Wills and the Intergenerational Transfer of Wealth

Transcription

1 Wills and the Intergenerational Transfer of Wealth Linda Rosenman(presenting author): Victoria University Melbourne and The University of Queensland Cheryl Tilse, Jill Wilson, Rachel Feeney : The University of Queensland Ben White : Queensland University of Technology APRU Symposium September 28-29,2015 University of N.S.W This paper derives from a number of papers currently under review for publication. Please do not quote or otherwise use without the prior permission of the authors 1

2 Wills and the Intergenerational Transfer of Wealth 1 Cheryl Tilse, Jill Wilson, Linda Rosenman*, Rachel Feeney The University of Queensland Ben White Queensland University of Technology Intergenerational transmission of wealth is a significant economic and policy issue internationally. The decisions that people make about handing on their wealth and their assets are impacted by, and have implications for income security, care and tax policy as well as for generational inequality. Intergenerational wealth transmission also reflects and has significant implications for relationships within families.the focus of this paper is on wills and bequests, how people decide to pass on their wealth and the sequelae in terms of challenges to those decisions through will contests. There are predictions that Australia is potentially facing a large intergenerational wealth transfer in the next 20 years with the property of the veteran generation being passed on to the baby boomer generation and their estates, housing and superannuation wealth in turn being passed on to the next generation on their death. These claims of the largest transfer of wealth in history can be questioned on a number of levels. They do however raise major questions about the mode of transmission of wealth and the principles and expectations that underpin such transmission. Intergenerational transfers of wealth comprise two major streams-testamentary bequests through wills distributed after death and inter vivos transfers- gifts made during life. Most wealth transfer occurs following death and wills are usually the document through which this is achieved. Wills however are more than just a legal document. On the one hand they deal with the transmission of property and assets on the other they are documents that spell out intra family and intergenerational relationships as well as how people relate to the wider community and establish their legacies. Generally research has focused upon transfers made between (aging) parents and adult children. An extensive economics literature exists on intergenerational transfers through wills and bequests. Theoretically two major motivations for leaving a bequest have been posited: altruism and exchange. Altruism assumes that people leave bequests to children because they care about their well being- and by extension predicts that bequests will be distributed unequally between beneficiaries depending upon their financial need. Alternatively an exchange motive posits that bequests are likely to be exchanged for care or other assistance given by children to parents and therefore unequally distributed between children in relationship to the assistance given to parents during life. Empirical research however has not been so clear-cut, indicating that the majority of testators distribute assets to their immediate family beneficiaries equally. Secondly the most immediate beneficiary is usually a spouse rather than children. Some researchers have suggested that this is to compensate for a wife s lower lifetime earnings however it seems more likely that community and social norms as well as family provision conventions have an impact. 1 This paper derives from a number of papers under review for publication. Please do not quote or otherwise use without the prior permission of the authors 2

3 Wills reflect wider societal conditions. Family structures are changing. There have been significant increases in the rates of divorce and in blended families with estimates that around 5% of families in Australia are blended families i.e. comprising parents with children from previous relationships as well as potentially children from a current relationship. Blended families pose a particular set of issues for making a will as fairness, equality and equity of access to family money need to be considered. Repartnering, especially later in life also has implications for acquisition and transmission of wealth. Internationally there are significant cultural and legal differences in terms of how and to whom intergenerational transmission is made as well as the degree of testamentary freedom that a will maker has. Currently 28% of the Australian population was born overseas and the majority of immigrants now do not come from countries with a legal system based upon English common law. They may have different cultural traditions regarding making wills and transmission of property. A proportion of those born overseas may have assets and/or have expectations of inheritances -including property in their country of origin which require legally acceptable wills to be made for different jurisdictions. Much of the research and theoretical models relating to wills inheritance and intergenerational wealth transmission has been done in other countries. This paper is based upon Australian research that focused on will making and will contestation. The paper draws on data from five linked studies: 1. A 2012 survey of 2405 Australian adults explored the prevalence of will making in Australia, reasons for making, changing or not making a will and the principles underlying asset distribution in wills. 2. An online survey of will drafters (257 Public Trustee officers and private lawyers). It aimed to identify social and family situations presenting difficulties to will drafters, approaches taken to resolve these difficulties, w a y s i n w h i c h the perceived risks of contestation are managed. 3. In-depth interviews (68) with non will makers and will makers with complex family situations complex assets or cultural considerations around wills and inheritance, that may create challenges in drafting a will and influence inter generational relationships. This included a subsample of 16 respondents for whom Sharia law and precedent was a major consideration in drafting their wills. Two additional studies focused specifically on contestation of wills 4. A judicial case review of 215 contested cases in Australia in 2011 identified disputants characteristics and underlying motives and outcomes of contestation. 5. A review of Public Trustee files involving 139 disputed cases that were dealt with, in the first instance, by the Public Trustee and generally settled outside court. Who Makes a Will- and Who Does Not? 3

