“Notional estate” in New South Wales

Readers of the page of this website entitled “Types of agreement” will recognise that granny flat agreements are being increasingly used to prevent unwanted challenges to Wills.

The typical scenario is a parent who has an estranged child.  The parent wants to leave his or her estate entirely to child or children who are not estranged.

Another circumstance is where a parent has already provided substantially to a particular child, during the parent’s life, and wants to ensure that the other children receive an equal provision.

This is all fair and reasonable, and the motives may be noble and equitable, but children can still challenge Wills, and often succeed, despite what has happened in past.

A granny flat agreement which involves the transfer of the parent’s home to a child or children (a common type of agreement) will usually have the effect of alienating the major part of the parent’s assets.  The parent accordingly will not have much left in their estate, and a Will challenge will not be possible as there will be nothing left in the estate from which further provision could be made.

Thus, the granny flat agreement can be regarded as a foolproof way of preventing challenges.  However, New South Wales has “notional estate” legislation (only in New South Wales).  This legislation’s purpose is to bring back into the (deceased) estate property that has been alienated with the intention of preventing a person (usually a child) making claim for further provision from the deceased estate – s80 of the Succession Act 2006 (NSW).

That is, property that has been transferred without full consideration (for instance, a gift to a favoured child).

The legislation provides that if affects relevant property transactions within three years of the date of death.

Accordingly, this notional estate legislation is a factor to be taken into account in New South Wales when drawing granny flat agreements which have the purpose, or one of the purposes, of preventing family provision claims by persons entitled to make those claims.

The  courts will not make notional estate orders as a matter of course – many factors have to be taken into account.  Whether a transfer of a house to a children would be affected by this legislation is debatable.  The transfer of the parent’s home in a granny flat agreement is usually made in return for consideration – which might be in the form of the right to accommodation at the property for life.  The agreement might also provide for the children to give care to the parent/s.

Moreover, as a general proposition, the granny flat agreement would usually last for a period longer than three years. The agreements are not entered into in contemplation of death – they are entered into, in a typical situation, because the parent/s can’t maintain their home, for physical and/or financial reasons, but they want to continue to live there for as long as they can.

Nevertheless, New South Wales residents should be aware of these laws.