Deeds of family arrangement and estate asset transfers

What is a deed of family arrangement?

A deed of family arrangement is a written agreement that varies the way an estate is distributed. It is signed by the people whose entitlements under the will (or the intestacy rules) are affected, and usually also by the executor or administrator who will give the variation practical effect. It does not rewrite the will. The will is still the will, and probate is still granted on the will as written. The deed sits alongside it as a contract that records what the beneficiaries have agreed between themselves.

Deeds of family arrangement are sometimes called deeds of family agreement, deeds of arrangement or, where they resolve a will dispute, deeds of settlement. Different terms are used in different jurisdictions and different practice areas, but the underlying concept is the same.

When deeds of family arrangement are commonly used

Some of the more common situations where a deed is used include:

• Resolving a contested will or family provision claim. A negotiated outcome is often documented in a deed that both settles the claim and records the revised distribution. See our article on family provision claims in Victoria.
• Consolidating fragmented entitlements. For example, where the will leaves the residue equally between three beneficiaries, but the beneficiaries agree that one will take the house, another the share portfolio and the third an equivalent cash sum.
• Redirecting a gift. A beneficiary may wish to pass their entitlement to a child, sibling or charity. A deed can record that variation in a way that is clear, binding and properly evidenced.
• Resolving an intestacy. Even where there is no will, the beneficiaries entitled under the intestacy rules can agree to a different distribution by deed.
• Estate and tax planning. A deed can be used to direct assets in a way that improves the overall tax outcome for the family, subject to careful advice on CGT and duty.
• Documenting an informal family agreement. Where a family has already discussed and agreed how the estate will be wound up, a deed converts that informal understanding into a binding and enforceable record.

How a deed can vary estate distributions

A deed of family arrangement can vary the distribution of an estate in a number of ways, including by:

• changing who receives a specific asset (for example, a house, a share parcel, a business interest or a sentimental item);
• changing the proportions in which the residue of the estate is shared;
• creating a life interest, right to reside or other ongoing entitlement that the will does not provide;
• releasing the estate from a contested claim in exchange for an agreed payment or transfer;
• redirecting a beneficiary's share to another person, charity or trust; or
• compromising disputes about loans, advances or gifts made by the deceased during their lifetime.

What a deed cannot do is override mandatory legal rules, defeat legitimate creditor claims or override entitlements of people who are not parties to the deed.

Estate asset transfers and practical administration issues

One of the main reasons a deed is used is to support a clean transfer of specific estate assets to specific beneficiaries. Practical issues that need careful handling include:

• Real estate. Transfers of land require the executor to hold a grant of probate or letters of administration, lodgement of the appropriate transfer documents and consideration of stamp duty. Concessions for transfers to beneficiaries are not automatic where the deed varies entitlements.
• Bank accounts and term deposits. Financial institutions have their own evidentiary requirements. They will usually want to see the will, probate and identification before paying out to a person other than the named beneficiary.
• Shares and managed investments. Listed shares are typically transferred through the registry process, and a deed can affect whose name appears on transfer documents.
• Business interests. Shares in a private company, units in a unit trust or a partnership interest may be subject to a shareholders' agreement, buy/sell arrangement or constitutional rules that limit who can receive them. See our article on what happens when a business owner dies.
• Superannuation. Superannuation usually does not form part of the estate unless paid to the legal personal representative. A deed cannot change a trustee's decision under the fund's rules, but it can deal with how estate-received super is then distributed.
• Personal effects and chattels. Practical issues often include valuation, removal, insurance and record keeping. A short schedule attached to the deed can avoid later disagreement.

Agreement of beneficiaries and affected parties

Every beneficiary whose entitlement is varied by the deed must be a party. That includes:

• each adult beneficiary under the will or intestacy with capacity;
• the executor or administrator, who will give effect to the variation;
• trustees of any trusts to which the estate is paying or has paid assets;
• substituted or contingent beneficiaries whose interests may be affected; and
• where appropriate, the spouse or partner of an affected beneficiary (particularly for asset protection and relationship-property reasons).

Where a beneficiary is a minor, lacks capacity or is unborn, their entitlement cannot simply be signed away by another family member. In those cases the deed may require court approval, a litigation guardian or independent representation. Trying to bypass these protections is a common reason deeds are later set aside.

Probate, letters of administration and timing issues

A deed of family arrangement does not replace the need for probate or letters of administration where one of those grants is required. The grant gives the executor or administrator authority to deal with estate assets. The deed sits on top of that authority and tells the personal representative what the beneficiaries have agreed.

Timing matters. Entering a deed too early — before the estate's assets, liabilities and tax position are understood — can leave beneficiaries committed to a distribution that turns out to be unworkable. Entering a deed too late — after assets have already been transferred in accordance with the will — can be expensive to unwind and may trigger fresh duty or tax consequences.

