Otto v Redhead[2007] QSC 278

SUPREME COURT OF QUEENSLAND

1. Mrs Beryl Otto died on 20 September 2005. She was a widow, her husband having died 10 years earlier. The applicant and second respondent are brothers and her only surviving children. The first respondents are the executors of her last will made on 8 September 2005. Probate was granted on 5 December 2005.

2. The brothers regard each other with rancour and, according to the executors’ counsel, ‘the estate has been administered in a climate of suspicion and antipathy remarkable even for this jurisdiction’.

3. I have been asked to determine no fewer than three applications concerning the administration of Mrs Otto’s estate and its distribution to her sons who are the residuary beneficiaries. At the heart of the dispute lies a controversy as to the precise meaning of the will and the value of the gifts it confers on the applicant and the second respondent.

4. There are cross applications for the construction of the will. I apprehend that a declaration as to its true meaning will resolve, or allow the resolution of, the remaining contentions between Messrs Otto and permit the executors to administer the estate relatively quickly.

5. The testatrix gave pecuniary legacies of $130,000 to each of her sons to be held by them upon trust for their respective children. The residue of her estate was divided between the applicant and second respondent as trustees of separate testamentary trusts in accordance with the principles set out in the will.

6. The principle assets in the testatrix’s estate were her shareholding in two private companies, Otto Developments Pty Ltd and Masterbuilt Homes Pty Ltd (respectively ‘Developments’ and ‘Homes’); her home; the proceeds of superannuation accounts; monies in bank accounts; and shares in publicly listed companies and managed funds. The testatrix was the only shareholder in the two private companies.

7. The relevant clauses of the will were:

‘Directions to my executors

5. It is my intention that upon my death, my two sons GLENN LAWRENCE OTTO (“Glenn”) and BRETT ADRIAN OTTO (“Brett”) will benefit equally from my estate and other family entities whether by virtue of a gift under my will, by virtue of my death taking control of any family entity in which I have had a controlling interest during my lifetime, or by receiving outside of my will any part of my superannuation entitlements.  I direct my executors to ensure such equality overall and not merely in respect of those assets which pass under my will.

6. I direct my executors to:

(a)select and engage a suitably experienced and qualified valuers and such other experts (including suitably experienced and qualified accountants and actuaries) as my executors consider necessary to value the assets (other than money) of the family entities in accordance with the valuation principles.

(b)in particular, engage such an accountant in relation to the valuation of the goodwill of the business of Otto Developments, my shareholding in Otto Developments and Masterbuilt Homes, in determining the net worth of the family trust and the superannuation fund and in any other case where the valuation principles require tax effect to be taken into account.

(c)have such person or person undertake such valuation or valuations as at the date of my death;

(d)determine the liabilities as at the date of my death of the family entitles;

(e)having regard to the valuation principles and the valuations so obtained, determine the net worth of the family entities for the purpose of carrying into effect the terms of my will;  and

(f)pay my personal debts, funeral and testamentary expenses.

Disposal of my estate

7. If during my lifetime or on or after or in consequence of my death any money or property (or the effective, exclusive control thereof) as set out below is received by or given to or transferred to Glenn or Brett being:

(a)any part of my superannuation entitlements or any part of the assets of the superannuation fund;

(b)any insurance proceeds payable in consequence of my death;

(c)any amount in the books of accounts of the family trust that are standing to the credit or debit of either Glenn or Brett or members of their respective families;

(d)any property or money belonging to a family entity (other than my estate);

(e)any other monies or property paid or transferred to Glenn or Brett consequent upon my death;

then that money or property (values as provided in the valuation principles) must be taken into account in determining the entitlement of the trusts set up under the provisions of clause 13 of my will and brought into account upon the division of my estate and, the distributions that would otherwise have been made in accordance with the provisions of clauses 13(a) and 13(b) are to be adjusted accordingly.

