Ilott v The Blue Cross and others – testamentary freedom and financial provision for family members around the common law world

On 25 April 2017 Richard Norridge, Joanna Caen and Gareth Keillor delivered a webinar on the state of the law relating to testamentary freedom and financial provision for family members following the landmark English Supreme Court decision in Ilott v The Blue Cross and others¹. The webinar also considered provision for family members in a number of other common law jurisdictions. On 17 May 2017 Richard and Joanna reprised the webinar as a live breakfast briefing session at Herbert Smith Freehills' Hong Kong office in front of an audience of bankers, accountants and others involved in trust and estate matters.

In Ilott v The Blue Cross and others the English Supreme Court set out what the correct approach is to determining an award for financial provision under English law, i.e. the Inheritance (Provision for Family and Dependants) Act 1975 (the "Act"). The judgment goes some way to clarify the law in this area by attempting to strike a balance between respecting testamentary freedom and making reasonable provision for family members and dependants who are not, or not sufficiently, provided for in the deceased's will.

Although it might be thought that the position would be similar in Hong Kong, Singapore, Australia and New Zealand, as set out below, there is in fact a wide divergence in the approach to the issue of what financial provision can justifiably be made out of the deceased's estate without disregarding the wishes of the testator or rewriting the deceased's will.

The history of inheritance provision and policy background

The Act was preceded by the Inheritance (Family Provision) Act 1938 (the "1938 Act") which first introduced the principle of financial provision for family members under English law. The 1938 Act provided relief only for a limited class of family members and so in the early 1970s the UK Law Commission reconsidered the position. The Commission issued a consultation paper, followed by two reports, to recommend improvements to the law as it stood then and, as a result, the Act was introduced in 1975.

The Act serves a number of policy objectives:

1. The Act protects the general principle, well established in English law, that testamentary freedom, i.e. a testator's freedom to leave his estate to whom and in such proportions as he or she sees fit, should be protected. The Act sets out the limited circumstances in which testamentary freedom may be curtailed to give way for financial provision for family members in need.
2. The Act encourages family members to discharge their responsibilities toward one another so that fewer people fall on the state for support.
3. Testamentary bequests and legacies form a substantial part of the income of charities in England and around the common law world. In the UK charity income from legacies has risen in recent years and now totals over £2.24bn, rising from £1.98bn in 2010. In 2016 25% of the total amount given to charities in the UK came from legacies, rising from 6% in 2010. There is a policy objective to protect the income received by charities given the obvious public benefit they provide.

Domicile

Domicile is important when considering the nature and extent of provision for family members. The domicile of the deceased needs to be established when working out which regime is applicable for financial provision for family members. The domicile of the claimant who is making an application out of the estate is irrelevant. It is therefore the courts in the place where the deceased was domiciled who will determine whether to make any order for financial provision. This may be surprising given that one of the main policy reasons behind allowing family members to apply for financial provision out of the deceased’s estate is to prevent them from falling on the state, but this is nevertheless the position.

The decision in Ilott v The Blue Cross

The testator, Mrs Jackson, was estranged from her daughter, Mrs Ilott, for a number of years prior to her death. In her will she made no provision for Mrs Ilott and instead bequeathed her estate to a number of charities.  Mrs Ilott applied to Court under the Act on the basis that her mother's will had not made reasonable financial provision for her maintenance.

Under the Act, reasonable financial provision for the spouse or civil partner of the deceased is that which is reasonable in all the circumstances for the spouse or civil partner to receive, whether or not financial provision is required for their maintenance. In respect of all other types of applicants, including adult children like Mrs Ilott, reasonable financial provision is limited to what is reasonable for the applicant to receive for his or her maintenance and is not assessed on the basis of what the Court considers fair in the circumstances. The Court must answer two questions when determining an application under the Act:

1. Did the will/intestacy make reasonable financial provision for the claimant?
2. If not, what reasonable financial provision ought to be made for the claimant?

When deciding how to exercise its power to award reasonable financial provision, the Court must have regard to the factors set out in section 3 of the Act. The Court has also made it clear that where it has to assess whether reasonable financial provision has been made, and/or what it should be, the relevant date for that assessment is the date of hearing.

