Risks of intra-family asset transfers

The LPLC regularly sees claims arising out of intra-family transfer of assets, especially if representing multiple parties or any party is unrepresented.

Typically, when the family members approach a practitioner about a transfer of assets, they know what they want and get along well. They have rarely turned their minds to unpleasant possibilities such as souring of relations, the arrangement not working out as planned or something more sinister such as fraud. The family members don’t appreciate that their respective interests are potentially different and the risks the arrangement may hold.

The proposed arrangement

A grandmother who had a falling out with all her children agreed to gift $300,000 to her favourite granddaughter to buy a new property. The conditions of the gift were that the grandmother be allowed to build her own granny flat on the property and have a right to live there, close to her granddaughter.

The practitioner met with the granddaughter and her husband. The couple explained that the property they intended to buy would be funded by the sale of their current home, a mortgage and the gift from the wife’s grandmother. They asked for a document that clearly stated the money was a gift and did not need to be repaid. They also said the granny flat would be built on the property.

The practitioner then met with the grandmother who explained she wanted to gift the money to remove it from her estate as she did not want her children to have it when she died. While she seemed very capable and sure of what she wanted, she was 89, partially deaf and blind and had suffered three strokes.

The final agreement

The practitioner prepared an agreement that provided:

• the $300,000 was a gift to the granddaughter and her husband

• the grandmother could build a granny flat on the property and have access to it and the rest of the property save for her granddaughter’s house

• the granny flat was to be removed on the grandmother’s death and form part of her estate

• the grandmother would have an equitable interest in the property and could lodge a caveat accordingly

• the agreement ended on the grandmother’s death.

Minor amendments were made under instruction from the grandmother and agreed by the granddaughter and her husband.

The aftermath

After the agreement was executed, the property was purchased and the parties moved into the house pending construction of the granny flat. Before long, they had a falling out and the grandmother moved out and demanded her gift back.

The grandmother issued proceedings against the couple. After the matter failed to settle at mediation, the practitioner was joined.

The claim

The allegations against the practitioner were that he:

• failed to advise the grandmother to seek independent advice about the agreement

• failed to properly explain the agreement and its consequences to the grandmother

• knew or should have known there was a conflict of interest and the grandmother was vulnerable.

These allegations are common in claims relating to intra-family transfers.

What the practitioner did well was create the caveatable interest as it went some way to protect the grandmother’s interest from the owners further mortgaging the property or selling it.

What the practitioner missed was that the caveat did not take account of a falling out and the need to unwind the arrangement.

The most effective way for the practitioner to manage his risk would have been to insist that one of the parties obtain independent advice. This would have enabled each party to receive robust advice about how to protect their interests without the practitioner trying to protect everyone’s interests. It would also ensure there were no allegations of conflict of interest.

While it is tempting to think that the risks can be managed by ensuring all parties are provided with detailed advice in writing about their respective risks and options. It does not cure any conflicts that will undoubtedly arise or the risk of allegations of conflict later.

While some clients may struggle to understand why one of them should have to go elsewhere for advice, especially if the practitioner has been their family solicitor for some time it is the practitioner’s role to help them understand why it is important to protect everyone and not give into pressure to act for everyone.

• Use the LPLC’s engagement decision tool to determine the right client, right matter and right time.

• Update your client intake policy to clarify that you will not act for the transferor and transferee in intra-family asset transfer matters

• Develop a clear explanation that can be used when the parties try to insist you act for everyone.