4 Firstly it is important to establish who does and does not have a will. Legislation regarding wills and intestacy are made at the level of the state or territory in Australia. If a person dies intestate legally their estate is distributed according to intestacy legislation that is broadly comparable from state to state. Generally a court ordered administrator distributes the estate to a life partner and then equally amongst children. The national prevalence survey established that most Australians have a will (n = 1426, 59%) or expect to make one (n = 524, 22%). Consistent with most research overseas the strongest predictors of having a will are being older and having a higher value estate. Other factors that are significant are gender-women are more likely to have a will than are men, relationship status-being married and prior experiences with wills (acting as an executor, receiving a bequest or becoming a guardian) also had significant statistical relationships with will making. Cultural attitudes are important; having a will is less common amongst those from non-english speaking backgrounds. Procrastination appears to explain why most non-will makers do not have a will. Deliberate non-will makers were a small but diverse group with a range of reasons for not intending to make a will. These included having few assets, not having children or dependents, being from a culture in which will making is not normative behavior. Allocation principles and Asset distribution Most testators intend to make an intergenerational transfer through their will, although not at the expense of their own lifestyle and care. Leaving an inheritance was not prioritized over providing for self. Almost three quarters (n = 985, 74%) of testators believed it was important to use their savings to live comfortably, even if it meant not leaving an inheritance. This view was particularly prevalent among older respondents. A Will is a family document where most assets are distributed to immediate family members. When making a will people prioritise o o o Their children receive an inheritance Ensuring their partner is provided for, Protecting their assets from claims by those they did not wish to inherit. 4

5 o Demonstrating personal connections by leaving specific items to individuals to reflect personal connections Table 1 What is important to testators when deciding how to divide their assets Respondents who considered the issue important (% of all people who responded to the question) When distributing assets it is important to. Ensure my children are provided for 1,202 (93%) Ensure my partner is provided for 1,077 (92%) Leave an inheritance 1,192 (89%) Protect my assets from claims from 1,080 (83%) those I do not wish to inherit Leave specific items to individuals in my 700 (52%) will to reflect my personal connection to them After providing for a partner the vast majority of people with children leave the bulk of the will to their children. The overriding principle in distributing assets to children is to leave equal shares regardless of patterns of pre-provisioning or care contributions over the life course. Those with dependent children are most likely to plan to leave equal shares.a slightly higher proportion of people with financially independent children and those with a mix of financially dependent and independent children planned to distribute the estate unequally. A relatively small proportion of the sample (n = 81) said that they would leave unequal shares to their children. In order of frequency mentioned this was to reflect: o The child whose financial need is greatest/financial situation is less secure (n = 38, 47%) o The child s behaviour (e.g., poor money management, addiction, lack of contact) (n = 37, 46%) o Differentiating between biological and step children (n = 32, 39%) o Cultural or religious practices (n = 6, 7%). Reciprocity or exchange for the provision of care or financial support by family members did not seem to be an important allocation principle 5

