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Here are ten testamentary trust questions you have sent in over the past few months.
Testamentary Trust Questions
Testamentary trusts are a great way to transfer wealth from one generation to the next but they also come with their own issues.
In this episode Paul Mackenroth of Cleary Hoare in Brisbane goes through ten of your testamentary trust questions.
Here is what we learned but please listen in as Paul explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Question # 1 – One Trust Per Child?
Should your will just have one testamentary trust for all children together or is it common to create one trust for each child?
It all depends on the age of the children. If you have three adult children, then it would be appropriate to create a testamentary trust for each child.
When old enough, the children will want to take their share of the estate and deal with their own portion as they see fit not necessarily tied to their siblings. So with adult children it is common to create more than just one trust.
However, when the children are young, the parents usually opt for one testamentary trust controlled by the other parent which ultimately will go to their children at some point down the road.
Another point to consider the assets involved in those trusts and at what point will those trusts be handed on to the next generation.
Question # 2 – Empty Trusts?
Is it common for testamentary trusts to be empty for many years until the second spouse dies?
Often times a will might give certain assets to the trust therefore forming the trust property. But it is not common for wills to give a small amount like a settlement sum to start the testamentary trust, as you often do for other discretionary trusts.
Settlement sums tend to not happen so much in the testamentary trust world.
Generally in a testamentary trust the trust will receive particular assets or a portion of the estate or the whole of the estate if there is one trust.
If all significant assets are held jointly with the surviving spouse, then there is no point establishing a testamentary trust until the second spouse dies.
Question # 3 – Change Trustee?
You can change the trustee or add a trustee of a testamentary trust. Just read the deed. The deed will tell you what you can and can’t do. There is no one rule as to how that works it is a matter of reading the individual terms of each trust document in order to determine what that trust allows or does not allow.
Question # 4 – Family Law?
Are testamentary trusts protected from family law to a similar extent to other trusts?
The short answer is that it really does depend on how the trust operates. Family courts look at the terms of the trust. They look at who ultimately controls this trust. Who is the alter ego of this trust.
And if that is solely one party to the relationship or marriage, then the trust assets will be counted as a full asset.
A way to protect the testamentary trust from the family courts is to make sure that nobody fully controls the trust. So that would be an argument for one trust for all children together.
Let’s say a single mother has three children. If she creates one testamentary trust for all children together, then no child controls the trust, hence the spouses of any of these children will find it harder to have the trust counted as assets to the marriage.
Question # 5 – Family Trust Election?
You don’t make the family trust election as part of the will. That comes later when the new trustee takes over and manages the trust’s tax affairs.
Question # 6 – Address?
While most people list their address in the will, you can in theory list a PO box. Ordinarily it would be the street address, but sometimes people might not want to record their home address for particular reasons.
Question # 7 – Executor v Trustee?
Executor and trustee are two distinct roles. The executor has the ability to sell assets, pay liabilities and make distributions according to the will.
But there is also a trust relationship for those assets. However, those two roles are generally forged in one person, often the surviving spouse but they are two distinct roles.
Question # 8 – Cease To Act as Executor?
Once you have got a grant of probate it is difficult to get out of that. Once you are an executor, you basically have to see it through.
Giving you probate the court has vested significant powers in you and therefore the court is not going to likely remove you from that role. But say for example the spouse obtains a grant of probate and then passes away or perhaps that person did not even obtain a grant of probate and they pass away, then in those circumstances there would be alternate executors and trustees.
Question # 9 – No Trust?
What happens if the executor doesn’t follow the directions of the will and fails to establish the testamentary trust?
The testamentary trust is established once there are assets that form part of the estate. The executor has a role in that they have to distribute the estate and give those assets to the trust.
There is usually a creation clause and a gifting clause. So you first establish the trust and the gifting clause then gifts the estate to the trust.
If the executor for whatever reason says ,
”I am not doing any of that. I am going to give the assets to myself or another person”,
then that executor is in breach of the will and not adhering to their duties as an executor.
As a result the beneficiaries who should have received the assets from the estate would have a course of action against the executor. And if those assets have been distributed not in accordance with the will, you can pursue for breach of their duty.
Question # 10 – Liability?
Who is liable for any debts of the testamentary trust?
The beneficiaries are not liable for the actions of the trustee. So the beneficiaries are never liable for any debts of a testamentary trust.
The trustee has the right to be indemnified from trust assets for liabilities they incur in their role as a trustee. But when that trust has insufficient asset, then the trustee becomes personally liable. Because in trust a law the trustee is the person who is contracting. So if a trustee contracts to buy a property, it is the trustee who is the party to the contract not the trust. The trust is not a living thing, it is the trustee. The trustee is the person who gets sued.
So this is very different to the director of a company. The director is protected by the corporate veil to some extent, hence the need to have a corporate trustee.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 15 March 2021
Tax Talks spoke to Paul Mackenroth - Senior Associate at Cleary Hoare - for more details.
