Calculating Family Provision Act Claims
- Arnold Shields
- Apr 13, 2010
- 3 min read
Updated: Jun 20
Understanding Lump Sum Calculations for Future Needs
Under the Succession Act and Family Provision Act, claims are commonly assessed on the basis of need, more specifically, the costs of maintenance, education, and advancement in life. To satisfy these legal requirements, it’s necessary to determine a lump sum value that represents the beneficiary’s future needs.
There Are Two Main Components to a Lump Sum Calculation:
Current Value of Future Costs: Estimated weekly or annual expenses the beneficiary is likely to incur.
Discount Rate: An adjustment reflecting the earnings potential of the lump sum, after allowing for inflation and tax.
Assessing the Current Value of Future Costs
Every claim is unique. We use a range of methods to assess future needs, depending on the individual’s circumstances, such as:
Beneficiary's Statement: A declaration outlining specific financial needs for housing, medical care, education, and more.
ABS Data: Australian Bureau of Statistics data on living expenses, household budgets, and demographic-specific costs.
Superannuation Benchmarking: Estimating a retirement-level lump sum based on the beneficiary’s current income and lifestyle.
No single approach is definitive, multiple angles often need to be explored to form a fair and accurate assessment.
What is the Discount Rate and Why Does it Matter?
The discount rate represents the net return a lump sum could earn if invested over time, after inflation and tax. It's used to translate a stream of future costs into today's dollar value.
Why is the Discount Rate Critical?
Because the lower the discount rate, the higher the lump sum required to meet future needs. Consider the following example over a 20-year period:
$700/week at a 3% discount rate = $551,530
$700/week at a 5% discount rate = $466,480
That’s an $85,050 difference, highlighting why this is often a key point of contention in Family Provision Act proceedings.
What Discount Rate Should Be Applied?
This depends on several factors, especially investment strategy and beneficiary profile.
Some courts reference the 3% rate outlined in Todorovic v Waller (1981) 151 CLR 403.
Others assess long-term expected returns of superannuation-style managed funds, using one of several risk categories:
Capital Guaranteed
Capital Stable
Balanced
Growth
High Growth
Choosing the Right Investment Profile
The most suitable profile depends on the age, financial literacy, and risk appetite of the beneficiary. A retiree may require a conservative rate, while a younger, financially savvy person might adopt a higher-growth assumption.
Why Use an After-Inflation Rate?
Because the cost estimates are expressed in today’s dollars, we adjust only the discount rate for inflation, rather than inflating each year's projected costs. This simplifies calculations and reduces error.
Why Use an After-Tax Rate?
Most needs (e.g. $700 per week) are expressed after tax, so the discount rate must reflect after-tax returns.
Some managed funds publish after-tax performance data, often factoring in franking credits. For example, an individual earning $99,235 in franked dividends may owe no further tax due to the offsetting credit.
In some cases, there are structuring strategies, like using superannuation, where the tax burden is significantly reduced, allowing for a lower discount rate.
Expert Evidence is Key
These calculations are highly fact-specific and often require forensic financial evidence to be accepted in court. At Dolman Bateman, we specialise in quantifying lump sum values in Family Provision claims and Succession Act matters.
We combine actuarial-style modelling with practical investment logic tailored to your case.
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.