Establishment of testamentary trust

13. In accordance with the principles established in clauses 5, 6 and 7 of this will, I give the residue of my estate as follows:

(a)As to a one-half share (“the trust fund”) to be held by Glenn as trustee (“the trustee”) upon the terms set out in clause 15, with the “principal beneficiary” referred to in that clause being Glenn – to be known collectively as “Glenn Lawrence Otto’s Testamentary Trust” but if his appointment fails then my executors shall be the trustee).

(b)As to the remaining one-half share (“the trust fund”) to be held by Brett as trustee (“the trustee”) upon the terms set out in clause 15, with the “principal beneficiary” referred to in that clause being Brett – to be known collectively as “Brett Adrian Otto’s Testamentary Trust” but if his appointment fails then my executors shall be the trustee).

Appropriation of assets

14. I direct to my executors to:

(a)appropriate or treat as having been appropriated to the trust fund set up under clause 13(a) of this will:

(A)my share holding in Masterbuilt Homes (which company acts as trustee for the family trust with the intent that Glenn will become the sole shareholder and director of that company and the company will, after my death, exercise its discretion to appoint both income and capital of the trust for the benefit of Glenn, his wife and children to the exclusion of any other beneficiaries).

(B)any monies which may be owing to me by the family trust at the date of my death;  and

(C)my interest as beneficiary in the family trust;

subject to the charge that the trustee of Glenn Lawrence Otto’s Testamentary Trust will within two years of my death pay to my executors any amount required to be paid to my estate to achieve the equality of partition provided for in clauses 5, 6, 7 and 13 of this will.

(b)appropriate or treat as having been appropriated to the trust fund set up under clause 13(b) of this will, my share holding in Otto Developments (which is the registered proprietor of the land described as lot 192 on Plan CK2582 in the County of Cook Parish of Bundaberg upon which industrial sheds are erected and which company also conducts the business trading as Bundaberg Concrete Casters, the valuation of which shares is to be determined in accordance with the valuation principles with the intent that Brett will become the sole shareholder and director of that company) but subject always to the charge that the trustee of Brett Adrian Otto’s Testamentary Trust will, within two years of my death, pay to my executors any amount required to be paid to my estate to achieve the equality of partition provided for in clauses 5, 6, 7 and 13 of this will.

The valuation principles

19. I direct my executors and through them any valuer or other expert engaged by my executors to undertake a valuation for the purposes of my will (“the valuer”) to have regard to and apply the following principles in determining the value of my assets and the net worth of the family entities for the purposes of my will:

(a)In relation to the valuation of my share holding in Otto Developments the valuer is to have regard to the following:

(i)the current market value of all company assets (including good will);

(ii)the amount of all liabilities of the company (including contingent liabilities);

(iii)any special rights, restrictions or conditions relating to the entitlement of my share holding to dividends or to a distribution of capital on winding up of the company;

(iv)any relevant tax effect;

(v)land and improvements are to be valued as if the tenants at my death were paying the then current market rentals for their premises;  and

(vi)any other relevant circumstance.

(b)in relation to the valuation of my share holding in Masterbuilt Homes, I direct my executors and the valuer to have regard to and apply the following:

(i)If all of the income and the capital of the family trust has been distributed prior to my death the value of my share holding is $1;

(ii)If all of the income and the capital of the family trust has not been distributed prior to my death then the value of my share holding is equal to the net worth of the trust taking account of:

(A)the market value of all the assets of the family trust,

(B)the amount of the liabilities of the trust (including contingent liabilities);

(C)any rights restrictions or conditions attaching to or affecting the assets of the family trust;

(D)any relevant tax effect;  and

(E)any other relevant circumstance.

(c)in relation to the valuation of my superannuation entitlements, the valuer is to have regard to:

(i)the market value of the assets generating my superannuation entitlements;

(ii)any liabilities attaching to those assets;

(iii)any special rights, restrictions or conditions relating to the assets generating my superannuation entitlements or the ability to receive those entitlements;

(iv)any relevant tax effect;

(v)the circumstance that some or all of my superannuation entitlements may be paid directly to Glenn and/or Brett;  and

(vi)any other relevant circumstance.

