How worthwhile are Mutual Wills Agreements?

What is a Mutual Wills Agreement?

A Mutual Wills Agreement (MWA) is an agreement between two people to make their Wills in particular terms and to not alter those terms after one of them has passed.

This most commonly arises in blended families where each spouse has children from prior relationships and they wish to initially benefit each other, but then benefit their respective children upon the death of both of them. In that scenario, the MWA would be intended to prevent the last survivor of the couple from altering their Will to disinherit step-children after they had received the estate on their spouse’s passing.

A MWA does not arise merely by a couple executing Wills together but requires an actual agreement (usually documented in writing) to limit the future alteration of the Wills.

Limitations of Mutual Wills Agreements

A MWA can be a worthwhile estate planning tool in the right scenario. However, they are not as certain as other planning options. The key limitations are:

1. They cannot fully prevent the surviving spouse from spending or dispersing the inherited assets during their lifetime as they are not subject to direct oversight.
2. They cannot prevent third party claims against the surviving spouse. For example, inherited assets are not protected from family law claims if the surviving spouse re-partners, or from creditors if they go bankrupt.
3. They cannot prevent family provision claims against either party’s estate. For example, if the step-children are not on board with the plan they may challenge their natural parent’s estate rather than waiting for their inheritance upon the death of their step-parent.
4. A MWA cannot, at law, actually prevent the surviving spouse from validly revoking their Will and executing a new Will in different terms – even if this breaches the MWA. Instead, it would be necessary for interested parties to seek enforcement of the MWA via a Court declaration of constructive trust.

The case of Forster v Forster [2022] QSC 30

This case is an interesting recent example of the issues that can be caused by these limitations.

The facts of the case were:

1. Timothy and Annabel Forster were married for 24 years. It was a second marriage for each of them and Annabel had two children from her first marriage, while Timothy had three children (including James Forster) from his first marriage.
2. Timothy and Annabel executed Wills dated 20 August 2015 which generally operated to pass the estate to the survivor of them on the death of one of them, and to then equally divide the estate between their five respective children on the death of both of them.
3. A MWA was also executed on 20 August 2015, which relevantly provided that:
   a) each party was not to take any action to substantially diminish the assets which would otherwise comprise their estate (for example by substantial gifts to their own children during their lifetime), other than what is reasonable for maintaining their standard of living and for necessary health and aged care; and
   b) each party was to ensure that any Will executed by them accorded with the agreement to benefit each other and then all their respective children.
4. Upon Timothy’s passing, Annabel duly inherited the bulk of his estate, as well as receiving jointly held assets by survivorship.
5. Timothy’s children subsequently filed a claim seeking further provision from his estate, although these claims were withdrawn before proceeding to a hearing. It is not clear from the judgement whether the MWA assisted in resolving these claims or if there were other factors that made them unviable.
6. Timothy’s son James then commenced the further claim which was the subject of the judgement. In essence, James was seeking a court order that:
   a) Annabel disclose her financial position; and
   b) that she annually update that disclosure, for the purpose of James ensuring compliance with the terms of the MWA in respect to the limitation of dispersing assets during her lifetime.
7. It was James’ view that Annabel possibly already had, or would in the future, breach the terms of the MWA by dispersing assets. He did not have any real evidence to support that view but there was obviously a history of distrust and animosity between the parties.
8. James’ claim was prefixed on an argument that Annabel held both her own assets and the inherited assets on constructive trust by reason of the promise in the MWA not to disperse these assets and to eventually Will them to the children. The existence of a constructive trust then provided grounds under the Queensland Trusts Act 1973 for orders to be made regarding its oversight.

James’ claim was refused. The judgement of Ryan J found:

1. No constructive trust arises on the death of the first party to a MWA. Consistently with a long line of cases, the correct view is that a MWA gives rise to a ‘floating trust’ that does not crystallise until:
   a) the death of the second party to the MWA; or
   b) there was an attempt to disperse assets inconsistently with the terms of the MWA.
2. Even if a constructive trust had arisen, orders for its oversight would not be made as James had not demonstrated any reasonable grounds for apprehending that Annabel might breach the terms of the MWA (addressing specific prerequisites of the Trusts Act 1973).

Key Takeaways

The limitations of MWAs mean that they may not be appropriate in situations where:

• there is acrimony between interested parties (eg step-children and step-parents); or
• the parties are not comfortable placing a heavy reliance on the surviving spouse to act in good faith with limited oversight of their actions.

In these scenarios, more certain planning tools such as life interests, testamentary trusts or direct gifts may better assist in achieving the estate planning objectives.

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