Hotchpot Clauses vs Equalisation clauses in Wills

 

Dangers of a Hotchpot Clause in a Will – Re Cosier
Deceased Estate Equalisation in Wills are bad

We want to treat our children equally. In our Wills, we put in an Equalisation clause. Or we put a Hotchpot clause in our Will. But neither an Equalisation clause nor Hotch pot clause in Wills work.

A Hotchpot Clause tries to balance and treat the beneficiaries fairly. Hotchpot Clauses date back 100s of years. However, Australians rarely use Hotchpot clauses in Wills.

A ‘Hotchpot’ in an Australian Will:

• is ‘mixture of property’
• it includes not just property in your Will
• it may include property you currently own but may not own in the future
• it may even deal with property that you have never owned
• it may not even deal with property you have never controlled

You can use Hotchpot clauses in both Wills and trusts. They try to ensure fairness to the beneficiaries, family members and loved ones. This is by taking into consideration amounts already received when calculating the final amount due to the beneficiaries under the terms of the trust or Will.

A Hotchpot Clause in a Will equalises the benefits that beneficiaries have already got. You gave gifts to only a few of your children: Re Cosier (1897) 1 Ch. 325 ( C.A.).

Example of a Hotchpot Clause:

• The oldest son already got one of your houses before you died.
• You paid for the wedding of all, but one, of your children.
• You gave $100,000 to each grandchild, but there are more grandchildren after you die.
• Your ex-spouse gave an asset to only one of the children.
• Your father gave an asset to only one of his grandchildren.
• The son got the farm from a Family Trust.

‘What is the object of every hotchpot clause? It is simply to prevent a person to whom a testator has left a share of his estate, and who has been advanced in the testator’s lifetime, from obtaining, by the combined effect of the bequest and the advance, more of the testator’s property than he intended the legatee should have.’ Re Cosier.

Black’s Law Dictionary defines “hotchpot” as:

“The blending and mixing [of] property belonging to different persons, in order to divide it equally.”

Hotchpot Clause in a Will

For fairness, the Will maker refers to:

• property already transferred to only one child and is brought into account by hotchpot
• a debt owing at death is, in turn, converted into an advancement by way of a loan and brought into account by hotchpot
• refers to past and future gifts and benefits from other people, not just the Will maker going to one child, but not the other

A hotchpot clause adds up all the Will maker’s assets and perhaps assets the Will maker controlled or even did not control. This includes the amounts the beneficiaries already received during the Will maker’s lifetime. This ensures an equal division. This is between the beneficiaries at the Will maker’s death.

Advances to a beneficiary are taken into account at the Will maker’s death. Such beneficiaries’ share under the Will is reduced accordingly. ‘Advances’ are difficult to prove and often impossible to value. They also are subject to CGT, stamp duty and other unknowable death taxes.

Here is an example of a hotchpotch clause that was unfair to everyone: Beatrice McCleary v Metlik Investments Pty Limited Beatrice McCleary v Benedict Chan; Clement Chan v Benedict Chan [2015] NSWSC 1043.

Tax equalisation provisions in Wills do not work – Todd v Todd 

Equalisation provisions in Wills usually fail. Consider Todd v Todd [2021] SASC 36.

The Will maker puts in his Will:

“divided between (the beneficiaries) in such a manner so as to ensure that as at the finalisation of the administration of my estate all of my said children have received an equal value of bequests under this my will”.

But assets at death are often pregnant with Captial Gains Tax and other hidden death duties. A family home is often tax-free for up to 3 years from the date of death. In contrast, superannuation suffers up to 32% on death. Should the Court take into account accumulated (latent) CGT liability and other taxes for each asset?

To equalise the deceased estate, do Courts consider potential CGT in our Will?

Should you consider CGT and the method of valuation on an estate asset? It depends on the facts. Every deceased estate is different. You need to consider how likely the asset is likely to be sold or disposed of by the beneficiary.

A home in your family for 5 generations may be kept by the beneficiary. But a balanced share portfolio may be liquidated after the Will maker dies by the beneficiary.

Is the sale of an estate asset inevitable? Then, generally, allowance is made for any CGT payable. The gift under the Will is worth less because the beneficiary has to pay CGT to the ATO when the asset is disposed of.

Sadly, in Todd v Todd the Court decides to forget about the future tax liability. Potential future CGT liabilities are ignored. In part, this is because the Will evidenced no intention. This is in ascertaining the equal value of bequests regarding future taxation liability.

People on high incomes pay more CGT than a person paying tax on a lower marginal tax rate. But is it relevant? Should a rich person be given more of a CGT asset to ‘equalise’ his position?

Craven v Bradley – another example that equalisation clauses in Wills do not work

Look at Craven v Bradley [2021] VSC 344. It shows the confusion of Will equalisation when CGT is considered.

Attempt for estate equalisation in Craven v Bradley

Dad in his Will gifts two properties to two of his three boys. 

He then put in an equalisation clause. While the two boys got the property, the third child needs to be ‘topped up’. To make it ‘even’. Bring on the mess.

The equalisation clause wants the children to take into account the different values of the two properties.

Here is the mess of confusion that this poor Will maker contaminated his Will with: 

• If the remaining balance is more than 3 times the value of property X, then I give property X to my son A free of all duties and encumbrances, and after all costs associated with its transfer have been met from my estate, and the value of property X is included in the gift to my son A.
• If the remaining balance of my estate is less than 3 times the value of property X, then I give property X to my son A free of all duties and encumbrances, provided he pays to my estate the difference between the value of property X and one-third of the balance of my estate as aforesaid.
• The value of property X should be determined by a registered valuer and on terms that would be granted to an arm’s length purchaser from my estate.
• In relation to one of the properties, the value of the property for the purposes of the will was to be calculated after deducting ‘an amount equal to the capital gains tax liability my estate would pay if the property were sold at the date of my death.

