REECE & OMRHAN (EXECUTRIX OF THE ESTATE OF MR MAIREAD)

[2013] FamCA 111

FAMILY COURT OF AUSTRALIA

REECE & OMRHAN (EXECUTRIX OF THE ESTATE OF MR MAIREAD) [2013] FamCA 111

FAMILY LAW – ENFORCEMENT OF ORDER – Deceased estate – Entitlement under an order not to be affected by estate duties and expenses even though orders referred to liabilities.

Family Law Act 1975 (Cth)

APPLICANT: Ms Reece

RESPONDENT: Ms Omrhan (Executrix of the Estate of Mr Mairead)

FILE NUMBER: MLC 256 of 2011

DATE DELIVERED: 21 February 2013

PLACE DELIVERED: Melbourne

PLACE HEARD: Melbourne

JUDGMENT OF: Cronin J

HEARING DATE: 14 And 15 February 2013

REPRESENTATION

COUNSEL FOR THE APPLICANT: Ms Stewart

SOLICITOR FOR THE APPLICANT: Kennedy Partners

COUNSEL FOR THE RESPONDENT: Mr Combes

SOLICITOR FOR THE RESPONDENT: Nanscawen Lawyers

Orders

1. That in satisfaction of her entitlement pursuant to the orders of this Court made on 17 October 2010, the applicant be paid by the respondent from the estate of the late Mr Mairead, the sum of $467,000 together with interest pursuant to the Family Law Rules 2004 as determined in paragraph 2.

2. That interest be payable by the respondent in her capacity of the executrix of the estate of the late Mr Mairead from his estate from 1 March 2012 on the sum of $1.467 million until the payment of $1 million was paid in 2012 and thereafter on the sum of $467,000 until payment.

3. That should any party seek costs arising out of these orders, such application be made by written submission and filed and served by no later than 18 March 2013 with such submission being endorsed with the fact that it has been so served on the other party and any recipient of such submission have until 2 April 2013 to file and serve any response and such response be endorsed with the fact that it has been so served on the other party and upon receipt of any such application for costs, it or they be determined in chambers.

IT IS CERTIFIED:

1. That pursuant to Order 19.50 of the Family Law Rules 2004 it was reasonable to engage counsel to attend.

2. That the application in a case filed 18 January 2013 and the response thereto filed 22 November 2012 are otherwise dismissed.

IT IS NOTED that publication of this judgment by this Court under the pseudonym Reece & Omrhan (Executrix of the Estate of Mr Mairead) has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).

FAMILY COURT OF AUSTRALIA AT MELBOURNE

FILE NUMBER: MLC 256  of 2011

Ms Reece

Applicant

And

Ms Omrhan (Executrix of the Estate of Mr Mairead)

Respondent

REASONS FOR JUDGMENT

1. These proceedings concern the interpretation and/or enforcement of orders of the Court made on 17 October 2010.

2. Mr Mairead and Ms Reece lived in a de facto relationship for a number of years.  The duration of that relationship is irrelevant because the first paragraph of the order of the Court on 17 October 2010 was a declaration as to the existence of that relationship for the purposes of the Court exercising its jurisdiction to alter property interests.

3. Mr Mairead died in July 2011 but that was after proceedings under Part VIII AB had been issued by Ms Reece (“the applicant”).

4. Upon Mr Mairead’s death, Mr Omrhan (“the respondent”) was substituted as his legal personal representative and she became a party to the proceedings (Rule 6.15 Family Law Rules 2004).

5. In relation to the orders of October 2010, both the applicant and the respondent were represented at the time by senior and experienced lawyers.  A minute of proposed orders was signed and the Court was requested to make the orders that it finally did on 17 October 2010.

6. Critical to my determination is that those orders were relevantly, an alteration of the interest of Mr Mairead’s estate in property in which he had a legal interest. That much can be seen from reading s 90SM(1)(a) and (c) of the Family Law Act 1975 (Cth) (“the Act”). Importantly, on 17 October 2010, the Court must have been sufficiently satisfied that the orders fulfilled the requirements of ss 90SM(3) and 90SM(8). The power of the Court using those cited provisions is broad. In respect of s 90SM(8) the Court is empowered to make such order as it considers appropriate with respect to the property of the parties and perhaps, there lies the problem.

7. The orders provided that the applicant was to receive from the deceased’s estate 38 per cent.  That amount was to be calculated after payment of:

   (a)all applicant Australian and US taxes;  and

   (b)all liabilities of the estate (including the calculated amount to the applicant).

