Estate disputes can come in many shapes and sizes. Some challenges relate to a Will’s validity. Others challenge a beneficiary’s inheritance or exclusion. One of the mechanisms that parties can use to settle on a resolution is a Deed of Family Arrangement (DOFA).
Beneficiaries and entitled persons agree through a DOFA on how to administer and distribute the Estate. It is essentially a contract between beneficiaries and Executors. It supersedes the Will of the deceased person and governs how the Executor should administer the Estate.
What Do I need to be concerned about when preparing a Deed of Family Arrangement?
A key consideration with a DOFA is its potential tax consequences. Section 63 of the Duties Act 1997 (NSW) sets a $100 duty for property transfers under a Will or intestacy. The Act does not make any similar provision for a DOFA. If a DOFA grants more property than the Will, the recipient must pay stamp duty on the extra amount.
Example:
A and B are the two beneficiaries of an Estate. The Estate comprises solely of a House and cash and shares owned by the deceased. Under the Will, A and B are entitled to half of the Estate. This means they would be both own half the house and would each take half the cash and half the shares as well. That situation could lead to further dispute in the future if the beneficiaries do not agree about what to do with the house. So they reach an agreement that A will forgo all of the cash and shares and instead take all of the house. B agrees and the parties sign a DOFA that records the amendment. However, A is now inheriting all of the house rather than half the house. The other half of the house is transferred because of the DOFA. If the house is worth $2 million, then A needs to pay stamp duty on the $1 million of value acquired in the DOFA rather than the Will.
A’s position is not uncommon, and the property market in NSW today means that real property acquire out of an Estate has even greater value. All other parts of the Duties Act apply, so A may qualify for concessions or exemptions under other provisions. The duties provisions apply only when transferring ‘dutiable property’.
Approvals
Regularly, a Will may leave an entitlement to a grandchild, or a third party charity. In these circumstances, it is important to consider whether a DOFA affects those beneficiaries’ entitlements under a Will. If a beneficiary’s entitlement under a Will is being varied, they will need to approve the DOFA.
Further, if the beneficiary is under an incapacity or a minor, the DOFA may also require the approval of the NSW Supreme Court to proceed.
Benefit for an Executor
A DOFA helps an executor resolve estate disputes and reach an agreement with beneficiaries. It usually includes a release protecting the executor from lawsuits. This is a significant benefit to the administrator of the Estate.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