6 Most common distribution Immediate family members with equal distribution among children Immediate family members with unequal distribution among children Least common distribution Non-family members e.g., friends, organisations/charities, carers, pets Figure 1 Hierarchy of allocation principles Will drafters similarly indicated that the majority of people making wills equally distribute assets to immediate family members. However more than half of will drafters (n = 102, 58%) reported that when people chose to divide their assets unequally between their children the most common reason for unequal division was to reflect the quality of each child s relationship with the testator (98 or 55% of will drafters reported that this occurred frequently). This finding is fairly consistent with the prevalence survey and reflects the fact that wills convey statements about relationships. Will drafters also reported that parents occasionally left unequal shares to their children to achieve equitable outcomes (e.g., similar levels of financial security). This demonstrates the important distinction between equity (equal outcomes) and equality (equal distribution), although the most common pattern is equal distribution. Those without partners or children were more likely to believe it was important to make provision for other people to recognise support, companionship and/or friendship. Women were more likely to consider it important to make financial provision for care of their pets. In common with all respondents, leaving a bequest to a charity or an organisation of importance to the individual did not receive a high priority. In depth interviews with testators with complex families (which included blended families, and those with a child with a disability) and those whose cultural traditions regarding distribution differ from Australian family provision legislation (members of Islamic communities) more commonly intend to make unequal distributions. Common reasons for unequal distribution were Family structure (e.g., distinguishing between biological and step children), and Need (e.g., providing for an adult child with cognitive disability) Cultural/religious beliefs (e.g., those following Islamic distribution guidelines where sons receive twice the share of daughters) or social traditions regarding primogeniture. 6

7 Interpersonal relationships between testators and potential beneficiaries often led to reduced shares or exclusion from the will due to Concerns about a child s behaviour (e.g., addiction, poor management of money) Poor quality relationships: Conflict and estrangement or mistrust or dislike of a partner Separation and divorce can complicate relationships and create questions regarding who is entitled to benefit from an estate. Many testators in step/blended families reported either excluding or leaving a smaller share to their stepchildren. Testators perceptions of entitlement of biological and step children in blended families varied based on family and estate context e.g., marital status, duration of relationship, degree of active parenting of step child (ren), and pooling of assets between partners. Testators with an adult child with cognitive disability also were more likely to consider unequal distribution. Around a third of those interviewed left equal shares to their children, another third intended to leave more to the child with disability and one third intended to leave less to the child with disability. Allocation decisions were based on factors such as the child s level of disability, predicted costs of meeting future care needs, the needs and financial position of other children and their commitment to care for the sibling with a disability. On the other hand practical considerations such as preserving pension eligibility for the child with a disability could lead to a smaller share. In interviews with respondents from Islamic communities, most asset distribution followed the prescribed Islamic distribution guidelines, which include a proportion of the will being left to charity and unequal distribution to children, based on gender. A significant proportion however considered that their wills should reflect broader principles of fairness seen as the underlying intent of Islamic wills. Examples given were equal allocation regardless of gender or unequal distribution based on need. The use of prescribed Islamic distribution principles was a slightly more common approach. A different picture emerged from a small number of interviews undertaken with people with large estates and multiple asset classes. For these respondents estate size or complexity of assets typically did not appear to displace usual allocation principles based upon equal distribution. Family businesses, especially family farms,create particular challenges for will making. In such cases some children may follow the parent in the farm/business, contribute to its income (and debts) and derive their livelihood through it. In many cases the business is the main asset and in the case of farms may also be the home. Notwithstanding this, the farmers interviewed intended asset distribution between their children to be equal. Inter vivos transfers An Inter vivos transfer is a transfer or gift made during one's lifetime. Almost two thirds of testators (n = 726, 62%) believed it was important to provide for their dependents while alive rather than wait until death. Notwithstanding often unequal gifts 7