8. After those calculations were made, the balance was to be paid to the nominated beneficiaries under the will and the respondent was obliged under the order, to sell the deceased’s Suburb P home.  As soon as practicable, thereafter she was required to wind up and distribute the estate.  Included in that obligation was the payment due to the applicant.  Thus, there was some focus in this proceeding on the respondent’s obligation to do things as soon as practicable after the sale of the home.

9. The orders also provided that the 38 per cent was to be calculated on the assumption that it was due to the applicant and it was “not an estate liability”.  Whilst that may need some thought, it is not a statement in conflict with the earlier reference to that debt being paid as a liability.  It is clear that the drafters needed a formula and it was not simple to put into words.

10. Two other peripheral orders assist my determination.  First, the respondent was to report to the applicant monthly as to developments about taxes and liabilities.  Secondly, there was to be no order as to costs.

11. By an amended application in a case filed 18 January 2013, the applicant sought orders that the respondent pay to her $488,407 plus “penalty” interest from 1 March 2012 in the sum of $110,064.  She also sought costs.

12. The respondent sought in a document filed 22 November 2012, an order that a distribution be made to the applicant according to the accounts as determined by the respondent.  For reasons set out below, I cannot accept the respondent’s position.

13. In October 2012, upon a request from the applicant, the respondent paid her an interim distribution of $1 million.  That needs to be taken into account in these calculations.

14. Each party relied upon affidavits.  The respondent was required for cross-examination and the applicant was not.  The applicant also relied upon the evidence of an experienced solicitor about estate distributions and executor’s commissions.  He was required for cross-examination.  Each of the parties was represented by counsel from whom I heard final submissions.

15. The questions therefore were:

    (a)How should the word “liabilities” in the orders be interpreted?

    (b)What should be done about some chattels that were not valued?

    (c)Should the applicant’s entitlement not yet be paid because the respondent had taken a cautious approach and had not yet determined what liability the estate might have for United States estate taxes?

    (d)What (if any) interest component is the applicant entitled to on any unpaid corpus? and

    (e)What amount is now finally owed to the applicant?

16. In her final address, Ms Stewart of counsel on behalf of the applicant submitted that the delay in relation to the United States estate duty which had certainly held up any distribution of money was not done for the purposes of the protection of beneficiaries.  She further submitted that the argument for the applicant was clearly set out in the affidavit material to which I shall refer below.  She submitted that the applicant was entitled to interest on the unpaid money and that questions of the breaches of an undertaking by the respondent as well as breaches of the orders made in October 2010 were relevant to the question of the interest payment.

17. Ms Stewart then addressed the question of how I should approach the inclusion in the calculation for the applicant’s entitlement to some chattels that had not been valued.  She submitted that I should use the usual principles of working on the best evidence available.  The applicant estimated from her recollection of what chattels were there that a $30,000 amount should be used.

18. Mr Combes of counsel for the respondent argued that the orders provided for liabilities and that included all of the expenses associated with the estate.  He submitted that the entitlement of the applicant was indeed a liability of the estate.  He submitted that there had been an impediment in March 2012 to the respondent making a distribution because of the unpaid United States tax and that that impediment was that the respondent had a statutory duty not to pay out until the debt was finalised.  It was important therefore in his submission, to set aside money for that debt.  He submitted that the respondent could not be criticised for taking a cautious approach.

19. The applicant is aged 88 years and lives in a residential aged care facility.  When the orders were made, Mr Mairead’s estate comprised a home, shares, cash, car and chattels.  Those chattels included art work and furniture.  After the orders were made, the home was sold for just over $2.6 million, the shares were liquidated for about $2.4 million and there was cash of about $1 million.  They were all identified and placed in documents before the applicant.  The chattels however became a problem.  A valuation was organised but the applicant claimed a number of items were missing.  The respondent advised that some of those had been given away by the deceased before his death.  In a rather blunt response to the applicant’s claim about those, the respondent’s solicitor said that they were so given away and the applicant was “well aware” of Mr Mairead’s intention.  Indeed in respect of other items, someone had affixed a sticker to various items in the deceased’s house confirming that those marked items were bequeathed to particular people.  It was the respondent’s evidence that some of those items were taken before the death of Mr Mairead and others which had not been valued, had been packed up and transported.  My initial impression was that the chattel removal was done without her knowledge, consent or control but then in cross-examination, she confirmed that at least in one case, the beneficiary in the United States had paid the cartage and she had reimbursed him.  In my view, that was at least acquiescence on her part.