The executor's duties continue throughout. They should not distribute assets in a way that contradicts the deed, and they should not enter a deed without being satisfied that their duties to creditors and to any non-party beneficiaries are protected. Our article on the duties of an executor in Victoria sets out the relevant principles.

Tax, stamp duty and CGT issues to consider

Tax is often the most important practical issue with a deed of family arrangement. Although a detailed analysis is beyond the scope of this article, the most common issues include:

• Capital gains tax. Transfers from the estate to a beneficiary under the will are typically treated differently from transfers between beneficiaries under a deed. CGT rollovers are not automatic and can be lost where a deed substitutes one beneficiary for another.
• Stamp duty. Victoria offers limited duty concessions for transfers to beneficiaries in conformity with the will. Transfers that go outside the terms of the will because of a deed may not attract the same concessions, and the State Revenue Office's position should be checked before signing.
• Income tax. Where the deed creates an ongoing interest (such as a right to income from estate assets), the income tax treatment of the recipient and the estate can change.
• Centrelink and aged care. Beneficiaries receiving a redirected inheritance can be treated as having disposed of it, with consequences for pension and aged-care assessments.
• Foreign beneficiaries. Additional complexity arises where any beneficiary is a non-resident for tax purposes.

These issues should be considered with a tax adviser or accountant in addition to the lawyer drafting the deed. The cost of getting this right is almost always small compared with the cost of getting it wrong.

Risks: disputes, capacity, undue influence and unequal bargaining power

A deed of family arrangement is a contract, and like any contract it can be set aside in certain circumstances. The common risk areas include:

• Capacity. A beneficiary who lacks capacity cannot validly sign. Where capacity is borderline, an assessment from a medical practitioner is prudent.
• Undue influence and unconscionable conduct. Pressure from a dominant family member or adviser can expose the deed to challenge. Separate legal advice for each beneficiary is the standard safeguard.
• Misrepresentation and mistake. Deeds negotiated without proper disclosure of the estate's assets and liabilities are vulnerable. The executor's obligation to provide accurate information is important.
• Unequal bargaining power. Where one beneficiary is far more sophisticated, better resourced or better advised than another, the courts will scrutinise the fairness of the arrangement carefully.
• Non-party beneficiaries. A deed that affects the entitlements of someone who is not a party is unlikely to be effective against that person and can expose the executor to a claim.

See our companion article on executor disputes in Victoria for related guidance on resolving disagreements during administration.

When court approval may be required

Court approval is not required for a routine deed between adult beneficiaries with capacity. Court involvement typically becomes necessary where:

• minor, unborn or incapable beneficiaries are affected and cannot consent for themselves;
• the deed compromises a family provision or other estate claim and needs to be sanctioned by the Court;
• trustees of a related trust need approval to give effect to the deed; or
• the deed varies dispositions in a way that requires judicial confirmation, for example for tax or duty purposes.

Practical examples

The following short scenarios illustrate how deeds are commonly used in practice. They are general examples only and not advice on any particular estate.

• Three siblings, three assets. The will leaves the residue equally to three adult children. The estate comprises the family home, a share portfolio and cash of approximately equal value. The siblings agree by deed that one will take the home, one the share portfolio and one the cash, with a modest equalisation payment to reflect the small differences in value.
• Redirected gift. A surviving adult child is already comfortable financially and wishes the inheritance to go to her own children. A deed of family arrangement, with proper tax advice, records the variation.
• Resolving a family provision claim. An adult child commences a family provision claim against the estate. The parties negotiate a settlement at mediation and document the revised distribution in a deed, which also releases the estate from the claim.
• Intestacy with surviving spouse and adult children. The deceased died without a will. The surviving spouse and adult children agree that the family home will pass to the spouse, with the balance of the estate divided between the children. A deed records the variation from the strict statutory entitlements.

What to do before signing

Before any beneficiary or executor signs a deed of family arrangement, it is sensible to:

• obtain a clear written summary of the estate's assets, liabilities, tax position and any outstanding claims;
• confirm that everyone whose entitlement is affected has been identified and included as a party;
• obtain independent legal advice — separate lawyers where the interests of the parties materially differ;
• obtain tax and accounting advice on CGT, stamp duty, income tax and Centrelink consequences;
• consider whether any related instruments (for example, a will, a power of attorney or a trust deed) need to be updated; and
• ensure the executor is comfortable that the deed is consistent with their duties to all beneficiaries and creditors.

Beneficiaries and executors who are concerned about a potential dispute should also consider our article on defending a family provision claim and the broader Contested Wills & TFM Claims service page.

Frequently Asked Questions