Deed of Family Arrangement - What is It & When To Use it?

What is a deed of family arrangement?

 

A deed of family arrangement is a document that legally changes the way a deceased person’s assets are divided between the beneficiaries. It can either change the terms of a Will or change the distribution under the rules of intestacy (e.g the way someone’s assets are divided if they die without a Will).

A deed of family arrangement can also provide the personal representative of the estate (which means either the executor or administrator) with protection from any future claims.

In order for a deed of family arrangement to be valid, it must be:

• Signed by the legal personal representative; and
• Signed by and have the consent of all the beneficiaries (aged over 18 years) entitled under the original will, or entitled under intestacy rules (if there is no will).
  
  

When would I need a deed of family arrangement?

There are 3 major ways in which a deed of family arrangement might be useful:

1. When the beneficiaries wish to change the terms of the Will.

 

The will of a deceased person may sometimes need to be changed to suit the circumstances of the beneficiaries.

For example, the Will may be several decades old and doesn’t take into account the births and deaths that have taken place in the years since the Will was signed.

Perhaps the person who is entitled to inherit the majority of the assets wishes to pass on their share to other beneficiaries in the will (e.g. give it their children).

A deed of family arrangement allows the beneficiaries to change the distribution of assets to better suit their needs.

2. When the beneficiaries are unhappy with how the ‘rules of intestacy’ will distribute an estate.

When someone dies without a Will, their assets are distributed based on the rules of intestacy. This is a formula set out by law, and changes from State to State.

In many States, the spouse of the deceased will be entitled to the majority of assets, including what’s called a ‘pecuniary legacy’. This is essentially an amount of money taken from the estate and gifted to the spouse. In NSW for example, the legacy is $350,000.

The partner will be entitled to this automatically, regardless of how much the estate is worth. If it is valued under $350,000, the partner will receive everything from the estate.

But what about the deceased’s children? The deceased may have adult children who have families of their own, who would certainly benefit from assets from the estate.

A deed of family arrangement could be used in this instance, to come to an agreement where all of the deceased’s immediate family could be left something.

A deed of family arrangement is useful in Western Australia. If a person dies without a will in WA, their estate is divided between their children and partner. That might lead to a situation where the husband, wife, or de facto of the deceased person might need to leave the family home (because it needs to be divided between the children). A deed of family arrangement allows the family to lawfully give everything to the partner.

3. When someone wishes to challenge a Will

If an ‘eligible person’ is unhappy with the Will of their relative, they may be able to challenge it with the Court. They may feel that they have not received enough, or anything at all, from the estate of the deceased person.

This is known as a family provision claim and can be made by a spouse, child, former spouse or a dependent.

A family provision claim will need to be heard by the Court, and this can often take years to resolve. It can also be extremely expensive.

A deed of family arrangement can avoid all of this hassle of dragged out court proceedings, by allowing the aggrieved people to come together with the other beneficiaries, and design a new plan for the distribution of the assets - that everyone is happy with.

When a deed of family arrangement cannot be used?

 

A deed of family arrangement cannot be used to reduce the entitlement of someone under 18 years, or for a person without mental capacity (e.g. with an intellectual disability).

To do this would require a Court order.

Capital Gains Tax (CGT) Considerations:

Under Australian taxation law, the passing of an asset to a beneficiary of a deceased estate will be exempt from capital gains tax. This is governed by section s128.20 of the Income Tax Assessment Act 1997 (Cth).

It’s also possible for a deed of family arrangement to be covered by this exemption, however, it will only be exempt if the deed is used to settle a claim to participate in the estate (such as a family provision claim). The ATO ruling ‘TR 2006/14’ gives us further guidance as to this exemption.

If the deed does not meet the requirements of the above ruling, CGT may apply.

Speak to an Estates Plus lawyer to determine how CGT could affect your or your loved one’s estate.

Transfer/Stamp Duty:

 

There may also be stamp duty (e.g. transfer duty) issues to consider when writing a deed of family arrangement.

Generally, an asset from an estate will be exempt from stamp duty, or the duty payable is extremely low (e.g. $50 in Sydney, NSW and $20 in Perth, WA).

Unfortunately, unlike tax law, stamp duty is legislated by State governments, and so there is no Australia-wide set of rules.

There are some concessions made, such in NSW, where stamp duty arising from the transfer of assets using a deed of family arrangement will only be paid on the value of assets exceeding what the beneficiary would have received anyway based on the will or intestacy rules. (s63 of the Duties Act 1997 (NSW))

In Victoria, exemptions will apply depending on the nature of the assets being transferred. For example, if a specific gift in a will was being given to Person A, and the deed of family arrangement transfers this gift to Person B, the exemption would not apply and Person B would need to pay stamp duty on the entire value of the asset.

However, if Person A and Person B were left a ‘residuary’ share of the estate, (whatever has not been specifically dealt with/mentioned in the Will), the exemption may apply in some circumstances.

Here is a guide to how transfer duty and deeds of family arrangement in WA

Stamp duty and its exemptions can be quite complicated, and it is recommended you discuss your specific situation with a tax advisor.

Need to Prepare a Deed of Family Arrangement?

 

Estate Plus can prepare a deed of family arrangement for you. Our documents are valid Australia-wide.