How a Testamentary Trust Protects Your Children's Inheritance

A testamentary trust is a trust created by a valid Will and comes into existence after the Will-maker’s death. Instead of giving your assets directly, you appoint a trustee in your Will to manage and hold your assets for the benefit of your heirs, known as beneficiaries. Testamentary trusts are common in estate planning and offer beneficiaries improved asset protection. The decision in Mantel v Mantel [2020] FAMCA 157 (‘Mantel’)confirms the effectiveness of such a strategy in a family law context.

In Mantel, a testamentary trust was established by the Will of the husband's father. The Will appointed the husband as the sole trustee and principal beneficiary, and granted him the sole discretion to distribute the trust's income and capital among the beneficiaries, including himself, his wife, their direct descendants and their spouses. Years later, the couple’s relationship failed and there was a consequent division of assets. The wife argued that the trust property is amendable to a property settlement order, as the husband is entitled to 100% of its value. The Court did not support the wife's arguments for a few reasons:

• There were beneficiaries other than the husband;
• The husband's father has provided explicit written instructions for the administration of the trusts, which requires the husband to preserve the trust assets to benefit future generations.
• The husband was able to prove his intention to comply with his father’s wishes, and therefore he was unlikely to receive significant benefit from the trust.
• Neither the husband nor the wife contributed to the accumulation of the assets in the trust.

It is clear from Mantel that careful considerations should be given to the terms of the testamentary trust. Such considerations should include:

a) Who is the trustee? An impartial trustee is likely to provide better asset protection in a family law proceeding;

b) Who are the beneficiaries? If there is only one beneficiary (who is also the trustee), he is more likely to be perceived as having effective control over the trust assets;

c) The level of control by the beneficiary: For optimal asset protection, it's advisable to limit or remove the beneficiary's control or discretion over the trust.

 As always, each case depends on its unique facts. Additionally, the parties' financial position plays a significant role in determining if a family law order adjusting property interests is fair and equitable.

A testamentary trust can also safeguard your children's inheritance in other circumstances:

a) Protection from creditors: Since a beneficiary isn't the legal owner of the trust assets, their creditors can't claim interests in these assets.

b) Protection from beneficiary's immaturity: Beneficiaries may be vulnerable due to their young age or mental capacity, or if they are spendthrift or have a gambling issue. A testamentary trust can manage the inheritance of young children until they reach the age specified by the Will maker (known as ‘preservation age’) and manage the inheritance of vulnerable adult children to ensure sound financial decisions.

Testamentary trusts are valuable tools in estate planning. It's crucial to consider your personal goals and seek legal advice tailored to your circumstances. Our team has extensive experience in establishing testamentary trusts and we can assist in strengthening the protection of your legacy and secure your family's long-term prosperity.

Contact us for a free thirty-minute initial consultation. 

We are not licensed to provide specific tax advice. We strongly encourage you to speak to an independent tax specialist. We recommend Price Financial Intelligence. 

Any information on this website is general in nature and should not be taken as personal legal advice. We recommend that you speak to a lawyer about your personal circumstances.

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