The last bit seems to be an attempt to deal with Capital Gains Tax on the two properties. One of the properties is the Wills maker’s family home. And that is usually, but not always CGT exempt.

How do equalise CGT in a Will? The problem with a Hotchpotch clause

The key questions in dispute, and the decision of the court, were as follows:

• is CGT calculated on the will maker’s taxable income?
• or is CGT calculated on the beneficiary’s taxable income?
• or to the estate’s taxable income at the date of the will maker’s death?
• the court held the estate is the relevant taxpayer – sadly, this is a light approach to the problems of CGT
• it fails to consider what date the value of the main residence is calculated. Is it the date of the will maker’s death? Or the point in time when the son paid into the estate the difference between the value of that property and one-third of the remaining balance of the estate or the date the property was transferred to the son.
• To add complexity each State’s laws treat this question differently.
• There is a statutory presumption. This is because the CGT date is the date of the will maker’s death. But this can be rebutted in your Will. And neither Western Australia nor ACT has this presumption.
• Confronted with this equalisation clause mess the court states the statutory presumption is not rebutted. Therefore, the date of death is the date for CGT.

Hotchpotch and equalisation clauses in Wills are like a contract

Interpreting a Will is a bit like interpreting a contract. In Craven v Bradley the court considers the purpose of the Will. What is the purpose of a particular provision? What facts are known and assumed by the will maker? This is at the time the Will is signed. You applying common sense. You ignore evidence of subjective intention. This was also the approach in Marley v Rawlings [2015] AC 129.

No will is made in a vacuum: Perrin v Morgan [1943] AC 399).

You cannot merely see the Willmaker’s intention in the literal meaning of the words. Consider also the surrounding circumstances. The Court avoids literal interpretations that give rise to absurdities.

Sensible interpretations are better: Re Lapalme; Daley v Leeton [2019] VSC 534).

But if the gives particular meaning to a word then on the face of it the Court should adopt that meaning: ANZ Executors & Trustee Co Ltd v McNab (1999) 3 VR 666.

A Court can even insert missing words into the Will. This is if it helps clarify the Willmaker’s intention: Butlin v Butlin [1966] HCA 4)

The Court interprets the Will as a ‘wise and just testator’. Read the Will as a whole. Look to the surrounding circumstances. What if the ordinary meaning of the words in the Will do not make sense? Consider extrinsic evidence under the ‘armchair principle’. The Court considers evidence of the circumstances surrounding the will maker at the time of signing of the Will. Consider Re Staughton; Grant v McMillan [2017] VSC 359).

But the Court cannot rewrite a Will merely because it suspects the willmaker did not mean what is said: Perrin v Morgan [1943] AC 399).

As you can see above in Todd v Todd the court decided that the Will maker in seeking ‘equalisation did not want the future potential taxation liabilities taken into account.

Is the attempt of estate equalisation only approximate? For example, does the son who did not receive a property have to pay the costs of that investment if he wanted to obtain a property. Such costs include substantial transfer (stamp) duty. In contrast, the other two boys got their properties free of stamp duty.

What does Craven v Bradley say about Hotchpot and Equalisation Clauses in Wills?

Hotchpot and Equalisation Clauses are too complex to put in a Will. There are better ways to produce fairness among your children.

Other problems of equalisation in Wills

What if a beneficiary is a non-resident for tax purposes?

Hotchpot clauses and attempts at equalisation are a mess. They add ambiguity and complexity to your Will. There are better ways to achieve Estate Equalisation. See here: /wills/

Forget about hotch potch clauses can my Will deal with assets I do not own?

Forget about hotch potch clauses. Can my Will deal with assets I do not own?

Look at Wheatley v Lakshmanan [2022] NSWSC 583.

The Will seeks to gift, unencumbered, a commercial property. There is a further power for the property to “be placed into a trust or superannuation fund of (the child’s) choice”.

But the property is not owned by the Will maker. It is owned by a company. Now, sure, the sole shareholder is the Will makers. But the company, not the Will maker, owns the property. And whoever owns the shares (under the Will) controls all assets in the company. So the shareholder controls the property – not the Will.

Hotchpotch clauses using Specific gift clauses in a Will are problematic

I dislike Specific Gifts in Wills. And here is another example of a Specific Gift that fails. The Court confirms:

• A Will only gives away assets that you own, in your own name.
• Confusingly (specific gifts often lead to confusion) the Will maker can direct the Executor to do things to ‘reduce into possession an asset not owned by the will maker’. But this does not work. See Re O’Callaghan, [1972] VR 248.
• Make sure the beneficiary gets the shares in the company. [But this is a mess if the company holds other assets or debts.]

The Specific Gift fails – as they often do. But, in this instance, the person is able to challenge the Will.

By challenging the Will the upset beneficiary gets some cash. But it is nothing like the value of the property. There would have been a lot of tax and stamp duty getting the money out of a company – as there often is – and this reduces what they would have got further.

On the bright side, the court mentioned that the parties became feral. With the need to win at all costs. Consequently, the accounting and legal fees are very high. So at least the accountants and lawyers got well-fed.

Granny flats in your parent’s Will – what is fair?

Mum builds a $4500k granny flat in your backyard. Your brother states that when Mum dies it is not fair you get the $450k asset for free. Start building a Legal Consolidated Will to help you with this issue. The granny float depreciates so its value decreases over time. Also Mum is living on the block without paying for electricity. Or, is she? Best to openly discuss these issues with all the family members.

Can I use a Life estate to achieve equalisation in a Will?

Life estates and Rights to Reside have their own issues which are explained here.