Groves, M --- "Adeptly Avoiding Ademption" [2010] UMonashLRS 2

Last Updated: 23 November 2011

FEATURE ARTICLE FOR AUGUST LIJ
08Groves

STRAPLINE: Ademption

AUTHOR’S HEADING: Adeptly avoiding ademption
By Matthew Groves

This paper was originally published in Volume 84, Issue 8 of the Law Institute Journal, pp. 36-40.

PRECEDE: When a power of attorney is used to sell the home of an elderly testator to pay for their care, a testamentary gift of the house may survive the sale. By Matthew Groves

Many things can change between the drafting of a will and the death of a testator. One increasingly common event is that testators require specialist aged care and their only substantial asset – the family home – is sold to fund that care. These arrangements can have an unexpected impact on the will. The doctrine of ademption can cause a specific gift of the house to fail, though there is growing recognition of an exception for cases involving the sale of property made on behalf of an infirm testator.

The principle of ademption
Ademption occurs when property subject to a specific testamentary gift is not part of the estate when a testator dies. The doctrine operates on the assumption that if the property “cannot be found ... the gift cannot take effect”.1 Ademption will not occur if the property “has been changed in name and form only, but which is substantially the same thing”.2 This can lead to fine distinctions in cases in which property has changed, but the extent of that change is not dramatic, such as the conversion of share options into shares. Real property is subject to strict rules, especially if that property is endowed in specific terms. A specific testamentary gift of real property will fail if the land is sold by a testator before death even if the proceeds of sale are either part of the estate or can be traced. The beneficiary is not entitled to the proceeds of its sale.3 Ademption will occur even if the sale remains incomplete at the death of the testator because a valid contract or other transaction to transfer property is sufficient to remove it from the estate and extinguish any gift of the property.4
When testators with capacity sell their home for any reason, any specific gift of that house will fail. Such cases involve a straightforward application of ademption – the property will not be part of the estate when the testator dies. This problem could be avoided only by amending or remaking the will. But in many such cases the testator has lost capacity – which is why specialist care is required – and the sale is conducted by relatives acting under a power of attorney. The testator would often not consent to, or even be aware of, the sale. According to the traditional view of ademption this did not matter; knowledge or intention by the testator was irrelevant. The important question was not whether the testator intended to extinguish a specific gift by disposing of the property, but simply whether the property was part of the estate when the testator died.5

Exceptions to ademption
Over time some minor exceptions to ademption arose that suggested the intention or knowledge of a testator was relevant. One exception was any fraudulent or tortious acts to dispose of property without the knowledge of the testator.6 A similar exception extended to fraudulent actions by an agent of the testator.7 These exceptions are consistent with the proposition that “whether the testator had notice or knowledge of the facts is a relevant factor on the question of ademption”.8

