Ready, steady, NO: tips and traps for beneficiaries wanting to reject an inheritance

It is long-established law that a person cannot be compelled to accept a gift of property against their will. A beneficiary under a will or intestacy can refuse or renounce a gift. A rejection of an inheritance is commonly called a ‘disclaimer’.

The principles surrounding disclaimers of gifts will vary depending on the nature of the gift and the type of property that is the subject of the gift. A disclaimer can be made in respect of an inter vivos gift, an interest in a family discretionary trust or a testamentary gift which takes effect on the death of the gift giver.

This article will look at the principles of disclaimers of testamentary gifts.

Motives for making a disclaimer

A person may disclaim an interest in a deceased estate for several reasons:

• To avoid inheritance tax in foreign jurisdictions that may take effect on death. This may be particularly relevant for beneficiaries who have a nexus to the United States of America or United Kingdom and are subject to the inheritance tax regimes of those jurisdictions. There is no inheritance tax levied in Australia.
• The gift is given with onerous conditions that may be more trouble than it is worth. For example, the gift is of shares or an interest in a company or business with substantial liabilities (Re Paradise Motor Co Ltd [1968] 2 All ER 625), or the gift requires the recipient to make ongoing payments to a third party, or the gift is connected to an obligation to maintain property to an extent that would be uneconomical for the beneficiary.
• Pursuant to the disclaiming beneficiary’s obligations under a contract with another party.
• Sentimental considerations, such as where the acceptance of the gift could result in a family dispute or where the deceased gift giver and beneficiary were estranged.

How to make a disclaimer

There is no authority that a disclaimer must be in a prescribed form or be approved by a court to be valid. A disclaimer may be made by a deed, in some other written format, orally or inferred by conduct (Townson v Tickell [1819] 3 B & Ald 31; 106 ER 75 and Re Clout v Frewer’s Contract [1924] 2 Ch 230).

A disclaimer must be total although it can be retracted if the beneficiary’s entitlement in the estate has not otherwise been dealt with (Re Young [1913] 1 Ch 272). A person will not be permitted to withdraw a disclaimer where the personal representative of the estate (i.e. executor or administrator) has acted in reliance on the disclaimer, such as where the substitute beneficiaries have been informed of their resulting interest in the estate (Re Cranstoun (deceased); Gibbs v Home of Rest for Horses [1949] Ch 523).

Where a beneficiary has not expressed acceptance of a gift, a presumption of assent to the gift will arise (In re Stratton’s Disclaimer: Stratton v Inland Revenue Commissioners [1958] 1 Ch 42). This means that a beneficiary is presumed to accept the gift unless they indicate otherwise. It follows that a beneficiary who wishes to reject an inheritance must take positive action to disclaim their interest. Passive behaviour will not suffice.

Disclaiming a testamentary gift

A disclaimer will operate back to the deceased’s death (In re Stratton’s Disclaimer: Stratton v Inland Revenue Commissioners).

Where a will gives two or more distinct gifts to a beneficiary (e.g. a specific gift of property and a gift of the residuary estate), a beneficiary is entitled to disclaim one of the gifts and take the other. A gift of the residuary estate may consist of different assets but is a single gift. A residuary beneficiary must therefore elect to receive all or none of the gift.

A residuary beneficiary may disclaim their interest in an estate prior to a grant of probate and even during the course of administration (Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184 (at [18])). A disclaimer made by a beneficiary prior to the death of a testator is ineffective (Smith v Smith [2001] 1 WLR 1937). This is because it is open to the testator to revoke or vary their will up until their death. In such circumstances, the disclaiming person has no proprietary right in the estate that can be effectively disclaimed as their only interest in the estate while the testator is alive is a mere expectancy to inherit (Chief Commissioner of State Revenue v Smeaton Grange Holdings at [19] and Smith v Smith at [10]).

It is possible to disclaim a gift given to two or more beneficiaries as joint tenants provided all joint tenants agree (Re Schar [1951] Ch 280).

Disclaiming an interest arising from intestacy

A person who dies without a will or leaves a will but does not effectively dispose of all their property by that will is deemed intestate (Succession Act 2006 (NSW), s 102). A beneficiary entitled to part or all of an intestate estate may disclaim their entitlement in the same manner as a person receiving a gift under a will (Re Scott; Widdows v Friends of the Clergy Corporation [1975] 1 WLR 1260).

A person who disclaims an interest in an intestate estate will be treated as having predeceased the intestate for the purposes of distribution of the estate (Succession Act, s 139(a)). The result is that the disclaiming person is left out of consideration when distributing the estate. However, if the disclaiming person has issue (i.e. lineal descendants), those issue may be entitled to take the disclaiming person’s presumptive share of the intestate estate by representation. This is relevant where the next of kin entitled to the intestate’s estate has predeceased the intestate but left issue who survive the intestate. For example, the effect of the statutory provisions relating to disclaimers in an intestate estate may still result in a distribution to the following persons:

• issue of a sibling of the intestate who has disclaimed (Succession Act, s 129(3)).
• children of an aunt or uncle of the intestate who has disclaimed (limited to first cousins of the intestate) (Succession Act, s 131(3)).

A beneficiary who disclaims their entitlement will also relinquish their right to obtain a grant of administration in respect of the estate (Probate and Administration Act 1898 (NSW), ss 63 and 75).