This dispute was litigated for over a decade with a number of hearings at all levels of the English court system. Mrs Ilott was initially awarded £50,000 out of her mother's estate, a figure which was later tripled by the Court of Appeal on the basis that the district judge had made two errors of principle; namely 1) he had failed to consider what the award would have been if there was no estrangement between mother and daughter; and 2) he had made his award without considering its effect on Mrs Ilott's benefits entitlement. The charities then appealed this award to the Supreme Court.

The Supreme Court reversed the decision of the Court of Appeal and reinstated the original award on the following basis:

1. The first instance judge had not erred in principle when considering the factors under section 3 of the Act. In fact, the Supreme Court held that the Court of Appeal had erred in giving little weight to the fact that 1) mother and daughter were estranged for nearly 26 years; and 2) Mrs Ilott had no expectation of benefit under the will.
2. The first instance judge had in fact considered the effect of the award on Mrs Ilott's benefit entitlement.

The Court recognised that the concept of "maintenance" imports a provision to meet the everyday expenses of living; it is not limited to subsistence level but it also "cannot extend to any or every thing which it would be desirable for the claimant to have".  The Supreme Court also confirmed that reasonable financial provision is to be determined on an objective basis; i.e. what is reasonable for the claimant to receive, and not whether the deceased had acted reasonably.

The Court made it clear that a "moral obligation" between parent and child is not a prerequisite for an application for financial provision (i.e. it is not a factor included in section 3 of the Act) but that "clearly, the presence or absence of a moral claim will often be at the centre of the decision under the 1975 Act". This helps explain the Court's view that the long estrangement between mother and daughter was an important factor when determining what reasonable financial provision Mrs Ilott should receive.

The Supreme Court stressed the following: "It is not the case that once there is a qualified claimant and a demonstrated need for maintenance, the testator's wishes cease to be of any weight. They may of course be overridden, but they are part of the circumstances of the case and fall to be assessed in the round together with all other relevant factors." The Court held that each decision will therefore be a highly individual value judgment on the facts and the Court should not interfere with first instance decisions unless there is an error in principle or law.

A further interesting point relates to the status of charities as beneficiaries under wills. The Supreme Court was critical of the Court of Appeal for arguing that the beneficiary charities had no expectation of benefit under Mrs Jackson's will and that they would not be prejudiced by an increased award to Mrs Ilott. Lord Hughes pointed out that the claims of Mrs Ilott and the charities were not on a par. He said that although not based on personal need, charities "depend heavily on testamentary bequests for their work, which is by definition of public benefit" and "more fundamentally, these charities were the chosen beneficiaries of the deceased" and as a result they did not need to justify their claim under the Act the same way Mrs Ilott did.

Lady Hale gave a separate judgment in which she drew attention to what she considered to be the unsatisfactory state of the present law. She emphasised that in other areas of family law, public interest in family members discharging their responsibilities towards one another so that these do not fall upon the state can be a factor in determining maintenance provision. Lady Hale pointed out that whilst the common law recognises the duty of divorced husbands to maintain their former wife and infant children to prevent them from being "thrown upon the state for public support", there is no such duty towards adult children. The position is similar in public law. Lady Hale was critical of the fact that the Act fails to give guidance on which factors should be taken into account when deciding whether an adult child is deserving of financial provision.

Courts in other common law jurisdictions take different approaches to balancing testamentary freedom with providing financial provision to family members.

Hong Kong

In Hong Kong adult children can apply for reasonable financial provision out of the deceased's estate under the Inheritance (Provision for Family and Dependants) Ordinance, Cap 481. However, such an application can only be advanced if the adult child was, immediately before the death of the deceased, being maintained either wholly or substantially by the deceased. This position is materially narrower than under English law where there is no such restriction. However, as is the case in England, the level of financial provision granted by courts in Hong Kong is limited to what is reasonable in all the circumstances for the applicant to receive for his or her maintenance.

Singapore

The law relating to reasonable financial provision for adult children under the Inheritance (Family Provision) Act (Cap. 138) in Singapore is quite different from the English or Hong Kong position. The law draws a distinction by gender; adult females can only apply for financial provision if they are unmarried or have some mental or physical disability. Male applicants will only be covered by the statute if they classify as infants (under 21) or have some mental or physical disability. This suggests that able bodied adult males will not qualify for financial provision under Singaporean law. Again, under Singaporean law reasonable financial provision only extends to "maintenance" rather than to what is "fair".