20. The dilemma in this evidence is that the items were modest in number as well as probably modest in value when one examines the total value of the estate.  But such was the lack of trust by the applicant in the respondent that it became an issue requiring determination.  That lack of trust is understandable because, apart from the paragraph of the order requiring monthly information, an undertaking was later given that distributions of the estate would not be made “until there has been acceptance” by the applicant of the estate accounts.  That undertaking I find, was ignored even if the effect of the respondent’s action was modest.  That did the respondent little credit.

21. Some of these chattels were sent to the United States and others apparently interstate to the deceased’s family and I find that the applicant was ignored. In her evidence, the applicant estimated the “artwork, furniture, chattels and jewellery” not valued, to be worth about $30,000. The respondent did not respond to that assertion despite filing two affidavits after the applicant filed her material. The applicant was not in a position to say what happened to those chattels and I found that very unsatisfactory. It was obviously impractical for the applicant to either seek to set aside the disposition under s 106B of the Act or to pursue the holders of those items for valuation purposes. Conversely, the respondent knew this was a concern of the applicant for some weeks and apart from not responding to the applicant’s affidavit, she did nothing about pursuing a valuation of those items. Whilst a pragmatic approach may well have been for the respondent to take the view that she did about the chattels, that was certainly not the approach that she took to the calculation of the deceased’s estate for the purposes of calculating United States estate taxes. I found her approach to the evidence about chattels at odds with the dogmatic approach she took in relation to the taxes.

22. Having said all of that however, absent a s 106B application, I must approach the issue from the perspective that the law permits. The applicant did not know the chattels had been given away and was told so rather brusquely by the respondent. I find that as at Mr Mairead’s death, he did not own the property that he had given away and that includes the items said to have been gifted even if not necessarily collected at that time by the relevant beneficiary. However, in respect of those items that he still owned, I can only do the best with the evidence available. One item was described as being taken as a form of compensation for work done by the person who took it. Others were electrical items that were not valued because the valuer would not take them. In respect of the latter, I find the applicant was not consulted. Some of the furniture was valued at $2700 and disposed of.

23. Counsel for the applicant cross-examined the respondent about the insurance value of the deceased’s chattels.  Mr Mairead had general contents insured for $379,000 but the items were hard to describe from the evidence I have.  For example, the valuer valued inspected artwork at $6490.  The applicant was estimating the value of the missing items at $30,000 but that included the items given away before the deceased’s death.  I am conscious that whatever sum is added to the estate, I must then apply the 38 per cent calculation according to the orders of 2010.  Thus, if $30,000 has to be reduced by the gifted items and the 38 per cent is applied to the balance, the amount for the applicant is still modest.

24. The onus lies on the applicant to prove her case and in respect of that particular sum, I could not justifiably determine any appropriate amount be added.  Even if I was to rely on the best evidence available, it could not be the applicant’s estimated sum of $30,000.  I am not at all comfortable about doing that and having regard to what I have said above, I am not prepared to add any further sum to the estate for the purposes of the calculation.

25. As I said, the respondent was much more emphatic about her duty to the estate and its beneficiaries in relation to taxes.  Her evidence was that the estate could not be distributed until the United States estate taxes were determined and although interim distributions could be made, $700,000 should be withheld and set aside to cover the estate state tax contingency.  I found the respondent’s evidence about this quite unsatisfactory.

26. In her evidence, the applicant said she had received the estate’s tax advice in December 2012.  That advice had been given in July 2012 by tax attorneys in the United States of America.  It said:

    Conclusion:  My recommendation to the executor is to file an Estate Tax Return (Form 706) since the gross estate is arguably greater than $5 million.  However, the filing will result in no estate tax due to the estate.

27. The logic behind the conclusion to which I have just referred was a recognition that the applicant had filed a claim under the Family Law Act 1975 (Cth) in Australia whilst the deceased was still alive and that after the death, the parties had settled and that there was an order of the Court that determined:

    That Applicant was entitled to 38 per cent of the net value of Decedent’s estate.

28. The advice went on to refer to the “value of the gross estate” but as will be apparent from the facts below, that sum included all of the assets of the deceased regardless of the entitlement of the applicant.  In other words, the attorney was calculating the obligation for estate tax on the basis of the entitlement of both the applicant and the deceased.