(d)in relation to the valuation of the net worth of my estate, the valuer is to have regard to:

(i)the market value of the assets in my estate;

(ii)the liabilities of my estate (including contingent liabilities);

(iii)any special rights, restrictions or conditions affecting any such asset or liability;

(iv)any relevant tax effect;  and

(v)any other relevant circumstance.

Meaning of words

21. Unless the context otherwise requires, in my will I declare that:

(c)“family entity” means:

(i)the trust known as the Otto Family Trust constituted by a deed of trust dated 17^th day of February 1976 between James Charles Aisthorpe as Settlor and Masterbuilt Homes as Trustee 9 ”the Family Trust”);

(ii)Masterbuilt Homes Pty Ltd ACN 009 874 604 (“Masterbuilt Homes”);

(iii)Otto Developments Pty Ltd ACN 010 153 027 (“Otto Developments”)

(iv)the superannuation fund known as the Otto Superannuation Fund constituted by a trust deed dated 20^th June 1996 made between me as the contributor and me and Graham as the trustee (“the superannuation fund”);  and

(v)my estate.

8. The respondents seek by their application:

‘A declaration as to the proper construction of the will … particularly as to whether the estate should be valued as at the date of death of the testatrix or as at the date of distribution of the estate.’

By his amended originating application the applicant seeks ‘a determination … on the true construction of the … will:

(a)In view of the provisions of the will as a whole, and the events that have occurred since the date of death, notwithstanding clause 6(c) … in valuing the assets to be appropriated between the residuary beneficiaries, the executor should adopt valuation of those assets as at a date close to the date of distribution of the residuary estate, rather than as at the date of death;  and

(b)In calculating the entitlements of the two residuary beneficiaries and the time for distribution of the estate, any net income from any assets appropriated to one of those beneficiaries shall be taken into account in any equalization …’.

9. The second respondent’s concern, and the reference to events that have occurred since the testatrix’s death, are that Developments has traded, made profits and increased in value. The other private company, Homes is a holding company, the value of which has not changed. Mr Glenn Otto’s fear is that if Developments is valued (as it has been) at the date of Mrs Otto’s death, and if the income earned by the company in the interim should be appropriated Mr Brett Otto, he will receive a larger recompense from the estate than the applicant.

10. The applicant stresses the testatrix’s emphatically expressed intention that her sons should benefit equally from her estate and its provisions, particularly clauses 7 and 14, which seek to achieve that equality. It is submitted that the intention can only be effectuated by valuing the assets to be divided at the time of the division, i.e. distribution, or as close thereto as is practicable. Otherwise, it is pointed out, variations one way or the other in the value of assets between death and distribution will frustrate the testatrix’s express wishes that her sons be treated equally.

11. Mr Murphy SC referred me to In Re Hillas-Drake Deceased;  National Financial Bank v Liddell (1944) 1 Ch 235 in which Simmonds J made the same point with considerable eloquence (p 238-9).  That was a case of hotchpot.  The will in question does not contain a hotchpot clause, nor were there were unequal advances made to the residuary beneficiaries in the testatrix’s lifetime, which, in accordance with equitable principles, should be brought into account.  Nevertheless clause 7 of the will does express a philosophy similar to that which guides the hotchpot cases and the problem which arises in those cases is similar to that which confronts the parties to this litigation. 

12. The authors of Wills and Intestacy, Hardingham Neave and Ford note (p 407) that the cases are divided as to the choice of date for the valuation of the assets of an estate for the purposes of hotchpot.  Some favour the date of the testator’s death and some the date of distribution.  Of these cases the most recent is Hillas-Drake and Simmonds J who decided that case and Re Wills (1939) Ch 705 would seem to have given a convincing exposition for the choice of the later date.  In Jarman on Wills 8^th edition the controversy is discussed (1162-1163) and the authors conclude:

‘It may be supposed that the rule adopted by Simmonds J will in future be followed unless, of course, there is some special direction in the will leading to a contrary result.’

