Inheritance wars: The increasingly murky state of succession laws in New Zealand

by Donna Chisholm / 04 October, 2017
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Carol Fry: “I would have been bankrupt.” Photo/Adrian Malloch

Should financially independent adult children be entitled to an inheritance when a parent dies? As blended families become more common, Donna Chisholm investigates the state of inheritance laws in New Zealand.

Auckland businesswoman Carol Fry was a widow of less than three months when she discovered her stepson was challenging his father’s will.

The ensuing legal battle took six years and cost her nearly $400,000, but she says she had no option other than to fight the claims in court. “If he’d got what he wanted, I would have been bankrupt, and I would have been tossed out of my own home.”

She says courts are treating second wives like second-class citizens.

The Fry case is one of many challenges by adult children to a late parent’s will, particularly after the parent has remarried, that have legal experts questioning whether the relevant law – the Family Protection Act (FPA), based on principles enshrined in 1900 – is still fit for purpose. The law says parents must provide for the “proper maintenance and support” of their offspring, even when they are adults, a clause that courts have since interpreted as “moral duty”.

Senior lawyers say the roughly 300 applications a year to the Family Court and High Court disputing estates are just a small proportion of the number of cases challenged, because most beneficiaries are advised to settle rather than incur the expense of a court battle.

But as people live longer and also become increasingly likely to divorce, remarry and start second or third families, the rights of a surviving spouse often conflict with the interests of their dead partner’s children. It’s particularly true when that spouse is similar in age to the stepchildren, who can see an inheritance vanishing into a distant future or being spent in the meantime.

Although Carol Fry won the case in the Family Court, it was overturned on appeal to the High Court, which ordered her to pay stepson Jason Fry $175,000 to meet his father Laurie’s moral duty to him. Laurie had left all his estate to Carol, on the understanding that his three children, and her own beneficiaries, would inherit on her death. The court ruled that because the relationship between Carol and Jason had irreparably broken down, it had little confidence she would provide for him.

Fry with her husband, Laurie. Photo/Fry family collection

Moral-duty claim

Carol Fry had bought and paid for her own home in Parnell in 1986, with no contribution from Laurie, before they married in 1989. It became the couple’s home, and part of Laurie’s estate. The couple set up their business, Unique Fabrics, in 1986, with start-up capital also provided by Carol.

Jason worked for the company in the early 1990s and, after a period overseas, became national sales manager in 2006. He said his father told him he would inherit half the company on his father’s death, but Carol Fry said the plan was always for Jason to buy out Laurie’s share. Jason did not pursue this claim of testamentary promise in the High Court, but went ahead with the moral-duty claim.

Carol Fry, 64, says she was blindsided by the legal challenge, because she thought she and Jason had a good relationship. “This is happening at the time you are grieving. Is that really okay? It steals your grief. You have to get out and fight, and the system makes you feel totally powerless – you can’t stop it happening.”

She says she was stunned that her stepson thought he was more entitled to the business than she was. “I was there every single day, and in the early days, we slogged – 18 hours a day, seven days a week.”

Carol Fry. Photo/Adrian Malloch

She says she has no beef with children getting a share of their parents’ estate, even if they’re in no financial need, but is upset at what seems to be a growing sense of entitlement. “It’s just ‘I want’. I wasn’t brought up to expect an inheritance. When my father died, everything went to his second wife and it didn’t even occur to me to challenge it.”

By the time Jason’s sisters – who did not challenge the will – inherit on her death, she says their payout should be many times the amount he received. Carol, who has no children, is leaving her estate to friends and family members, and some loyal employees.

She’d like to see more certainty in the law about what, if anything, independent children are entitled to. “There needs to be a way to stop it going round and round in the system, because in some cases, it will leave the spouse unable to live at the standard they are used to living in, and I think they should be able to do that.”

Jason Fry told the Listener he felt he had no option but to pursue a legal claim after he’d worked for Unique Fabrics for 15 years, but found his father had left him nothing in his will. “I always knew it was a no-win situation, but I did it on principle. I had no other choice.”

He says his father had promised he would inherit shares in the business. Under his stepmother’s will, he might have inherited “in 20 or 30 years”, but there was no guarantee she would not change it before she died.

He believes financially independent adults should be entitled to a share of their parents’ estate, but he wouldn’t recommend anyone pursue litigation lightly, saying it’s a gruelling and expensive process. He says his relationship with his stepmother broke down from the moment he raised the issue.

University of Otago law professor Nicola Peart.

Open to abuse

University of Otago law professor Nicola Peart, an expert in family property and succession law, says there is a need for change. “Property rights on death are a mess. What we have now is highly unsatisfactory. It is open to abuse by people who probably don’t deserve to get anything and equally open to abuse by people who probably do deserve to get something.”

She and a number of other high-profile family-law specialists believe financially independent adult children who aren’t in the will or feel they’ve got too little shouldn’t be entitled to claim on their parents’ estate unless they can show genuine need. They support recommendations on the same lines that the Law Commission made in 1997, but which were subsequently shelved.