29. The advice went on to say:

    The issue is whether the gross estate is calculated with or without the 38 per cent claim from Applicant.  Generally a Decedent is not required to report assets that are not considered his, such as the community property of his wife.  Community property is often reported using the “net method” which discloses only the decedent’s community interest on return.  Similarly, if a decedent and a long term partner were in dispute over ownership of assets subject to common law rules, if there was agreement before decedent’s death, that amount could be excluded from the decedent’s Estate Tax Return under a similar theory.  However in this case, because there was an ongoing claim with regard to the ownership of assets, the gross valuer of the Decedent’s Estate would arguably be his entire estate (the $6.2M), and the Applicant’s claim would be considered a claim against the Decedent.  A debt or claim must be enforceable against the Decedent’s Estate to be deductable.

30. That advice seems clear.  Whilst the order was not made until after the death of Mr Mairead, it is quite clear that the Court altered the interests not on the basis of an obligation but because it was just and equitable to take some of the assets away because they belonged to the applicant by virtue of the many and varied things that had occurred during the long relationship with Mr Mairead.  The advice went on to say that the relevant United States regulations indicate that events occurring after the death are to be considered when determining the amounts deductible.  It seems clear therefore that the order of the Court in October 2010 was such an event.  That event clearly indicated that the asset was no longer that of the deceased.  I could not construe the order as creating an estate liability.

31. In her evidence, the respondent said she proposed to withhold $700,000 for this estate duty until September 2015 having lodged the estate return in order to make provision for it.  The subject of the withholding of the tax was very contentious in these proceedings.  In her affidavit, the respondent described herself as a tax professional and in February 2013, no doubt being aware of the applicant’s objection to the withholding of the $700,000, she wrote the following:

    I have been preparing US tax returns since 1978 in the employ of major accounting firms such as [various firms named].  Approximately 8 years ago I began practice under my own name.  I now prepare between 80 and 100 US tax returns per year for clients who need both US and Australian tax returns, including many very high worth individuals…

32. In cross-examination, it became apparent that whilst experienced in completing tax returns, the respondent has no qualifications and has not (prior to this case) completed a United States estate duty return.  It therefore puzzled me as to why the paragraph quoted above was in her affidavit at all.  The only conclusion I could come to was that it was there to convey an air of expertise to give some strength to the opinion about the obligation to pay the $700,000 US duty.  What concerned me was that the return lodged by the respondent treated the entitlement of the applicant effectively as a liability of the estate as distinct from it being separated from the estate’s assets.

33. Indeed, the return lodged in the United States was annexed to the respondent’s material and it is quite clear that the applicant’s 38 per cent is treated as a liability of the estate.  The estate form makes clear that there are other provisions about alternatives but they were not considered by the respondent.

34. In my view, a normal reading of the estate return would most likely see the estate as having a debt to the applicant as distinct from it always having been her asset.

35. The whole tax issue was further clouded by the fact that the $700,000 was an estimate by the respondent.  Without some evidence of an expert, I must reject the need for her to withhold the $700,000.

1. A second issue concerned the withholding of the $700,000 until September 2015.  The respondent’s position had apparently been that by delaying the issue, there may be some advantage to the estate.  I am not at all clear what that advantage was but in any event, the orders of October 2010 required not only the sale of the deceased’s home but also the winding up of the estate as soon as practicable.  The actions of the respondent do not seem to me to be as soon as practicable.

2. The respondent said that if a distribution was now made, she would be responsible for the tax because of her position as a trustee.  However, having regard to the delays to date, the advice to which I have referred and the additional apparent affluence of the applicant, I see no reason why an unforeseen overpayment could not be repaid by the applicant even if there was some liability on her part.  In my view however, there is no such liability. 

3. I find therefore, no reason to factor into the value of the estate the $700,000 or for that matter any estate duty as having an impact on the applicant’s 38 per cent.

4. I turn then to another dispute between the applicant and the respondent about the value of the estate.  Various spreadsheets were provided by the respondent showing expenses of the estate including legal fees.  The orders of 2010 made it clear that neither party was to claim costs.  For the respondent to claim those costs including from these proceedings against the estate assets for the purposes of determining the applicant’s 38 per cent, not only flies in the face of the order but it would also mean that the applicant would be contributing to the respondent’s costs when her entitlement was clearly defined as being only affected by the liabilities of the estate.

5. In relation to other expenses, I had the evidence of Mr B.  Mr B is a lawyer with more than 45 years experience and has been accredited by the Law Institute of Victoria as a specialist in wills and estates.  His expertise was not challenged by the respondent.  In respect of deductions of sums to determine the value of the deceased’s estate, Mr B said that the deceased’s property should be valued at its realised value for the purposes of calculating the executor’s commission.  That was because the assets had been realised and therefore were now calculable.  The respondent claimed GST as an expense on that commission.  Mr B rejected that on the basis that it is not an estate expense but rather a personal expense of the respondent.  The respondent disagreed but had no basis for her assertion.  I accept Mr B’s evidence.  He gave clear authorities for his propositions and I see no reason to reject that approach.  In addition, Mr B saw that the respondent’s executorial functions were incomplete because of the US tax issue.  That however does not create any impediment to the payment out to the applicant.

