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Pt I: Understanding How Inheritance Contracts Work

By 3 May 2024May 6th, 2024Estate Planning
Pt I: Understanding How Inheritance Contracts Work

In Australia, individuals have the freedom to distribute their assets as they see fit through their wills. However, there are situations where couples or families may wish to establish a legally binding agreement regarding the collective distribution of their estates, ensuring that their wishes are respected and their legacy is preserved. This is where inheritance contracts, also known as deeds of mutual wills, come into play.

What are inheritance contracts or deeds of mutual wills?

An inheritance contract, or a deed of mutual wills, is a legal agreement between two or more parties, typically spouses or partners, that outlines the distribution of their combined estates after their deaths. It is a binding contract that ensures that the terms of their wills cannot be changed or revoked without the consent of all parties involved.

These contracts can take various forms, such as:

Joint will: In this arrangement, both parties create a single will that outlines the distribution of their combined assets after their deaths.

Mutual wills: Each party creates a separate will, but they agree not to revoke or alter the provisions concerning the distribution of their estates without the consent of the other party.

Hybrid: This approach combines elements of both joint and mutual wills, where certain parts of the will are mutually binding, while other sections can be changed independently.

Legal requirements for inheritance contracts

To ensure the validity and enforceability of an inheritance contract in Australia, several legal requirements must be met:

Contractual capacity: All parties involved must have the mental capacity to enter into a legally binding contract. This includes being of sound mind and understanding the nature and implications of the agreement.

Formalities: Inheritance contracts must be in writing and properly executed, often requiring the involvement of legal professionals and witnesses.

Consideration: In contract law, there must be some form of consideration exchanged between the parties. In the context of inheritance contracts, the mutual agreement to distribute estates in a particular manner is typically considered sufficient consideration.

Compliance with the Succession Act: The terms of the inheritance contract must comply with the relevant succession laws and regulations in the state or territory where the agreement is made.

Benefits of inheritance contracts

Inheritance contracts are favoured in particular by long-term married couples or de facto partners and families seeking to secure their legacy. Significantly these agreements provide certainty and stability regarding the distribution of assets, preventing potential disputes or challenges to the will after the death of the parties involved.

By establishing a binding agreement, inheritance contracts can help protect vulnerable individuals from undue influence or coercion regarding their estate planning decisions. By clearly outlining the distribution of assets, inheritance contracts can help avoid the common occurrence where family members who are beneficiaries of the will disagree or argue once the testator or testators pass and the estate is distributed.

In some cases, inheritance contracts can also be used as part of a comprehensive estate planning strategy to minimise potential tax liabilities.

Limitations and considerations

Depending on the specific terms of the agreement, the ability to revoke or vary the inheritance contract may be limited or subject to strict conditions. The agreement not to revoke, without notice to either party to the contract, has been implied by Australian courts from the circumstances of the making of a mutual will, and is a key element of such contracts.

Australian law also requires adequate provision for certain dependants, such as spouses, children, and other eligible persons. Inheritance contracts must comply with these legal obligations.

As circumstances change – including the couple separating, or a decision by one party to dispose of assets within the estate during their lifetime, or a change to the specified beneficiaries – inheritance contracts may need to be reviewed and updated to ensure they remain relevant and aligned with the parties’ wishes.

Speak with our experienced wills and estate legal professionals

Due to the complex legal nature of these contracts or deeds of mutual wills, guidance from experienced estate planning professionals such as our team at Felicio Law Firm is highly recommended. Our experts can ensure the agreement is properly drafted and meets all legal requirements.

To read part II: Barns v Barns, a Landmark Case on the Topic of Inheritance Contracts