The estate has been administered and lucky you, you received a slice of the testamentary pie. What happens then, when the Executor contacts you to request that the money be returned to the estate? The short answer is that you may be liable if you do not return the money, subject to the matters outlined below.
A useful starting point is to consider:
- the reason for the request to return the gift; and
- whether you have already spent the money.
‘Mia culpa‘: Where the payment was a mistake
An Executor is responsible for the administration of an estate in accordance with the deceased’s wishes. In discharging their duty, they must act in the best interests of the beneficiaries. Mistaken payments can occur for many reasons, including miscalculation of estate expenses, errors of judgment, or inadvertent mistakes. For example, the Executor may have made an excessive distribution to you without regard to other estate expenses, resulting in an inability to pay those expenses. On the other end of the scale, we recently advised a charity in respect of a request by an Executor for the return of part of their gift, on the basis that the Executor simply ‘forgot’ to pay 2 legacies in the Will. It does happen!
If an Executor makes a mistake, they may ask you to return the money so that it can be applied properly in accordance with the deceased’s wishes and the Will. If that money is not returned, Executors can be held personally liable for the mismanagement of the estate, particularly where that mismanagement has resulted in creditors or other beneficiaries coming up short on their entitlements from the estate.
When a payment is made by mistake, the general rule is that the recipient is obliged to return the money.1 This obligation arises because the recipient is said to be ‘unjustly enriched’.2
To avoid that obligation, you must be able to show some reason why it would not be unjust for you to refuse to pay back the estate. One reason could be that the Executor’s mistake was not about an existing state of affairs, but was instead a mistaken assumption or belief that something will happen in the future.3 For example, the executor in Olsen v James4 distributed money as they believed that there would be enough funds in the estate to pay all the other beneficiaries as well as the estate’s expenses. After the Executor made distributions, the estate became embroiled in litigation and significant legal fees were incurred which depleted the estate. As a result, there weren’t enough funds for the Executor to meet the remaining estate liabilities. The Executor asked 2 charities to return the money that had been given to them. Ultimately, those charities weren’t required to return the money because the Court determined that there was no mistake at the time of payment – those distributions were made at a time when there were sufficient funds in the estate.
Change of position defence
If you receive a payment from an estate in good faith, you may not be required to return the gift if your position has subsequently changed in reliance upon receiving that money.5 In other words, you received the money without knowing that it was mistakenly paid to you and now, because it was available to you, you’ve spent it and cannot easily trace it back.
To rely on this defence, you would have to show that you would be in a worse position overall if you now had to repay that money.6 To be in a worse position, you would need to show that you are unable to reverse the action you have taken.7 As an example, you may have used the money to buy a property from an independent third party who had no notice of the mistake. If you were to now repay that money, it could put you in a precarious situation having to:
- sell that property, perhaps at a loss; and
- purchase another property, perhaps in a declining market.
The expenditure of the money in and of itself is not enough to raise this defence – you will need to demonstrate why you can’t repay the money.8
Additional considerations
Although you may have a strong case for not returning the money, the Executor may nonetheless commence legal proceedings against you for unjust enrichment, or join you to an action brought against them. The practical realities of legal proceedings could be that it may not be commercial for you to defend your receipt of those monies, in circumstances where it could potentially cost you more to fund a defence, than to keep that money. This was the case with our charity in question, which graciously returned part of its gift, rather than risk becoming embroiled in lengthy and costly litigation.
Please do not hesitate to contact the authors if you would like to discuss what practical options may be available to assist in managing a dispute or prosecuting a claim in a deceased estate matter.
This article was written by Simon Crawford, Partner, Angela Liaskos, Senior Associate and Matthew Deetlefs, Law Graduate.
1 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Re Diplock [1948] Ch 465.
2 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353.
3 Strang Patrick Stevedoring Pty Ltd v Owners of the MV Sletter (formerly the Hibiscus Trader) (1992) 38 FCR 501; Olsen v James [2020] NSWSC 1015.
4 [2020] NSWSC 1015.
5 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Australia New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 602; Commissioner of State Revenue v Royal Insurance Australia Limited (1994) 264 CLR 1.
6 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560, [157].
7 Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd [2008] WASCA 119; Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548; K & S Corporation Ltd v Sportingbet Australia Pty Ltd (2003) 86 SASR 313.
8 Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd [2008] WASCA 119.