6. The respondent wanted her draft accounts to be accepted by the applicant.  Both the applicant and the respondent agreed on the realised values of the assets and the consequential income leaving aside some rounding up and down of smaller amounts.  There was an argument about the adding back of the artwork which I have rejected above.  Thus, the estate had assets in March 2012 of about $6.29 million.

7. The dispute thereafter centred on what was called “expenses” of the estate.  Those included funeral expenses and the like.  These are all normally payable from an estate as first call against assets.  It was not intended by the orders of this Court that the applicant pay any portion of those expenses.  To consider it otherwise would mean that the applicant would be paying 38 per cent of the deceased’s expenses including his funeral expenses from her own share of property as declared by the Court upon the request of the parties in 2010.

8. It was perhaps an unfortunate description in the orders that the formula referred simply to liabilities.  What was clearly intended was that of the deceased assets, after payment of his liabilities as then known, the respondent was to have 38 per cent of the net.  There is strong support for that very view in the wording of what was described as the three stages of the order.  The first call on the deceased’s assets were taxes.  Whether those taxes were intended to include estate duty seems to me to be very doubtful because had he not died, the tax that would have been “taken off the top” would have been taxes applied to his income.  The $700,000 referred to by the respondent is clearly a tax on the deceased’s assets as distinct from assets that he and the applicant owned either in law or in equity.  The estate tax is a consequence of Mr Mairead’s death and not anything to do with the contributions of the applicant giving rise to the interest that she had at the time that the orders were made.

9. In cross-examination of the respondent, it became apparent that there were debts for a variety of medical and tax obligations and they were paid. They should have been “taken off the top” of the assets because pursuant to s 90SM(11) of the Act, any of those creditors would have had an entitlement to make a claim against the deceased. Thus, I agree with the applicant that but for the $30,000 claim for artwork, the $20,000 Audi which seems to me to have already been taken into account in the calculations and any adjustment still necessary for Australian tax and the United States tax but not estate tax, the amount of the applicant’s entitlement is 38 per cent of approximately $6.227 million less $899,000. The applicant already has received $1 million so her entitlement is approximately $467,000. I say approximately because there may be interest on bank accounts and tax payable on that interest. Those matters and any other similar adjustments should be made between the parties. Even if there is some inaccuracy in the approach to rounding figures off as I have done, I am conscious that the applicant had had no adjustment for the missing chattels so common sense should prevail.

10. The applicant also sought interest.  For the purposes of proceedings in this Court, the provisions of s 117B apply.  Those provisions set out:

    (1)      Subject to any order made by the court under subsection (2), where, in proceedings under this Act, a court makes an order for the payment of money (other than an order for the payment by way of maintenance of a periodic sum), interest is payable, at the rate prescribed by the applicable Rules of Court, from:

    (a)      the date on which the order is made; or

    (b)      the date on which the order takes effect;

    whichever is later, on so much of the money as is from time to time unpaid.

    (2)      A court that makes an order for the payment of money as mentioned in subsection (1) may order that interest is not payable on the money payable under the first-mentioned order or may order:

    (a)that interest is payable at a rate specified in the order, being a rate other than the rate prescribed by the applicable Rules of Court; or

    (b)that interest is payable from a date specified in the order, being a date other than the date from which the interest would be payable under subsection (1).

11. This estate was ready for distribution in March 2012 save for what the respondent saw as the dispute over the United States estate duty and the expenses that she was claiming. Having regard to what I have found, the applicant was entitled to her corpus in March 2012. Interest should be calculated pursuant to the Family Law Rules 2004 from that date until the payment of the $1 million and thereafter until now, upon the balance unpaid. In my view, there are no reasons to depart from that simplistic approach.

12. Costs in these proceedings were also a significant dispute.  Having regard to the fact that I do not want the parties to incur further costs by a further attendance at Court notwithstanding the fact that they will have to prepare written submissions, I propose to make an order that each provide written submissions within a very short space of time and those issues (if any) will have to be determined by me in chambers.

13. I make orders accordingly.

I certify that the preceding Forty Eight (48) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Cronin delivered on 21 February 2013.

Associate: 

Date:  21 February 2013