The same qualification was expressed in Hillas-Drake itself.  A provision in the will directing that a valuation at a date other than distribution must be given effect.

13. There is in Mrs Otto’s will such an indication. Clause 6 sets out specific instructions for selecting and retaining valuers and experts to determine the value of assets ‘of the family entities in accordance with the valuation principles’. The valuations were to be obtained for the very purpose of achieving the equality Mrs Otto so ardently desired. This is clear from clause 13 which divides the residue ‘in accordance with the principles established in clauses … 6’. Clause 6(c) specifically directs the valuation to occur as at the date of the testatrix’s death. There is no scope for argument. The division of assets which is to achieve equality is to occur on the basis of a valuation carried out as at the date of death.

14. The terms in which the valuation principles are expressed do not affect this conclusion. Those principles referred to the ‘current market value of all company assets’ in Developments, and the ‘market value of all the assets in the family trust’ of which Homes was trustee. One should also note that the valuer was to have regard to ‘the amount of all liabilities’ of Developments. Each of these phrases is neutral and does not express a preference either for death or distribution as being the date with respect to which the valuation should occur. A current or market value can only be determined by reference to the market at a particular date. The term does not itself connote any particular date. That must be affixed by extraneous indications. The same is true of liabilities. Ordinarily these vary in quantum over time and can be ascertained only with respect to a particular date which, as with assets, must be fixed by extraneous indication.

15. In this case it is clause 6(c) of the will which is the extraneous indication. It fixes, by the testatrix’s express declaration the relevant date for determining ‘current value’, ‘market value’ and the amount of ‘liabilities’.

16. Clause 6(e) provides that the valuations the earlier subclauses direct should be used to determine the net worth of the family entities for the purpose of carrying the terms of the will into effect. Relevantly that means the equal division of the residue. The valuations were directed to be undertaken ‘as at the date of … death’. It is clear beyond doubt a division of residue on that basis will achieve what the testatrix regarded as equality.

17. The second declaration sought by the applicant gives rise to a separate consideration, how should intermediate income be dealt with? By that term is meant the net profits earned by Developments between the date of the testatrix’s death and the date of distribution. The applicant suspects the amount is large though my attention was not directed to any particular evidence on the point and I am not inclined to search for it myself amongst the many valuations. The amount does not matter: the point must be approached as one of principle.

18. In attempting an answer to the question some things must be borne in mind. Profits are money the value of which is immediately ascertainable and needs no investigation. Clause 6(a) directed a valuation of the family entities which relevantly meant the company, Developments and its good will. The valuation must occur as at the death of the testatrix. What happens to any income earned and accumulated by that company between that date and the distribution or, for that matter, income similarly earned by Homes? Clause 13(b) directs the division of residue to be effected by the appropriation to the second respondent of the testatrix’s shareholding in Developments. Now the ownership of the shares will carry with it the entitlement to the wealth, in whatever form it takes, of that company, subject, of course, to the constraints and restrictions which the Corporations Act imposes.  These are not great in the case of solvent private companies.

19. Income earned and accumulated by Developments subsequent to 20 September 2005 will not form part of the assets of the company which are to valued as at that date. How does the will say it should be treated? The answer is to be found in clause 7. Relevantly that provides that:

‘If … after or in consequence of my death any money (or the effective exclusive control thereof) … is received by … Glenn or Brett being:

(d)any … money belonging to a family entity (other than my estate);

then that money … must be taken into account in determining the entitlement of the trust set up under … clause 13 … and brought into account upon the division of my estate and the distributions … are to be adjusted accordingly.’