Tips and traps

Failure of gifts – ademption and partial intestacy

Trap: A disclaimer by a residuary beneficiary may cause a gift to lapse or to be distributed in accordance with the intestacy rules (Succession Act 2006, Chapter 4). This will commonly occur in circumstances where a gift clause does not contain an adequate gift over to a substitute recipient, or where the gift cannot be saved by the statutory provisions designed to prevent the lapsing of dispositions to issue who died before a testator (Succession Act, s 41) and the occurrence of a partial intestacy of residuary dispositions (Succession Act, s 42). A disposition includes a gift of property as well as the creation or exercise by will of a power of appointment affecting property (Succession Act, s 3(1)).

Tip: It is common for gift clauses to specify the contingencies that must be fulfilled in order for a gift over to take effect, e.g. in the event that the original beneficiary predeceases the testator or does not survive the testator by 30 days (Succession Act, s 35). A disclaimer by the original beneficiary may not be an event that falls within the contingencies that will trigger a gift over. Accordingly, a disclaimer may result in a partial intestacy of the residuary estate on a literal interpretation of the will (The Trust Company Limited v Gibson & Anor [2012] QSC 183 (at [12])) or create doubt as to who is entitled to the disclaimed share of the residuary estate (Arnott v Leong [2009] NSWSC 187 at [6]).

However, it is the approach of the courts to favour the construction of a will that avoids intestacy (Fell v Fell [1922] HCA 55). The Supreme Court of NSW has the jurisdiction to effect a gift over where the original gift fails and may construe the gift over as coming into effect on any event which prevents the original gift from taking effect (Jones v Westcomb [1711] 24 ER 149, Egan v O’Brien [2006] NSWSC 1398 (at [10]) and Jeffree Wilfred Hegarty v [2011] NSWSC 1194 (at [39]-[42])).

Careful consideration should be given to the wording of residuary gifts to ensure the provisions permit a gift over to operate in the event of a disclaimed interest. This will mitigate any ambiguity or dispute concerning the construction of those provisions.

Protection of personal representatives

Trap: Difficulties can arise in the administration and distribution of an estate in circumstances where the terms of a disclaimer are unclear, not reduced to writing, asserted by a third party (e.g. the next of kin of a deceased person entitled to benefit from the estate if an effective disclaimer was made) or retracted by the beneficiary.

Tip: The personal representative of the estate should enter into a deed with all affected persons recording the agreement to distribute the estate in the varied manner. Appropriate releases from the parties should also be obtained to protect the personal representative. Unless all affected persons are capable of reaching an agreement among themselves and are legally capable of such an agreement, it is prudent and desirable for the personal representative to obtain judicial advice for their own protection.

A trustee may apply to the Supreme Court of NSW for an opinion, advice or direction on any question respecting the management or administration of the trust property (Trustee Act 1925 (NSW), s 63(1)). The Court can be asked to determine the beneficiaries of the estate and their rights as a result of a disclaimer under intestacy (Application of the NSW Trustee and Guardian; Estate of SGB [2015] NSWSC 398 at [19]-[20]). A trustee acting in accordance with the judicial advice given will be deemed to have discharged their duty (Trustee Act, s 63(2)). The definition of trustee includes an executor or administrator (Trustee Act, s 5).

Social security benefits

Trap: Beware of adverse consequences for a disclaiming beneficiary in receipt of social security benefits.

In determining whether a person qualifies for a social security allowance, the value of the person’s assets must be assessed. The definition of assets includes property or money within or outside of Australia (Social Security Act 1991 (Cth), s 11(1) and s 1207A). Certain assets are disregarded in calculating the value of a person’s assets (Social Security Act, s 1118). A person’s interest in a deceased estate is an assessable asset but is exempt from assessment until it is received or able to be received (Social Security Act, s 1118(1)(j)).

Generally, a person in receipt of social security benefits who waives their right to their interest in a deceased estate will trigger the deprivation provisions under the Social Security Act. This is because a disclaimer will be deemed a disposal of assets by a person provided that no consideration or inadequate consideration was received for the disposal (Social Security Act, ss 1123(1)(a) and 1123(1)(b)). Deprived assets of a person qualified or eligible to receive social security benefits are assessed for a period of five years from the date of the relevant disposal (Social Security Act, ss 1126AA and 1126AB). The result is that the disclaiming beneficiary’s social security benefits may be severely reduced or lost.

Tip: A beneficiary considering waiving their entitlement in an estate should obtain specialist financial planning advice before proceeding with a disclaimer. It may be in the beneficiary’s interest to accept the gift rather than dispose of it.

Transfer duty

Trap: A transfer of dutiable property (e.g. land in NSW) arising from a disclaimer may not attract the concessional rate of duty of $50 available for deceased estate transfers (Duties Act 1997 (NSW), s 11 and s 63(1)). This will depend on the terms of the disclaimer and any agreement entered into by the beneficiaries in respect of the disclaimer.

Tip: Consider making an application to Revenue NSW for a private ruling on the treatment of transfers of property resulting from a disclaimer.

Taxation

Trap: A person will not ordinarily be taxed on a disclaimer of a testamentary gift provided they have not accepted the gift. The situation is different for disclaimers of an interest in a family discretionary trust. A beneficiary of a trust may suffer adverse tax consequences where an interest in the income of the trust is disclaimed after the end of the income year. In such cases, the beneficiary will be deemed presently entitled to the trust income and will not be absolved from liability on their share of the net income (Commissioner of Taxation v Carter [2022] HCA 10 and Income Tax Assessment Act 1936 (Cth), s 97).

Tip: Obtain specialist tax advice before disclaiming an interest in an estate or trust.

Jennifer Vuu is Senior Associate at HWL Ebsworth and a member of The Society of Trust and Estate Practitioners.