Can an existing Trust be a beneficiary under my Will?

Yes, a Will can nominate an existing trust as a beneficiary

A person can leave assets under their Will to the trustees of a trust already in existence, such as a family/discretionary trust, unit trust or charitable trust.

These are collectively known as ‘inter vivos’ trusts.

In the USA, a Will devising all or part of the estate to the trustee of an existing inter vivos trust is called a Pour-Over Will.

For the gift to be valid in Australia, 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.

Such delegations are barred by the High Court due to their decision in the 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 to a trust under a Will not considered a delegation of testamentary power?

Each case will be assessed on its own facts and circumstances.

Examples where the gift to an existing trust is not deemed a delegation

1️⃣ 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.

2️⃣ 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?

Potential Tax Advantages

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 the maximum marginal rate of tax.

Concerns regarding legal mental capacity to understand a complex WIll (incl. a Testamentary Trust)

A gift to an inter vivos trust may also be advantageous if there are concerns regarding the testator’s legal mental capacity to understand a complex Will incorporating testamentary trust/s where the benefits of a trust are still desirable.

In this case, a gift to an existing trust is a much shorter and more straightforward Will to understand, effectively lowering the hurdle that needs to be cleared to establish a valid Will.

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

The main disadvantage is the risk that the trust deed may contain express terms which do not allow for the testator’s wishes to be effectively carried out.

There may be express terms 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.

For this reason it is important that the trust deed is reviewed by a lawyer to determine whether any such restrictions exist.

If restrictions are identified, these may be capable of being removed while the testator is still alive so that their testamentary intentions are not defeated.

Trusts in Australia

Unless the Will was prepared recently, there is also the risk that naturally arises due to the passage of time.

Generally Trusts in Australia have a maximum life of 80 years (except Charitable Trusts which can exist in perpetuity and Trusts from South Australia where the Rule against Perpetuities has been repealed).

Thus, if the trust has already been operating for a number of years it may only be capable of existing for a short time after the testator’s death (or may, in fact, have already vested, that is, the Trust may have automatically terminated by reaching its own expressly nominated expiration date).

After the Will is executed, it is also possible that the trust's circumstances may have changed such that it is no longer appropriate to receive the gift.

For example: The trust may have exposed itself to an unforeseen risk, or the control of the trust or the members of the beneficiary classes may have changed.

It is also very easy for the trustee to lose the tax advantages provided by the s 102AG concessions by accidentally mixing capital or income and therefore potentially defeating the testator’s intentions, and potentially triggering anti-avoidance tax laws.

Conclusion

In summary, the potential disadvantages of using a Will to gift assets to an existing inter vivos trust far outweigh the potential advantages.

It is preferable (assuming the requisite mental legal capacity) to draft a new Testamentary Trust(s) into the terms of the Will.

Using a new Testamentary Trust ensure the trust will:

1️⃣ Be created in accordance with the testator’s wishes;

2️⃣ Is unaffected by external factors and other risks due to the passage of time;

3️⃣ Avoids concerns regarding early vesting; and

4️⃣ Is less likely to inadvertently trigger anti-avoidance tax laws.

Therefore, unless there are concerns regarding clearing the hurdle of the legal mental capacity required for a complex Will, we highly recommend the use of Testamentary Trusts as the default trust structure used in estate planning.

Credits:

This FAQ was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:‍

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.