Dispositions made on behalf of a testator lacking capacity
The case of Re Viertel9 took the established exceptions of ademption an important step further. The testatrix in that case had made a specific gift of her house to two friends who managed her affairs in her later life. When the textatrix became too frail to live independently, her friends arranged her move into care. They also sold the testatrix’s home by exercise of a power of attorney she had made in their favour. The money was invested to pay for the testatrix’s care. After the testatrix died her friends discovered they were the beneficiaries of a specific gift of the house. The question before the court was whether the sale of the house caused ademption of the gift. Thomas J held it did not and did so by drawing together several issues.
Thomas J noted a division in earlier cases. Some held ademption occurred when property was no longer part of an estate, no matter whether the testator knew or consented to its disposal.10 Some held otherwise, partly because the testator had not intended to extinguish the gift.11 Thomas J identified a slightly different issue when the property had been disposed of by someone acting under a power of attorney. The question in such cases was not whether the disposal of property was valid, but whether it should alter testamentary gifts. Thomas J noted a division of authority in America and Canada on this issue, notably the question of whether actions of a guardian or attorney could cause ademption of a testamentary gift by the person for whom they acted. His Honour drew support from an American case which held that such cases should not be decided simply by asking if the property formed part of the estate at death, but should give some weight to the intention of the testator.12 That case concluded that the weight of American authority favoured an exception to ademption, for reasons of fairness and to give effect to the expressed wishes of the testator. Thomas J adopted that view.
This exception was soon followed in Western Australia in Re Hartigan.13 In that case the only asset of an elderly testatrix was her home, on valuable land, which was left to several people. When the sale of the land was required to fund the care of the testatrix, the public trustee sought directions on what effect this might have on the testamentary gift. The trustee was, unlike the attorneys in Viertel, well aware of the gift. Parker J held that the reasoning in Viertel was “helpful and persuasive”. He also noted that the reasoning in Viertel turned “on the sale of property by a person other than the testator at a time when the testator is incapable of selling the property or of altering an existing will to give effect to the testator’s intentions in changed circumstances”.14 His Honour reasoned that if this reasoning was accepted there was no obvious distinction between cases in which the seller knew of the will (and the specific gift of property) or was unaware of it.
The Viertel and Hartigan cases were considered in Victoria by Kaye J in Mulhall v Kelly.15 In that case the testatrix had lost capacity and had her affairs managed by her daughter acting under a power of attorney. The daughter sold her mother’s house to fund specialist care for her mother. Kaye J concluded (at [15]) that Re Viertel and Hartigan offered a “sound” principle to resolve such cases. It is useful to note that Kaye J (at [6]) drew attention to the limited authority on this issue and expressed concern that the question came before him in the Practice Court and without an opposing party. Such remarks suggest the exception to ademption recognised in Re Viertel is yet to be decisively settled. Re Viertel has met with hesitation elsewhere. In the recent Queensland case of Ensor v Frisby16 McMurdo J held that, but for Re Viertel and subsequent similar cases she would have held that a specific testamentary gift of property did not survive the sale of that property under a power of attorney. McMurdo J reasoned (at [18]) that the testatrix could easily have expressed the specific gift as one of the property and its proceeds if the property was sold by her attorney. In Banks v National Westminster Bank plc17 the English High Court did not follow Re Viertel and held that English law allowed an exception only when property was sold without the consent or authority of the testator. On this view, disposal of property under a power of attorney would cause ademption of a specific gift of that property.18 The court acknowledged this could cause problems, but concluded that they should be resolved by parliament rather than the courts.
In my view, there are several reasons why Re Viertel should be followed. First, it represents an important and sensible practical step, but only a modest extension of principle. A Queensland case explained that “once an exception is recognised for the unauthorised act of which the testatrix is unaware, it is a relatively smaller step to recognise ... an exception where the act was done under the authority of an enduring power of attorney”.19 Second, testamentary gifts should not be disturbed by people acting under a power of attorney any more than is strictly necessary, lest they overturn the previously expressed wishes of the people whose benefit the power is ultimately for. Third, people who exercise a power of attorney to sell the home of an elderly testator are usually that person’s children, who are making arrangements for their elderly parent. These children are also normally the beneficiaries of a testamentary gift of the property that is sold. It is unfair to all concerned that ademption could occur in such circumstances. Finally, the cases provide a principle of general application. The cases concern family homes and real property, but none have suggested the principle is so limited. Accordingly, Re Viertel provides a useful general means to avoid inadvertent ademption in the affairs of a testator who has lost capacity.

People subject to guardianship orders
The position of people subject to guardianship orders is clarified by the Guardianship and Administration Board Act 1986 (Vic). Section 53(1) of that Act provides that represented people have “the same interest in any money or other property arising from any sale, mortgage, exchange, partition or other disposition” of property made by the person’s guardian. The same entitlement is expressly extended to the heirs, next of kin and other possible beneficiaries of a represented person. It has been held that the purpose of the entitlement granted to heirs is “to save gifts made by the protected person which would otherwise be adeemed by activities carried out not by the protected person, but by his or her administrator, who may know nothing of the contents of the protected person’s will”.20 On this view, s53(1) preserves a testamentary gift made by a person under a guardianship order if the subject matter of the gift is disposed of by the guardian.
This provision has several other useful features. It applies to the sale of property and any “mortgage, exchange, partition or other disposition” of property. The various terms extend the section to virtually any disposition of property made for value. The section preserves entitlements to the “money or other property” arising from a disposition. Accordingly, beneficiaries maintain a right to the proceeds of the sale of property even if those proceeds are received in a form other than cash. Under s53(3) the guardian must maintain separate records of these proceeds. This obligation enables beneficiaries (and executors and administrators) to easily identify the proceeds of the disposal of any property, to which any entitlement under a testamentary gift applies. Section 53(1) preserves the rights of executors and administrators which enable them to take control of and manage the proceeds of the sale of a represented person as they would any other asset of a deceased estate. Finally, s53(1) is of limited application. It applies only to the property of people subject to a guardianship order and only to dispositions made by the exercise of guardian powers. It does not apply to the sale or disposition of property made by other means, such as a power of attorney.21

