A recent Court decision shows that testamentary trusts can effectively protect an inheritance from becoming part of the ‘matrimonial pool’ of assets on relationship break-down. We quite often consult with clients, in the context of their estate planning, who are concerned to protect the assets and wealth they have built up in their lifetime and which they want to pass on to their children after their death. Some clients tell us they are worried about their adult children’s marriages/relationships and they wish to put in place measures that will prevent the spouses of their adult children from getting some of their children’s inheritance if the relationship fails and there is a consequent division of assets. We often recommend the use of testamentary trusts in wills to provide such asset protection and, while no testamentary trust can be foolproof against the extensive powers of the Court, it is great to see a recent Court decision which confirms the effectiveness of such a strategy.
In Bernard and Bernard (2019), the Court found that the husband’s inheritance from his father (worth $3.5 million) was excluded from the matrimonial pool of assets for the purpose of the division of the assets of the husband and wife following their separation. In this case, the husband’s father had died, leaving his estate as to half for his son and half for his daughter. The father established two testamentary trusts in his will, each trust holding one half of the estate. One of the trusts had the son as the beneficiary and the daughter as the trustee (the trustee being the person who controls the trust). The other trust had the daughter as the beneficiary and the son as the trustee (so each sibling was in control of the other’s trust). The son was able to successfully argue that because he had no control over the trust and he was not the owner of the trust assets (his sister as trustee had control and she was the legal owner of the trust assets as the trustee) then that inheritance should be excluded from the property pool.
Simply put, a trust is a legal structure where a trustee holds property (this includes real property and personal property) for the benefit of the beneficiary/ies. There are a number of different forms of trusts, including testamentary trusts. A testamentary trust is one that only comes into effect after the will-maker has died. This allows the will-maker to name their chosen trustees and beneficiaries. In most circumstances, a testamentary trust will is structured in a way that allows the primary beneficiary of the trust to take part or all of their inheritance as an absolute gift or via the testamentary trust. In circumstances where the will-maker wants to provide for a vulnerable beneficiary, the will can be structured in a way that ensures someone other than the vulnerable beneficiary is the decision-maker in this respect. You can structure your will to create a separate trust for each of your intended beneficiaries. Each trust will then have its own trustee/s. The trustee is the person or persons that control the assets in the trust. They have the discretion, according to the terms defined in the will, to distribute the income and capital of the trust to the nominated beneficiaries. A testamentary trust may be able to provide protection if one of the beneficiaries is likely to be involved in divorce or separation proceedings in the future and you are worried that their partner may end up with some of your assets.
If you’d like to discuss your estate planning, contact Tanya Herbertson, Partner at Meyer Vandenberg via email: Tanya.Herbertson@mvlawyers.com.au