Can an existing trust be a beneficiary in my will?

Yes! A person can leave assets under their Will to the trustees of a trust already in existence, such as a family trust or a unit trust. These are collectively known as ‘inter vivos’ trusts. For the gift to be valid, however, it is necessary that the disposition would not be considered a ‘delegation of testamentary power’.

 

What is a delegation of testamentary power?

A delegation of testamentary power is when the person making the Will (‘the testator’) gives another person the power to decide how to dispose of their estate. This is barred by the High Court case of Tatham v Huxtable (1950) 81 CLR 39, where the Court stated that “[i]t is a cardinal rule… that a man may not delegate his testamentary power”. Given that trusts often have a range of beneficiaries, there is scope for argument that a gift to an inter vivos trust by a testator is effectively passing on the decision-making power for who shall ultimately benefit from the estate.

 

When is gifting assets under a Will to a trust not considered delegation?

Despite the above rule, section 33R of the Succession Act 1981 (Qld) states that a trust or power (created by a Will) to dispose of property is not void, if the same power or trust would be valid if the testator had made it during their lifetime. This is especially the case if it is easy to determine with certainty who or what class of people are intended to benefit from the trust in question.

In the case of Gregory v Hudson [1997] NSWSC 140, the Court determined that the deceased’s gifting of his entire estate to the trustee of a family trust for the benefit of his family was valid. In this case, the deceased chose this method so that the independent trustees would make distributions according to each beneficiaries’ individual needs, without being influenced by the tense blended familial relations.

 

What are the advantages of leaving a gift to an inter vivos trust?

The main advantage of leaving a testamentary gift to a trust is to ensure that that gift is not deprived of the benefit of the concessions found in s 102AG of the Income Tax Assessment Act 1936 (Cth).If the trust deed permits the trustees to accept “excepted trust property” and the trustees hold this property separately from other trust assets, minors may receive distributions from the trust generated by the separately held trust assets, whilst being taxed at the normal marginal tax rate on those distributions. This is very different from the rate at which distributions to minors from an inter vivos trust are usually taxed – which can be up to 45%.

A gift to an inter vivos trust may also be advantageous if there are concerns regarding the testator’s mental capacity to understand a complex Will incorporating testamentary trusts but the benefits of a trust are nonetheless desirable. In this case, a gift to an existing trust is a much shorter and more straightforward Will to understand.

 

What are the disadvantages of leaving a gift to an inter vivos trust?

The main disadvantage is the risk that the trust deed may not allow for the testator’s wishes to be effectively carried out. For example, there may be provisions in the trust deed preventing distributions being made to certain beneficiaries, or such distributions may only be permissible with the consent of a third party. It is for this reason that it important that the trust deed is reviewed to see if any such restrictions exist. In many instances, these problems can be fixed while the testator is still alive so that their testamentary intentions are not defeated.

Unless the Will is prepared very shortly prior to the testator’s death, there are also the risks that naturally arise owing to the passing of time. Trusts in Australia have a maximum life of 80 years (except in South Australia), so if the trust has already been operating for a number of years it may only exist for a short time after the testator’s death (or may, in fact, have already vested). Additionally, after the signing of the Will the structure of the trust may have changed meaning it is no longer inappropriate to receive the gift (for example, the trust may have exposed itself to risk, or the control of the trust or the beneficiary classes may have changed).

It is also very easy for the trustee to lose the advantage of the s 102AG concessions by accidentally mixing capital or income and therefore potentially defeating the testator’s intentions. This could result in a potential breach of the anti-avoidance rules as set out in s 102AG(3).

 

Summary

It is clear that the potential disadvantages of using a Will to gift assets to an inter vivos trust far outweighs the potential advantages. In most instances it is preferable to simply draft a trust(s) into the terms of a testator’s Will (called a ‘testamentary’ trust). This option allows the trust to be created in accordance with the testator’s wishes, is unaffected by outside factors, avoids concerns regarding early vesting and is less likely to inadvertently trigger anti-avoidance tax laws. It is for these reasons that testamentary trusts are the more widely used trust structure in estate planning.

Please note that this article is for information only and is not legal advice.

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