The Pitfalls of a Discretionary Testamentary Trust: Have you made adequate provision for your spouse or children?
The starting point in making a Will is that you have what is called testamentary freedom to gift your assets in any manner you wish. Whilst this stands, the law contains provisions giving the Court power to alter the distribution of your Estate after you die if you have not made adequate provision for a certain class of people, such as a spouse or a child.
The Succession Act 2006 (NSW) sets out a list of persons who are eligible to make a claim on your Estate if you fail to leave them with adequate provision in your Will, including a spouse and a child. Other eligible persons listed in these provisions need clear evidence they lived with you and were dependent on you for a period of time before they are eligible to make a claim.
There is a common myth that creating a discretionary testamentary trust in your Will so that a spouse or child receives from your Estate but does not have control over the assets in the trust, make those assets “claim-proof”.
For a testamentary trust to achieve certain purposes, such as protect the assets from a beneficiary’s bankruptcy or have those assets excluded from consideration in your beneficiary’s spousal separation proceedings, it must be entirely discretionary and include various classes of beneficiaries. Each beneficiary’s share is therefore undefinable and not guaranteed. The Trustee usually has ultimate discretion as to when and how they distribute to any of the beneficiaries in the Trust.
As discretionary testamentary trusts operate in this manner, your intended beneficiary, such as your spouse or your child, do not have a definable interest or guaranteed provision from your Estate. As a result, your eligible beneficiary may be inclined to make a claim that you have not left them with adequate provision. As the Court has the power to alter your Will to make provision for your eligible beneficiary, the structure of the Trust may be altered or the Trust dissolved.
Contact our Principal, Tracey Dwyer, to discuss options for drafting your Will, purposes of a testamentary trust and advice on minimising the risk of a family provision claim.