The Inheritance (Family Provision) Act (Cap. 138) does not apply to Muslims whose inheritance rules are determined by the Administration of Muslim Law Act (Cap. 3).

Australia

1. New South Wales

In New South Wales ("NSW"), the Succession Act 2006 allows children of the deceased to apply for financial provision out of the deceased's estate. Unlike England, Hong Kong or Singapore, the test under NSW law is not reasonable financial provision for the maintenance of the applicant but rather "adequate provision for the proper maintenance, education or advancement in life of the person in whose favour the order is made". NSW case law clarifies that it is not the role of the court to achieve a "fair" disposition of the deceased's estate and that courts should be vigilant not to reform the testator's will according to what they consider to be the proper distribution of the estate. The attempt to balance testamentary freedom and respect for the testator's decision against the financial need of certain eligible individuals is a trend which seems prevalent in Australia and is very similar to the Court's concerns in Ilott.

NSW case law makes it clear that no special state (i.e. infancy, disability or marital status) is required for an adult child's claim to succeed, which is a notable contrast to Singaporean law.

NSW law also suggests that spouses should generally be accorded primacy over adult children applicants; as the spouse will have less hope of improving himself or herself economically, whereas an adult child who is considerably younger will have better prospects of improving his or her financial position.

2. Victoria

In Victoria, family members may apply for financial provision through "testator's family maintenance" proceedings under Part IV Administration and Probate Act 1958, as amended by the Justice Legislation Amendment (Succession and Surrogacy) Act ("JLA(SS)A") which came into force on 1 January 2015.

"Eligible persons" may apply for a family provision order for their proper maintenance and support (the same test as in New Zealand below). Adult children or stepchildren are defined as eligible persons but special rules apply.

To make a family provision order under the new regime introduced by the JLA(SS)A, the court must be satisfied that (i) the applicant is an eligible person, (ii) at the time of death, the deceased had a moral duty to provide for the eligible person's proper maintenance and support and (iii) distribution of the deceased's estate would otherwise fail to make such adequate provision for his or her proper maintenance and support.

3. Queensland

Under the Succession Act 1981, the spouse (including husband, wife, de facto partner or civil partner), children (including biological, adopted and stepchildren) and dependants of the deceased may apply for financial provision in Queensland. Unlike in Victoria, there is no statutory restriction on the application of adult children. Similarly to the Victoria and New Zealand position, the deceased's spouse, child or dependant may apply for financial provision for his or her proper maintenance and support.

New Zealand

In New Zealand, children of the deceased may apply for financial provision out of the deceased's estate under the Family Protection Act 1955. Financial provision will be available for "the proper maintenance and support" of the applicant. The courts' interpretation of the meaning of "proper maintenance and support" has changed considerably during the last century. Until recently, the courts of New Zealand had adopted a very liberal interpretation which allowed adult children to succeed even if they had no financial need at all. In the last few years the New Zealand Court of Appeal has cautioned against a wide interpretation and recommended a much less interventionist approach. It did not, however, go so far as to restrict awards to bare maintenance for the necessities of life. Having said that, the clear message from the New Zealand Court of Appeal is that judges should not use the Family Protection Act to do what they think is fair in the circumstances but should intervene only where the applicant has shown that the deceased has failed to make adequate provision for the applicant's proper support and maintenance.

The trend seems similar to Ilott; the courts are trying to balance the testamentary freedom of the deceased against the financial needs of surviving family members in a way that does not result in rewriting the testator's will based on what the court considers to be fair. Similar to Ilott, the New Zealand Courts impose a "moral" recognition standard (i.e. the right of adult children to receive something from their parents' estates regardless of need) even though this is not contained in the statute. In Fisher and others v Kirby and others [2012] NZCA 310 the Court of Appeal confirmed this position; courts are not authorised to rewrite a will because they perceive it as unfair, but the question still remains whether there has been a breach of moral duty judged by the standards of a wise and just testator or testatrix, and if so, what is the appropriate remedy for the breach. The Court emphasised that awards should not be "unduly generous" but should also not be "unduly niggardly", particularly where the estate is large.

Trends across jurisdictions

There are a number of common themes which can be detected in the law of the above countries.

