How does one attain a vested interest?

Serwin v Dolso^[1]

Many older wills include a gift containing a condition like:

I give the rest and residue of my estate to Mr Smith provided that if Mr Smith predeceases me or dies before attaining a vested interest, I give the residue to Ms Brown.

In this gift clause, what is the meaning of the words “vested interest“?

The drafter obviously did not intend it to mean the same thing as being alive at the time of the gift because that condition was already stated in the clause i.e. “predeceases“.

In this case of Serwin, Mr Stanislaw was a beneficiary under a clause drafted as follows:

Subject to the preceding trusts to give the rest and residue of my estate to my brother STANISLAW HABEL .. and in the event that my brother STANISLAW HABEL has already died or does not survive me or dies before attaining a vested interest, to give the rest and residue to my brother’s daughter HALINA SERWIN.

The timeline of events in the case was as follows:

• The deceased died on 27 June 2014. The executors began to administer the estate.
• On 3 November the executors settled the sale of an estate property.
• On 7 November Mr Stanislaw provided a declaration to the executors confirming he was able to be a beneficiary under the will.
• On 13 November the executors receive the net proceeds of personal effects and contents.
• On 14 November there was an interim distribution of personal items to Mr Stanislaw.
• Mr Stanislaw died on 19 November.
• On 24 November the executors receive the bank account proceeds.

The question then arose – had Mr Stanislaw lost his entitlement to be a beneficiary because although he survived 30 days as is required by the Succession Act^[2], he had not attained a vested interest?

The Judge looked in substantial detail at the meaning of “vested interest“. As is usual in such cases, the Court emphasised the fundamental principle of will interpretation is that words are first given their ordinary meaning ^[3].

The Court decided that the condition must mean something more is needed than simply surviving beyond the testator. The Court noted there was nothing in the will to suggest that the deceased wished Mr Stanislaw’s portion to pass to his children on his death.

It was agreed that the estate was not capable of being distributed on or before 19 November, being the date of Mr Stanislaw’s death. It was still being administered by the executors as executors and not as trustees ^[4].

The Judge considered there were 3 potential meanings to the phrase “attaining a vested interest“; namely:

• it means the same as if he/she dies before the testator;
• it means vested in possession and that means the time when the beneficiary would receive the estate beneficially; or
• means before the estate is fully administered and available to be distributed ^[5].

In considering the issue the Court looked to the well-established principle that a beneficiary in a will has no more than an equitable chose in action until the executor completes administration of the estate. During the administration of the estate, the beneficiary has no further interest in any of the property which forms part of the estate and cannot demand or control it and, generally speaking, cannot be taxed upon it.

From an income tax law perspective, it is only once the administration of the estate is complete and the assets are held by the executors as trustees, that the beneficiaries are entitled to receive the income and are therefore taxed on that income.

The Tax Office uses the language that a person has a present entitlement to income of a deceased estate if they have “an indefeasible, absolutely vested interest in the income – in other words they have a claim or interest in the income that can’t be defeated by another person“^[6].

At the time of Mr Stanislaw’s death, the executors had not yet paid all the debts, funeral and testamentary expenses of the estate nor had they completed taxation affairs of the deceased, nor had they collected all estate assets.

It was clear that the executors were still administering the estate. This meant that, notwithstanding part of the personal property had already been distributed to him, Mr Stanislaw had no vested interest in any part of the deceased’s residuary estate.  There was no part of the estate set aside for him or held on trust for him.

The usual position is that where someone dies more than 30 days after the deceased (allowing for the statutory requirement for beneficiaries to survive the deceased by 30 days in order to attain an interest), then it is the beneficiaries of the estate of the beneficiary who receive.

Therefore the Court ruled Mr Stanislaw’s heirs were not beneficiaries under the will, the gift to him failed, and the substitute beneficiary under the will received what would have been his share.

Will drafting implications

This case gives practitioners greater clarity in how the Court will interpret a similar clause in the future. If a will provides that a substitute beneficiary will receive the gift if the primary beneficiary does not “attain a vested interest”, then if the primary beneficiary does not survive the administration of the estate, the substitute beneficiary will receive the gift.

[1] Selwin v Dolso [2020] NSWSC 370

[2] Section 35 of the Succession Act 2006 NSW requires beneficiaries to survive the willmaker by 30 days.  If they do not then they are deemed to have predeceased the willmaker.  The QLD Succession Act has a similar provision in section 33B.

[3] At paragraph 41.

[4] At the point at which an estate has been fully administered except for being distributed to beneficiaries, the executor’s role switches to that of a trustee because they then hold the estate on trust for the beneficiaries in the particular proportions and are no longer administering the estate.

[5] At paragraph 75.

[6] TR IT2622.