please contact our friendly and experienced solicitors on 1300 038 223 for assistance with any aspect of estate planning. The contested wills team can assist you if you need advice or representation during litigation on this issue or any other succession matter.