Legal Tip 102: One or multiple Testamentary Trusts in a will?

One or multiple Testamentary Trusts in a will?

When setting up a testamentary trust consider the long term effects on the beneficiaries of the trust.


Where there are 2 or more children (or other beneficiaries) and assets are left to one trust which both children control and/or are beneficiaries of then consider what will happen if:

• One child wants to mortgage a trust property and the other doesn't;
• One child wants to cause a trust property to be sold and the other doesn't;
• One wants to cause the trust to invest aggressively and the other is more risk adverse.

For these and other reasons it may be worth considering setting multiple discretionary trusts in the will with each trust being controlled by each child or main beneficiary. This way they can still benefit but go their separate ways.


One drawback of this separate trust approach is that asset protection on the divorce or separation of the main beneficiary that controls the trust will not be as great as the control of the trust will basically rest with one person. With a discretionary trust controlled by say 3 siblings then this will provide greater asset protection as it is more likely to be treated as a ‘financial resource’ of a party to the marriage/de facto where the trust is controlled by one person and that person later goes through a separation.

 

Thanks, TerryW for this information.

 

Assuming testamentary trusts also last for 80 years (do they?), and a testamentary trust might be created when the deceased's children are say 50. This is of huge benefit to the grandchildren or great grandchildren, but if it's complicated for siblings to control one trust, having it controlled by a batch of cousins from multiple branches of the family will be even worse. Especially when the deceased's children start to die off.

Can testamentary trusts be split in the future?

 

How would you treat multiple trusts if each of the heirs were to be treated equally? Each trust being a tenant in common with X share over all of the assets or balancing up the value of each trust so they held the same value upon establishment?

 

If there was cash and/or shares to make the balancing easier.
Binding death benefit nomination on super?
You'd also want to educate both the executor(s) and heir(s) to make sure they understand what's happening.

 

That is up to the testator - best to build in flexibility so they can decide which trust gets what at death. Otherwise each trustee would be a joint owner of all assets usually.

 

Generally that is the maximum they can last because of the laws against perpetuities.

 

Yes but could trigger CGT and duty potentially

 

Commonly parents will want to pass down to their children their PPOR and all their assets. They might only have one property.

What commonly happens in this case when there's only 1 property but 2 children and 2 trusts?

I imagine the will could instruct sale of the property and the proceeds be split between the 2 trusts.

But are there any options if you do not wish to sell the property yet? Would it be put into a 3rd trust where ownership is split 50 / 50?

 

Each testamentary trust could own a 50% interest in real property, what does the will that creates the TTs say ?. The issues may be who are the trustee/s of the trusts . That is the weakest point of any trust for minors or unentitled beneficiaries. Also terms of each TT.

 

So each of the children have a TT with a 50% interest in the property. The trustee of each is a company. What would the issues be here?

 

Joint ownership by two TTs has all the same problems of joint ownership by two human adult beneficiaries. Personally would avoid it for the same reasons to avoid owning a property with family other than spouse.

 

Yes absolutely. I'm wondering what usually happens in this situation and how people usually handle it. Would it be outlined in the will to sell the property then distribute the proceeds to each trust 50/50, or are there other options to retain the property?

 

The problem isn't retaining it, it's who owns and controls it. If you have two or more beneficiaries, it's automatically a problem even if you have someone independent to control it. Even if you force joint ownership long term, depends if you think the benefit of holding it outweighs the potential for family conflict.

Partly, this is why the choice of executor of the estate is so important. Instead of dictating what the executor does, choose an executor that can be trusted (and know how) to do the best thing for the beneficiaries.

 

But the executor is simply following instruction of what is outlined in the will? I'm still curious as to how most people would set this up. Ideally you wouldn't want to be forced to sell in a declining market just to distribute cash to both trusts.

 

The way I would generally structure it is to have multiple optional trusts set up in the will and to give a power of adjustment so that after the death happens the kids and the executors can discuss and rearrange things to suit their needs, without stamp duty or CGT. One kid might take control of one trust which holds the house and the other kid might get other assets of the estate or non-estate such as super, life insurance etc.

But 2 trustees can own the one property if required. Tenants in common. Perhaps a dedicated trust for each, which controls no other assets so if one child wants out the control of one of the trusts can be passed to the other.

It is also possible to get the main residence exemption within the trust if a right to reside is given.

Seek legal advice from your solicitor

 

No beneficiary of a discretionary trust has any propriety interest in the assets of the trust. They might have a contingent interest if they are a default beneficiary though.

Heaps of issues to consider, 100s. What happens if the trustee of one wants to sell and the other doesnt for example.

 

Is one solution to give wider powers to the executor, and just choose your executor very very carefully?

 

That might be part of one solution

 

Thanks Terry. So in my basic example where there's a parent and 2 children, each given one TT each with shares, cash etc. split evenly, would also have another 2 TT, one each for a total of 4. The other 2 control no other assets except have 50% of the PPOR each. And therefore this allows for more flexibility?