What happens when there is an error in a Trust Deed?

We often get asked by our clients, what can be done when their SMSF Trust Deed contains a mistake or typo. Formalities are necessary and a deed of rectification may be the only effective way of fixing the problem.

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A gift with a catch?

You’ve inherited a property, but is the inherited property liable to repay the remaining mortgage debt?

Your debts don’t die with you. They survive you and have to be paid from your estate. In the recent case of Winn v Harding, the New South Wales Supreme Court was asked to assess whether the gifted property or the rest of the estate were liable to bear the remaining mortgage debt.

The Case

Maureen was the executor and a beneficiary under the Will of the late Karen Winn. She inherited a property in Bathurst which, at the time of Karen’s passing, had a mortgage to Bankwest.

The will of Karen directed that the outstanding mortgage debt on the property be paid out of the residue of her estate.

The main issue considered by the court was whether the property was liable for payment of the remaining mortgage.

So, who usually pays?

The default position in NSW is that where someone does not include a ‘contrary intention’ in their Will, the mortgaged property will be liable for the payment of the mortgage.

This general rule is contained in Section 145 of the Conveyancing Act 1919 (NSW).

The effect of this section is that money from the general pool of assets contained within someone’s estate will not automatically assist to pay out a mortgaged property upon their death.

This notion is based on an old English legal principal and is mirrored in almost all Australian states.

Contrary intention

In this instance, Karen had included a specific intention in her Will that payment of the mortgage debt would be from her residual estate (meaning everything that Karen owned, excluding her property that was expressly gifted under the Will).

The court held that the Will had in fact provided a contrary intention for the purposes of Section 145 of the Conveyancing Act. This was on the basis that Karen’s Will included an express direction that referred to the property address and the money from which the mortgage debt was to be paid.

Lack of Funds

As it turned out, Karen’s residual estate at her death did not hold enough funds to cover the payment of the remaining mortgage debt.

In light of this, the courts decided that the property was liable for payment of the remaining mortgage debt, essentially reverting back to the default position.

Accordingly, Maureen may not have inherited the property itself, unless she was in a financial position to help pay out the remainder of the mortgage to Bankwest.

By Olivia Agosti, Solicitor

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Julia is currently 91 years old. She has been married to Henry for 51 years and suffers from diminished mental function as a result of dementia. She was previously married, with her first husband passing away in 1953. Julia has two children from her first marriage, Gordon and Kirk, and one child from her second marriage, Rosie.

Julia lost capacity to make a will as a result of the severity of her dementia. As she did not have a will, Rosie made an application under section 40 of the Wills Act 1970 (WA) to have the court make her mother a will on proposed terms, otherwise known as a ‘statutory will’.

Henry, Gordon and Kirk all consented to the proposed will for Julia. Despite this, the Court rejected Rosie’s application for several reasons including inconsistencies of evidence, and the risk that Gordon and Kirk would end up receiving significantly less than if Julia was to pass without a will. Accordingly, Julia will pass away without a will and her assets will be dealt with under the statutory laws of intestacy irrespective of the present wishes of her family.

Court-made Wills

The Court pointed out that the ability of the Court to effectively make a ‘statutory will’ does not confer a will-making power on the potential beneficiaries of a will maker who has lost capacity. It simply permits the Court to make a will on the balance of both the proposed terms and the information provided to it.

The court highlighted that some of the matters a Western Australian court must consider in granting such an application include:

• an estimate of the value of assets and liabilities of the person concerned
• any evidence as to the wishes of the person concerned
• evidence that the applicant has made reasonable enquiries as to the possibility of a Family Provision Act 1972 (WA) claim

Could this have been avoided?

Absolutely – if Julia had an up-to-date and valid Will at the time she lost capacity, her wishes would have been formally expressed. This would have eliminated any issue of disproportionate distribution among her children, and prevented Julia’s assets being distributed under the law of intestacy upon her passing.

A professionally drafted will is a significantly small cost compared to the cost of litigation for a statutory will, and reduces the risk of assets being dealt with otherwise than in accordance with the will maker’s wishes.

By Olivia Agosti, Solicitor

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