The commission slated the Family Protection Act as urgently in need of review, saying the concept of moral duty was obscure and the varying interpretations of judges unpredictable.

A Stuff poll published in June that asked if parents should have to provide for independent adult children in their will attracted more than 10,000 responses. Nearly 80% said “no” – they should be able to divide their estate however they want.

Cue a hollow laugh from Peart. “They think that, until they’re the person at the receiving end. Ask if they’re happy for their parents to leave all the money to the dogs’ home and they’ll probably say yes. But ask if they’re happy for them to leave it all to your stepsisters, and they’ll probably say no.”

Peart suspects the Law Commission recommendations were ignored because they simply went too far. “Effectively, they went from one extreme to the other – you get not a dime unless you are in serious financial need, and I suspect it’s hard to turn the clock back quite to that extent.”

What the commission was trying to do, she says, was to put a person’s obligations in death in line with their obligations in life: as long as we’re alive, we can give our money or assets to whoever we want and leave adult children with nothing.

Often, says Peart, a challenge under the FPA’s moral-duty provisions isn’t about the money, but about parental recognition. “Am I so worthless they’ve left me with nothing?” But she says a court’s financial award could surely not restore that feeling of worth or recognition.

Society has also changed. Parents now tend to help their children more during their lifetime, helping to repay student loans, for example, or to raise a mortgage on a first home. “At the other end of the spectrum, the longer we are living, the more money we need in our retirement,” Peart says.

“Here is an Act introduced in 1900 with a view to preventing families from becoming dependent on the state for charitable handouts, and now we are using it for something very different. Should we not be going back to society and asking if this is the way we ought to be doing this?”

Because of the way courts are interpreting moral duty – basically, limiting adult children’s claims to about 10% of an estate if there’s been no “disentitling behaviour”  – lawyers are strongly advising people making wills not to treat children unequally, and not to cut them out, even if they want to.

Trust and estate law specialist Juliet Moses. Photo/The Treehouse Creative

No magic solution

Auckland lawyer Juliet Moses, who specialises in trust and estate law, says she always encourages clients to treat their children equally, but sometimes they don’t want to take that advice. “They have their reasons. One child may have been more successful, one is down on their luck or has a problem perhaps with drug addiction, or they’re worried about the child’s spouse or partner.”

Sometimes, she says, a parent will simply not like a child, or feel they haven’t been to see them as much, or helped them as they’ve aged, and is shocked to discover they don’t have the testamentary freedom to cut the child out without the risk of legal action. “We would always suggest leaving something rather than nothing to remove the incentive of a challenge.

“Most people in a normal nuclear family would leave everything to the spouse, and to the kids after that. But a blended family is much trickier and in almost every situation that has become contentious after someone’s died; it’s the man who has died and his second wife or partner is up against the kids from the first marriage. It’s so common.”

It’s also not uncommon that the second wife is little older than the children of the first, and if she is bequeathed a life interest in the whole estate, including, say, an investment portfolio, there can be issues with how the investments are made. “She probably wants more cash than capital growth, so life interests are very messy in these situations.”

There’s no magic solution, Moses says, but family trusts do give more flexibility around succession planning because the assets in them aren’t subject to the FPA.

Inheritance law specialist Greg Kelly.

“Asking for trouble”

One of the biggest problems, says Wellington inheritance-law specialist Greg Kelly, is that about 20 different statutes deal with aspects of succession law. Kelly, who wrote a master’s thesis on the subject in 2010, says different laws being introduced at different times have made for an ad-hoc approach and “a tide of litigation”.

Kelly wants recognition or moral-duty awards removed and says there is no consensus in New Zealand that a will-maker is obliged to provide for adult children. He believes claims should be limited to children under 21 who need support.

He told the Listener he was sure many adults would feel miffed if they had no claim on their parents’ will.

“But if your parent cuts you out of the will – and there is usually a reason for it – I don’t see how forcing the others [beneficiaries] to make a payment remedies that.

“If you bring your kids up, educate them, give them every opportunity, you’ve already done your job, haven’t you? You should have some freedom to deal with your assets as you see fit.”

It’s not uncommon, he says, for a parent to “take a snitcher” against a child, and sometimes the child is an innocent party of the falling out. “As people get older, they can get quite difficult and you’ve really got to calm them down and say, ‘Don’t do that. That’s just asking for trouble.’”

Kelly’s thesis suggests an inheritance code be introduced, making testamentary freedom the cornerstone of “long-overdue” reform.

However, one senior lawyer who disagrees with the need for new legislation is Auckland trust and wills expert Bill Patterson, who believes judges have done well in dealing with the “many shades of grey” in family-protection disputes. He believes the legislation works because it gives judges flexibility. “They’re getting results that reflect the current views of society. The Act, because of the way it’s worded, is highly susceptible to changes in attitude.”

A bigger problem, he says, is that lawyers are “not putting enough energy into getting this right” when wills are drawn up, and are failing to help clients identify their objectives and how best to achieve them.