8 financial and otherwise made to beneficiaries, the vast majority of respondents did not intend to vary the equal distribution principle in their wills by leaving unequal shares to their children to recognise prior intervivos transfers. Researchers have suggested that intervivos transfers may be the vehicle by which people attempt to balance equity and need between their children rather than use their last will and testament to do this. () This seems to be consistent with the responses to the prevalence survey and that observed by will drafters. It is possible that intervivos transfers are also used in place of testamentary transfers to reciprocate for care and financial assistance provided by a child or a friend. Intervivos transfers in the form of gifting, establishing educational funds for grandchildren etc. are often used in jurisdictions where estate taxes (death duties) exist as a form of tax effective financial management. One of the reasons that testators gave for equal distribution in the will was to reduce the risk of the will being contested after death, however perceived inequity in intervivos transfers can leave a residue of ill will and discord between family members particularly if the will treats all children equally. This can increase the risk of contestation subsequently. Contestation of wills Regardless of the assumption that a will embodies the wishes of the testator wills can and are contested. Contesting a will means contesting the underpinning allocation principles and reflects and usually perpetuates and worsens poor family relationships. Arguably the strong norm of wills being about transfers of assets within families underpins attitudes of entitlement to family money that can foster challenges to testators intentions. Contesting a will is costly to family relationships, to the estate, which bears the costs, and to the judicial system and so to the state if a case escalates to court. Most wills are contested by family members (primarily adult children) under family provision legislation, where the distribution of assets is directly challenged. Adult children are the most common claimants in will contests Exclusion from the will, unequal distribution between children and perceived inadequate provision are commonly observed in contested estates. Aside from allocation principles, other potential triggers for contestation are: complex family situations such as blended families, spousal relationships of short duration, estates with no close family to benefit and poor interpersonal relationships between beneficiaries, disputants and/or the deceased. Complex or difficult family relationships e.g., blended families or families with a history of conflict and/or estrangement were often present in contested estates and in some instances emerged, as potential triggers for will contests. Examples from litigated cases include: Excluding children from a will, or making an uneven distribution perceived to be unfair. This sometimes arose against a backdrop of a history of previous favouritism or significant inter vivos transfers Excluding a partner from the will or providing them with only a life interest Complex or blended families, especially where the testator had remarried and there were children from a previous or subsequent relationship. There may have been conflict between a later spouse and children of an earlier relationship or between children from different relationships. 8

9 Poor family relationships were also associated with cases escalating to Court. Half or more of cases in which relationships were very poor or poor went to Court compared with none where relationships were good or very good. Relationship quality likely reflects the level of capacity of the parties to mediate an outcome. Most contests are resolved by redistributing in favour of family members. Contestation has a high rate of success whether it is through mediation or the courts. A significant cost of will contestation is damage to familial relationships. Will drafters were doubtful about being able to avoid contestation, particularly in the context of complex family dynamics and/or an unwillingness of the testator to take advice on intentions or drafting directions presenting a risk of family conflict and will contestation. There was recognition that no strategies on the part of a will drafter can totally prevent an eligible applicant from making a challenge. Discussion: Most people report that it is important to them to ensure that their will provides for their immediate family- namely a partner and children and that they intend to divide their estate equally between their children. This is broadly in line with intestacy legislation. For some testators this is to avoid the perceived risk of subsequent challenges to their will. There seems to be some evidence from will challenges that unequal distributions in wills underpin a fair proportion of challenges to wills. For will drafters and for the state there is the challenge of assisting people to draft a will that adequately addresses their intentions while not leaving it open to a high possibility of contestation. Poor family relationships underpin challenges to a will and, perhaps as importantly, will contests are likely to exacerbate and perpetuate family divisions. They are costly to the individuals involved emotionally and financially as they deplete the value of an estate through mediation and court costs as well as delaying probate. At the family level there seems to be very limited communication prior to death about the contents of the will and about the testator s intentions and reasons for the distributions made. There is a view amongst will drafters that such intra familial communication might reduce will contestations and the lasting legacy of bitterness that they can leave within families. A considerable amount of research and policy has focused upon caregiving and into the financial and emotional costs of providing care. It seems that for most testators reciprocating care by distributing the estate unequally to reflect such contributions is not desirable. Whether there is any financial reciprocation for the person who undertakes the care, and whether this is done through intervivos transfers while alive rather than testamentary transfers after death is a researchable question that needs to be considered further. Expectations of caring can extend beyond death. The parents of adults with a disability face particular challenges in drafting a will that ensures that a child will be cared for after their death, that siblings or others are recognised financially for the care that they provide. Income and care policy is also an issue since many are concerned to ensure that providing financially for a child in their will does not jeopardise their child s entitlements to government funded care and income support. 9

