A testamentary trust is a trust established under a Will. The trust does not come into effect until after the death of the person making the Will. One of the advantages of a testamentary trust is that it may protect the assets in the testamentary trust from claims by spouses or partners if the intended beneficiary is involved in a matrimonial property dispute.
However, a testamentary trust is not guaranteed to exclude inherited assets from being included in the matrimonial pool of assets divided between spouses.
The decision of Bernard & Bernard  FamCA 421, provides a reminder of the importance of structuring a testamentary trust in the estate planning phase, and sets out the factors that the Family Court will consider when deciding whether the assets of a testamentary trust will form part of the matrimonial pool.
The husband and his sister both had testamentary trusts established under the Will of their father. Both were the trustee of the other's trust. Neither was a beneficiary of the other's testamentary trust.
The wife argued that the assets of the husband's testamentary trust should be included in the matrimonial pool.
The Court decided that the assets of the testamentary trust should not be included in the matrimonial pool because the husband did not have any direct or indirect control of the trust.
The trustee and appointor roles are not the only factors
In this case it was fairly clear that the husband did not have any direct control of the trust – he was neither a trustee nor the appointor. The case also demonstrates that these are not the only relevant factors for a court to consider in determining whether the assets of the trust can be included in the matrimonial pool of assets.
The court will also look at any evidence that suggests that the beneficiary indirectly controls the trust, including:
- requirements for the beneficiary to provide consent before the trustee can make certain decisions
- the dealings of the trustee and whether they have acted as a mere puppet of the beneficiary (i.e. acting in accordance with the wishes, or at the direction, of the beneficiary).
In this case, the Court reviewed the conduct of the sister as trustee of the husband's trust including her resolutions relating to distribution of the trust assets and decisions to accumulate income, along with the trust's tax returns.
Having concluded that the husband did not have any direct or indirect control of the trust, the Court considered that the husband only had an entitlement to the testamentary trust as a mere discretionary beneficiary. On this basis, the assets of the trust were not included in the matrimonial pool but the husband's interest as a beneficiary was considered a financial resource (although the Court noted that it is difficult to value this resource in circumstances where the husband has no present entitlement).
Testamentary trusts can assist in protecting inherited assets from a matrimonial dispute.
It is imperative that the testamentary trust is properly drafted in the estate planning phase to ensure that the control of the trust is structured properly – balancing the need for protection and the practical circumstances of the client.
Advisors also need to be aware that the asset protection benefits of a testamentary trust are not achieved simply through the structure of the trustee and appointor; the ongoing administration of the trust, the way the trustee carries out their role and the records maintained by the trustee are all relevant factors.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.