Carol Fry, who paid out her stepson to end the court battle because of the emotional and financial cost of pursuing an appeal, says something has to change.

“After the hospital and the funeral, and the global financial crisis, it just seemed overwhelming to have this. It was devastating getting nasty legal correspondence sometimes twice a week or twice a month for more than five years and not knowing whether you were going to financially survive. I think it’s really cruel. There has to be a better way.”

University of Canterbury associate professor John Caldwell.

Money can’t cure hurt

New Zealand’s family protection legislation was originally introduced to ensure the state wasn’t left to provide for widows, widowers and offspring after the death of a spouse, parent or parents. It allowed surviving spouses and children to claim under the Family Protection Act if the parent failed to make “adequate provision for their proper maintenance and support”.

But lawyers say that over the years, court judgments have extended that approach beyond need, and inserted the concept of “moral duty”.

“You will still hear judges say their task is not to rewrite the will before they rewrite it – so denying the very task they are about to undertake,” says associate professor John Caldwell of the University of Canterbury, a family law expert. “The problem is they have never articulated why, and people really struggle to find the justification, when a person is economically secure, a sum of money should be given to that person.”

He says it is seen as “a bit of psychological support” if the claimant hasn’t received proper recognition of their position in the family. “My argument is that if you feel excluded or not properly treated by the deceased, that’s an emotional hurt that can’t be cured by money.”

If there were to be a new law – and so far, there’s no sign that it’s high on any political agenda – he believes it should rule out claims from adult children “unless there are exceptional, extraordinary circumstances”, the reverse of the default position now.

“If you want to be safe, it probably pays to ensure your adult children, no matter how wealthy they might be, are given 10% of your estate if you want to avoid an unseemly fight after your death. Or you could put it in a trust – or give it all away before you die.”

What if there’s no will?

A Public Trust survey in 2012 found that about 12% of people aged 55 and over don’t have a will.

  • If you die without a will, and have a partner and children, the first $155,000 of assets and chattels goes to the partner. The partner then gets a third of what’s left, and the children two-thirds.
  • If there are no children, but surviving parents, the partner gets two-thirds of the balance and the parents a third.

Succession plans

Farming families often come into disputes over succession plans, says Rotorua rural law specialist Ian Blackman. In his book Keeping Farming in the Family, he says the best solution lies in the right structure of a company and trust.

  • The company owns all the farming assets, including land.
  • The trust owns the shares in the company, and also owns non-farming assets.
  • Shares in the farming company are sold to the succeeding child over a long period.
  • Using this structure means the parents have financial and emotional security, the succeeding child has a flexible long-term plan and the non-farming children are treated fairly.

Trust and wills specialist Bill Patterson.

The kids are all right

If you’ve got a blended family, take steps to ensure your last wishes are carried out.

So, if you’ve repartnered and have children from previous ­relationships, what’s the best way of ensuring your will won’t be contested after your death and your wishes will be met?

Auckland trust and wills specialist Bill Patterson offers this advice:

Identify your objectives. Joint ownership of assets, where the estate goes to the survivor is dangerous unless you really want that. If you do want your children to be provided for, make sure your lawyer knows that when you discuss how property should be owned and what should go into your will.

If you want to protect your children by putting your assets into a trust, ideally you should have your own trust, even if your partner has one. State in your will who can appoint and remove trustees in the future. If you have a single trust containing the assets of both, each partner should have the right to nominate a trustee to continue after they have died, or become incapable. If only one side of the family holds the power of ­appointment, there is a danger the other side might miss out.

Understand the difference between mirror wills and mutual wills. It’s a common misconception that if a couple make wills on exactly the same terms, it will constitute a mutual will, but that’s not true in 99% of cases. Under the Wills Act, a mutual will is a contract between the two will-makers, usually the husband and wife. If one dies not having changed the will, the other person can’t change theirs. However, if the will is simply identical to the spouse’s, it can be changed after the spouse dies.

Instead of leaving your estate outright to your spouse, a better idea is to leave a life interest with the power to resort to capital, so the surviving spouse has the economic benefit of the whole lot. It may even be used up, depending on how big the estate is and what the surviving ­partner’s needs are, but if it isn’t all used up, then the wishes of the person who made the will – that it go to their family – get carried out.

If someone marries a much younger partner, leaving the similar-aged children of a first marriage out in the cold, it’s best to identify the problem and not leave it to be sorted out under the FPA. It probably won’t be easy for a court to do so, “because the whole point of the FPA is the primary obligation to the partner”. If the estate is not large, it’s best to tell the children not to expect anything. If it’s larger, the life-interest solution is probably best – at least the grandchildren might benefit.

Many of these issues don’t apply to the first marriage where only the nuclear family is concerned. However, even in these cases, especially when the parents are ageing, and new trustees may need to be appointed, there are issues to be considered. For example, is it wise that only one or two of the children are appointed as trustees? If the kids don’t get on, consider an independent trustee or trustees.

If you put assets into trust, always do a statement of your wishes to help future trustees understand your intentions.

This article was first published in the September 23, 2017 issue of the New Zealand Listener.

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