10 Common law, intestacy legislation and community norms and expectations are predominantly based on a western nuclear family model that no longer dominates-if it in fact it ever did. There is great variation in traditions, expectations and norms amongst people who come from different societies. Framing a will can be a particular challenge when the beneficiaries (usually children brought up in Australia) do not share or accept the norms of the testator. This can provide a challenge to professional will drafters as well as conflict within families. The question about reinstating estate taxes has been raised again in Australia. In this context it is instructive to consider the implications of estate taxes for the form in which inheritances take, and also for whether it pushes testators towards inter vivos distributions (which seems to be the evidence from overseas). Inter vivos bequests can be more difficult to equalise and, unlike a will, are often unrecorded. While they may address equity within a family they do not appear to be frequently taken into account in framing a will. Nevertheless a strong sense of injustice was evident in some of the interviews regarding unequal intervivos transfers not being redressed in the bequests at death. Inequality in will bequests to recognise a beneficiary s contribution to a family business, including a farm, is another area where equity and equality clash. The majority of older people respond that it is more important to them to use their assets to live comfortably for the remainder of their lives than to leave a bequest. This then raises some interesting issues regarding whether and if the predicted largest intergenerational wealth transfer in history will be as large as predicted. Longevity at age 60 is continuing to increase with the likelihood that people will need to ensure that their resources are adequate to ensure that they can live comfortably into advanced old age. User pays policies now require people to pay increasingly large share of the costs of health and aged care as well as supporting themselves financially rather than relying up on the pension. People therefore need to plan to utilise their resources over an unpredictable life span, a fluctuating economy and an uncertain policy environment. This may well impact on if, how and how much people are able to transfer to the next generation. References Albertini, M., & Radl, J. (2012). Intergenerational transfers and social class: Intervivos transfers as means of status reproduction?*. Acta sociologica, 55(2), Albertini, M., & Radl, J. (2012). Intergenerational transfers and social class: Intervivos transfers as means of status reproduction?*. Acta sociologica, 55(2), Cox, D & Rank M (1992)Inter-Vivos Transfers and Intergenerational Exchange The Review of Economics and Statistics Vol. 74, No. 2 (May, 1992), pp Drake, D. G., & Lawrence, J. A. (2000). Equality and distributions of inheritance in families. Social Justice Research, 13(3), Goodnow, J., & Lawrence, J. A. (2010). Inheritance norms for distributions of money, land and things in families. Family Science, 1(2), Lawrence, J. A., & Goodnow, J. (2011). Perspectives on intergenerational bequests: Inheritance arrangements and family resources. Family Matters, 88,

11 Tilse, C. Wilson J, White.B,Rosenman, L. Feeney R (2015) Will-making prevalence and patterns in Australia: keeping it in the family (AJSI Forthcoming September 2015 Wilson, J. & Tilse, C. (2012). Will-making in Queensland. Research Report to The Office of the Public Trustee Queensland. Brisbane, Australia: School of Social Work and Human Services, the University of Queensland 11