Does A Testamentary Trust Have A Trust Deed?

I mean – if you have a client who already has a Will which includes a testamentary trust deed, and that client (hopefully many years afterwards!) dies – then, how do you actually set up that testamentary trust?

Well, it’s not really that hard to do – but as with most things, you do need to carefully follow the correct process to make sure you don’t end up in strife!

The first thing you need to do is to obtain probate of the Will. Why? Because the terms of the testamentary trust are contained in the Will, and therefore the Will is the “trust deed” for the testamentary trust. However, you can’t rely on the Will yet, until it has been validated and proven (“probated”) by the relevant State / Territory Supreme Court to be the last valid Will of the deceased person.

But what if on the face of it there is no legal requirement to obtain probate of the Will? For example, it may be the case that the only assets in the name of the deceased person are a number of bank accounts, and in each case the relevant bank has advised that they only need to be given certified copies of the death certificate and the Will to release funds to the executors of the estate. If you can get by without obtaining probate, you could save a lot of time, hassle and expense – maybe several thousands of dollars depending on the size of the estate and the State or Territory you are in (especially New South Wales, which provides for a very generous scale of fees for legal fees to obtain probate, plus significant Court filing fees). However, this approach is truly “false economy”.

As tempting as it may be to not obtain Probate, you must obtain it nevertheless – otherwise the testamentary trust will not have a valid “trust deed” and you are likely to experience problems such as not being able to open a bank account for the testamentary trust (as opposed to opening an “estate of the late” account for the deceased person), or further down the track if the trustee of the testamentary trust wishes to borrow monies, or in dealings with the Australian Taxation Office (especially when it comes to justifying tax effective income distributions to minor trust beneficiaries if the trust is audited).

Once you have obtained Probate of the Will, the administration of the estate can take place. Generally this involves the collecting of all the estate assets, ascertaining and paying out the proper debts of the deceased, and working out what and when to pay the beneficiaries under the Will in terms of legacies, specific gifts, and gifts from the residue of the estate.

At this time it is also important to seek advice from a lawyer who is properly qualified and experienced in dealing with testamentary trusts (which means someone who not only has quality experience in designing and drafting different kinds of testamentary trusts in Wills but also who has appropriate knowledge and experience in advising on the various Commonwealth and State / Territory taxation issues relating to each type of testamentary trust). This advice should cover, in relation to each testamentary trust incorporated into the Will, issues including but not limited to the following:

• What sort of testamentary trust it is (eg, life interest trust, right of residence trust, fixed interest trust, discretionary / hybrid trust, etc);
• How does it work (eg, what is the meaning and application of the provisions of the trust, in particular how to apply any restrictions under the trust regarding access to income and / or capital, etc);
• Who is / are the Primary Beneficiary/ies of the trust, and what rights and powers do they have (if any) in relation to the trust;
• Who are the other Beneficiaries of the trust, and under what circumstances can they have access to income and / or capital of the trust;
• Who should be the trustee of the trust, and in particular who has the power to nominate who the trustee is from time to time, and can a company be nominated as the trustee;
• What discretions are available to be exercised in relation to the establishment of the trust (eg, are there any discretions exercisable by the executors regarding the trustee, the beneficiary classes, the breadth of restrictions applicable to the trust, and even whether or not the establishment of the trust is “optional”);
• What assets must (or may) be allocated to the trust, and are there any discretions applicable to this issue (such as whether there are any requirements to “equalise” the distribution of assets between more than one testamentary trust having regard to previous gifts made to primary beneficiaries during the lifetime of the deceased person, etc);
• What are the taxation consequences of establishing the testamentary trust in a particular way (eg, in terms of income tax and capital gains tax consequences for the trustee, for the beneficiaries, and as regards the status of particular assets of the trust) – in this regard, it may even be necessary to seek advance opinions or private rulings from the relevant taxation authorities.

Once all these matters have been determined, then the executors and the relevant trustees should hold respective meetings and / or pass relevant resolutions to reflect the establishment of the testamentary trust, with the preparation of relevant meeting minutes and or executor / trustee / corporate trustee resolutions. Much of this paperwork will be similar to the documentation required to set up an inter vivos trust during one’s lifetime, such as a family trust or other trust.

After the testamentary trust has been established, other matters will again reflect what may need to be done in relation to an inter vivos trust, such as applying for a Tax File Number (TFN) or an Australian Business Number (ABN). Thereafter, other ongoing administrative requirements will similarly reflect what happens with “ordinary trusts”, such as holding meetings of the trustee / trustee directors, passing resolutions in relation to trust decisions, preparing annual financial statements and lodging annual taxation returns and so forth.

In fact, apart from obtaining probate and getting legal advice on the interpretation of the Will and the provisions of the testamentary trust, most of the initial establishment and ongoing administrative requirements do not require the involvement of a lawyer. These requirements can be very well handled by the deceased client’s advisers, who should naturally become the advisers for the estate and for the testamentary trusts under the Will – and thereby for the deceased client’s family who are the beneficiaries under the testamentary trust.

This is why these days arguably having custody of a client’s Will as part of a “Will bank” is actually more important (and profitable) for the clients’ adviser, rather than for lawyers as it used to be in the “olden days”!