20. The accumulated profits of Developments fits the description in clause 7(d). It is money belonging to Developments, a family entity. The parenthetical exception ‘(other than my estate)’ is not easily comprehended but I think the money in question is within the description of clause 7(d). The exception, ‘other than my estate’, is capable of applying to ‘money’ or ‘family entity’. That is clause 7(b) may be read as meaning either:

‘Any … money … (other than my estate)’  or

‘Any … family entity (other than my estate)’

I do not think it can mean the latter.  One reason is that ‘family entity’ is defined to include the testatrix’s estate.  So if the second alternative were correct the subclause would read:

‘Any … money belonging to my estate (other than my estate)’

This is, obviously, nonsensical.  I think what is meant is money which is not part of the estate which would devolve by force of the will itself but, rather, money which is owned by or earned by or held by (legally or beneficially):

(1)The trustee of the Otto Family Trust.

(2)Homes.

(3)Developments.

(4)The trustee of the Otto Superannuation Fund.

The assets of those persons, or entities as the will calls them, are ultimately available for the enrichment of the will’s beneficiaries but they are not themselves the subject of, or capable of being the subject of, an immediate gift by the will.

21. I think this is what the subclause means. The testatrix intended by clause 7 that any monies which may be received by one of her sons from one of the family entities but was not part of her own monies forming part of her estate to be taken into account in the adjustment process described in clauses 7 and 13. Money earned by one of the companies which was a family entity would, in my opinion, fall within that description.

22. The income in question may fall within the description given by clause 7(d) but the clause would not be satisfied unless the money is received by one of the testatrix’s sons, or the effective exclusive control of the money, is received by or given to one of the sons, after or in consequence of Mrs Otto’s death. It is clear that the profits earned by Developments will not have been received by or given to or transferred to Mr Brett Otto. The money, as I understand the source of the dissention between the residuary beneficiaries, remains the property of the company. However, after and in consequence of the testatrix’s death Mr Brett Otto succeeds to her shareholding in Developments and becomes the only shareholder. It seems right to conclude from that circumstance that the effective exclusive control of Developments’ accumulated profits will have been received by or transferred to Mr Brett Otto. The receipt or transfer is in consequence of Mrs Otto’s death which enliven the dispositions made by her will. Therefore, in my opinion, the profits in question are within clause 7(d) and have to be brought into account ‘upon the division of (the testatrix’s estate) in accordance with … clauses 13(a) and 13(b)’.

23. This construction appears consonant with the testatrix’s express desire that her sons be treated equally, and that each should receive exactly half of her residuary estate. It would be inimical to that desire, and the processes set out in the will to achieve it, if profits gained by either of the private companies after the date specified for their valuation should be treated as the property of the son to whom the company was to be appropriated in satisfaction of the residuary gift. There is nothing in the will to indicate that a particular residuary beneficiary should receive accretions to the wealth of their respective companies after her death. The will is structured so that there is to be an equality of residue. One aspect of that equality is to value the assets of the family entities as at the date of death and appropriate particular assets so valued in satisfaction of the gift of residue with the important exception that the transfer of the testatrix’s shareholding in the two companies was subject to a charge for adjustment in the event that the transfer would benefit either of her sons unequally.

24. Accordingly the appropriate declarations are:

(1)The assets to be appropriated between the residuary beneficiaries are, in accordance with clause 6(c) of the will to be valued as at 20 September 2005;

(2)Any net income from the assets appropriated to either of the residuary beneficiaries which is received by, given to or transferred to that residuary beneficiary or which is within the beneficiary’s effective exclusive control should be taken into account in the process of determining the amounts to be paid to those beneficiaries in accordance with clause 13 of the will.

25. The applications also seek orders for the distribution of the estate. It is inappropriate to make any such order before the executors have had an opportunity to prepare accounts for the distribution in accordance with the declarations just made. Accordingly the applications for relief other than the declarations should be adjourned.