The advantages of testamentary trusts and the importance of obtaining considerate and knowledgeable estate planning advice was evidenced in Bernard & Bernard  FamCA 421 (Bernard & Bernard), where a father left his estate to his two children in separate testamentary trusts.
A testamentary trust is a trust established in a will and funded by the assets of the deceased estate.
A testamentary trust is a discretionary trust, the terms of which are very similar to a standard discretionary family trust. The trustee of the trust controls the assets of the trust and is responsible for administering the trust property, filing annual income tax returns on behalf of the trust and distributing trust income and capital amongst the beneficiaries.
The beneficiaries of the trust have no fixed entitlement to any income or capital of the trust fund. The beneficiaries are merely persons or entities who are eligible to receive distributions of income and capital of the trust, in respect of which the trustee has an absolute discretion unless that discretion has been limited by the testator.
Bernard & Bernard
In the case of Bernard & Bernard, the father died in 2012, leaving a testamentary trust to his son and to his daughter respectively. The son and daughter were the sole trustees of each other’s trusts, however, had no role in their own trusts, other than being the primary beneficiary.
The trusts were in partnership and operated a family business.
After the father died and the testamentary trusts were established, the son and his wife separated and applied to the Court to divide their property.
The wife’s primary argument was that the two trusts mirrored each other, acted in partnership and the son and daughter had the same legal obligations as trustees of each other’s trust. Consequently, the wife argued that the son effectively controlled his own trust and therefore the assets of the trust were property of the marriage.
The wife’s arguments were rejected by the Court. The Court found that there was no evidence that the son controlled his trust and therefore the assets of the trust were not matrimonial property between the parties.
The Court made its decision based on the following:
- the son has no control over his sister as the trustee of his trust;
- the son cannot make decisions as to distributions of his trust;
- the trustee has complete discretion to make distributions to the beneficiaries of the trust and the son is not guaranteed a distribution from the trust;
- the fact that the son’s trust mirrored his sister’s trust does not provide him with control of the assets of his own trust; and
- the assets of the son’s trust were not acquired during the marriage.
It is imperative to consider all possibilities that may affect the beneficiaries of your will. The above demonstrates that a testamentary trust is a useful tool in protecting beneficiaries in the event of a relationship breakdown. Testamentary trusts also protect beneficiaries in the following circumstances:
- in the event of bankruptcy;
- allowing for asset protection if any beneficiary is a business owner; and
- high income earners that would benefit from a flexible set up to manage taxation.
If you would like to discuss your own estate planning and the benefits of a testamentary trust in your personal circumstances, please telephone our office on (03) 9853 0311 to speak with an estate planning lawyer.
We recommend that you contact a lawyer to seek advice regarding your particular situation. This article is for informational purposes only and does not constitute legal advice.