1. In recent years courts have grappled with balancing the protection of testamentary freedom and the wishes of the deceased against the provision of financial provision for family members out of the deceased's estate. This was specifically emphasised in the recent cases of Ilott and Re Martin (Deceased) in the English courts.
2. Reasonable financial provision for surviving family members is based on what is adequate for the maintenance (and in New Zealand also for the support) of the applicant. Courts are trying to avoid introducing principles of fairness into the assessment of reasonable financial provision to avoid rewriting the testator's will.
3. What constitutes adequate maintenance will be fact dependent in each case but the financial situation of the applicant, the size and nature of the estate and any possible disabilities of the applicant seem to be common factors across jurisdictions which the courts will consider.
4. Who can apply for financial provision out of the estate varies between jurisdictions. Whereas children of the deceased are covered under the relevant act in each jurisdiction in some form, unmarried couples, for example, seem to receive different treatment. The recent English case of Re Martin (Deceased) found that long-term partners of the deceased are deserving of reasonable financial provision under English law. This is similar to Australia and New Zealand (where de facto partners of the deceased can apply for financial provision). In Singapore, by contrast, unmarried partners of the deceased will not qualify for financial provision under local law.
5. The “moral obligation” of the deceased to provide for family members in his or her will is given different weight in different jurisdictions. In English law, following the Ilott case, it seems that whilst the existence of a moral obligation is not a prerequisite to the making of an award for reasonable financial provision (and it is not listed as one of the factors in section 3 of the Act), the Court should have regard to this and it will often be central to the Court’s decision. Hong Kong case law follows the English position and suggests that the existence of a moral obligation may be necessary to establish that a failure to make any or any greater provision for an applicant was unreasonable. In New South Wales, Australia, on the other hand, case law explicitly states that adult children do not need to show a special need or special relationship to succeed.  Whereas in New Zealand, the presence of a moral obligation still plays a substantial role.

Takeaway points

1. The legislative framework for financial provision for family members differs in each country to reflect the unique circumstances in each jurisdiction. Therefore the courts in each country interpret the applicable law in differing ways. This means that unlike, for example, in the area of fiduciary duties, relying on cases from different common law jurisdictions is probably unhelpful in relation to financial provision for family members.
2. The decisions in this area are highly fact-specific and as the Ilott case illustrates, courts on different levels and on separate occasions may reach widely divergent decisions, which may have an effect on estate planning. Due to the "moral obligation" to provide for family members and the possibility of expensive litigation, testators may wish to consider making sufficient provision for their children in their will to satisfy a potential “moral obligation” hurdle. Further, if the testator wishes to leave substantial amounts to charities or trusts, it may be worth considering donating during the testator’s lifetime to avoid potential litigation after the testator’s death for financial provision out of the estate. Donations made during the lifetime of the donor are generally harder to claw back than those made out of the testator’s estate.
3. It is important to get legal advice on the domicile of the testator, not just in relation to the tax ramifications of one’s will but also in respect of the applicable financial provision legislation in the various common law jurisdictions. This point may become particularly relevant in cases where people relocate from one common law jurisdiction to another where different financial provision rules are applicable.
4. The financial provision regime may also affect in terrorem clauses. In terrorem, no-contest or non-disputation clauses are clauses in wills which stipulate that if a beneficiary under the will challenges the will, he or she will lose his or her gift under it. If the potential beneficiary brings a challenge and the will is found to be invalid then the forfeiture clause will also be invalid. The effect of this type of clause is to cause the potential beneficiary to weigh up the pros and cons of bringing a claim, taking into account the risk of losing the gift in the will, rather than to prevent a claim. The relationship between such in terrorem clauses and claims under the Inheritance Act 1975 does not seem to be entirely settled yet. It is also unclear how this interplay would be decided in other common law jurisdictions.
5. The majority of civil law jurisdictions enforce “forced heirship” regimes. Forced heirship involves limiting the freedom of the testator to dispose of his estate in the way he chooses and usually provides that a certain percentage of the estate must be distributed to specific heirs of the deceased. Such regimes may successfully prevent claims such as in Ilott if the children of the deceased automatically receive a certain percentage of the deceased’s estate. On the other hand, the common law position provides much greater testamentary freedom and flexibility both for the testator to provide in his or her will as they see fit and also for the courts to award financial provision for family members if the testator failed to provide for his or her family members.

If you have any questions, please either contact your usual Herbert Smith Freehills contact, or email GlobalTrustsAdvisoryGroup@hsf.com

[1] [2017] UKSC 17