Contesting a Testamentary Trust

What is a testamentary trust and how is it different from a will?

Normally, a Will appoints an executor and gives that executor power to gather the deceased’s estate and distribute it to the named beneficiaries. In these circumstances, the beneficiaries receive their entitlement as specified in the Will and any interest/income which has been earned on those assets between the death of the deceased and that final distribution of the estate. An executor has no discretion as to the distribution of the assets or the income earnt by those assets; they must bequeath the assets to the named beneficiaries in strict compliance with the Will.

In comparison, a testamentary trust is set up in a person’s Will and comes into force when the will maker passes. It holds and protects all or some of the person’s assets, in order to look after them for the beneficiaries. When a testamentary trust is established in a person’s Will, a trustee is named to manage the assets in the trust. The trustee then has effective control of the trust and its assets, although they must operate within the rules set out by the testator. Typically, the trustee has discretion to decide which of the nominated beneficiaries receive income and capital distributions each financial year so they have meet the needs and best interests of the beneficiaries from year to year.

What are the benefits of a testamentary trust?

Protection against creditors

In the case where a normal Will has been used to bequeath assets and a beneficiary is experiencing bankruptcy at the time of the distribution of an estate, their inheritance usually goes directly to creditors. However, if a testamentary trust is used, this outcome may be avoided. Because the testamentary trust legally owns the assets it holds, the assets are protected from the beneficiaries’ creditors in the event of bankruptcy or successful legal action against them.

Similarly, holding assets in a testamentary trust may provide significant protection in a potential property settlement through the Family Courts in the case of a relationship breakdown.

Tax purposes

A testamentary trust is also used for tax purposes. Depending on the beneficiaries’ circumstances, a testamentary trust can assist with minimising tax liability. Most notably, when paying income distributions to a beneficiary who is a minor, they will be taxed as an adult. Therefore, it means that a minor beneficiary is entitled to receive an $18,200 tax fee threshold and the standard adult rates thereafter as opposed to the higher tax rates that usually apply to minors.

Added protection for beneficiaries

A testamentary trust is effective in providing for a beneficiaries’ needs as required without putting disposable assets in their name or providing them with a lump sum of money.

As a testamentary trust is established by a Will, the testator has absolute control over the terms of the trust and can dictate the parameters for how the trust must operate after their death. Therefore, they can be drafted to include conditions and restrictions upon a trustee so as to provide for a beneficiary who may suffer from physical or mental handicap, is a spendthrift, has poor judgmental capacity, or has an addiction to drugs or alcohol.

Can I contest a testamentary trust?

As a testamentary trust is established by a Will, it can still be challenged or contested by any eligible person under the Administration and Probate Act 1958 (Vic). This may result in assets that were intended to be set aside for a testamentary trust being made available to satisfy a potential family provision claim.

Contesting if you are not an object of the testamentary trust

The process of contesting a Will which contains a testamentary trust is essentially the same as contesting a Will that does not contain such a trust. In essence, so long as you are an eligible person under the Administration and Probate Act 1958 (Vic), able to show that the testator of the Will has not adequately provided for your proper maintenance, and can prove that they had a moral obligation to do so, you have the ability to contest a Will that contains a testamentary trust.

In these cases, you may receive a settlement from the estate that includes assets that were intended to be included in the trust.

Contesting if you are an object of a testamentary trust

Contesting if you are a beneficiary of a testamentary trust requires the same process as mentioned above, however the only additional hurdle that may arise is that you may need to prove that your entitlement as a beneficiary of a testamentary trust does not amount to proper provision.

If you are successful in this argument, the court generally awards a lump sum to be paid in lieu of your entitlement under the trust.

Case example

An example of this can be found in New South Wale case of Bowers v Bowers [2020] NSWSC 109. This case concerns an applicant son who made a Family Provision Claim from his deceased mother’s estate.

On the facts, the Will provided for the applicant as a discretionary beneficiary of the testamentary trust. However, it was clear that this was not sufficient in adequately providing for the applicant’s proper maintenance or advancement in life as he was not in a strong financial position and needed funds to secure accommodation and pay for general expenses.

Upon consideration of the various factors argued by the applicant, the court found that a payment of $750,000 should be made to the applicant in place of the provision made for him in the Will of the deceased.

See Tucker v Tucker [2012] NSWSC 1302 for another example of a beneficiary of a testamentary trust being awarded a lump sum payment in place of their original discretionary entitlement after proving there was inadequate provision for them under the trust.

For more information, please don’t hesitate to get in touch with our team of experienced estate lawyers.