Avoiding ademption
Ademption can be anticipated when a will is drafted. Ademption will not occur if a testamentary gift of property is expressed to give the property or any proceeds of its sale, transfer or other form of disposition. On this view, any gift of a family home that extended to the proceeds of the sale of the home would almost certainly overcome any possible ademption. The point could be placed beyond doubt if such a clause were expressed as applying not simply to the proceeds of the sale but also to any bond, deposit, surety, interest or licence that accrues by reason of the sale and investment of the proceeds of the property. If a testamentary gift is expressed in such terms, particularly a gift of the family home, the beneficiaries would take whatever remains of the proceeds of sale on the death of the testator.
Ademption could also be avoided by an amendment to the Instruments Act 1958 (Vic), which mirrored the protection given by the Guardianship and Administration Board Act 1986 (Vic). Such an amendment could operate when testators lose capacity and have their affairs managed by someone acting under a power of attorney. When someone acting under such a power sells or disposes of the testator’s property, it is usually done for the benefit of the testator (to either pay for nursing home or other aged care, and also to relieve the testator of the cost of maintaining a house he or she no longer lives in). An appropriately drafted amendment to the Instruments Act 1958 (Vic) could preserve the entitlements of beneficiaries of a testamentary gift in property sold under a power of attorney as occurs under guardianship legislation. There is no obvious reason why the entitlements of beneficiaries should vary depending on the legislation under which property is disposed of. Such an amendment would also have the advantage of clarifying the issue for testators, beneficiaries and the lawyers who advise them.

MATTHEW GROVES teaches in the Law Faculty, Monash University.

1. Jenkins v Jones [1907] UKLawRpCh 58; [1907] 1 Ch 665, 671. See also Brown v Heffer (1967) 116 CLR 334, 348.
2. Oakes v Oakes [1852] EngR 350; (1852) 9 Hare 666, 672; [1852] EngR 350; 68 ER 680, 683; Re Slater [1907] UKLawRpCh 58; [1907] 1 Ch 665, 672.
3. Re Dowsett [1900] UKLawRpCh 214; [1901] 1 Ch 398, 401; Fairweather v Fairweather [1944] HCA 11; (1944) 69 CLR 121, 129-30, 136, 142, 146; Re Morton [1963] VicRp 8; [1963] VR 40, 44.
4. Re Williamson [1904] ArgusLawRp 81; [1904] 10 ALR 197; Re Edwards [1958] Ch 168, 176-8; Re Morton, note 3 above, 45-6.
5. In re Rudge [1949] NZGazLawRp 85; [1949] NZLR 752, 761. This principle has been traced to Roper on Legacies (1847): Johnstone v Maclarn [2002] NSWSC 97, [13]-[16]
6. Jenkins v Jones [1866] UKLawRpEq 106; (1866) LR 2 Eq 323, 327-8; Johnstone v Maclarn, note 5 above, [18].
7. Basan v Brandon [1836] EngR 944; (1836) 3 Sim 171; 59 ER 68; Johnstone v Maclarn, note 5 above, [17].
8. Re Viertel [1996] QSC 66; [1997] 1 Qd R 110, 112; Re Dorman [1994 1 WLR 282, 288.
9. [1996] QSC 66; [1997] 1 Qd R 110.
10. Re Slater, note 2 above, 671.
11. Jenkins v Jones, note 6 above; Re Dorman, note 8 above.
12. Re Estate of Pearl Swoyer 439 NW 2d 823 (SD, 1989).
13. Unreported, WA Supreme Court, 9 December 1997.
14. Note 13 above, p. 10.
15. [2006] VSC 407.
16. [2009] QSC 268.
17. [2005] EWHC 3479 (Ch).
18. Note 17 above, [28]-[30].
19. Ensor v Frisby [2009] QSC 268 [19].
20. Daniels v Scrivenor [1997] 2 VR 595, 599.
21. The Instruments Act 1958 (Vic), under which powers of attorney are made, contains no equivalent to s53(1).