TESTAMENTARY TRUSTS: WHEN THE FAMILY COURT LOOMS

TESTAMENTARY TRUSTS

Testamentary trusts are a type of trust created in a will to hold assets (such as an inheritance) after the will-maker’s death. The Trustee ostensibly has full discretion to decide who gets income or capital from the trust and when they get it, A beneficiary does not own the property in the trust and cannot demand income or capital from the Trustee.

WHEN THE FAMILY COURT LOOMS

Sometimes will makers will draft their will so that on their death their children (for example) will not get their inheritance immediately: instead the will maker will instruct their solicitor to set up a Testamentary Trust. The inheritance will then sit in the trust: the trust owns it, not any individual. The will maker might do this because they want to leave their child an inheritance, but they don't want the child’s estranged partner to get their hands on it. After a long marriage such property would rightfully be included in the pool of assets to be divided by the parties. The will maker, however, wants to prevent this.

It is commonly believed that the assets in a testamentary trust are untouchable and therefore cannot be the subject of division between separating spouses: indeed, in Ward v Ward [2004] FMCAfam the husband told the court that his mother had set up the trust in her will to put his inheritance “out of the reach of his wife”.

FAMILY COURT SETTLEMENTS INVOLVING TESTAMENTARY TRUSTS

This method of quarantining assets didn't work as intended for the husband in Ward v Ward. Even though his inheritance had not vested (his mother hadn't died) the Family Court determined that though the assets in the testamentary trust were not properly to be regarded as property of the parties to the marriage, or to either of them, (and therefore not to be placed in the asset pool) they did provide Mr Ward with a financial resource from which he would benefit in the future. The testamentary trust therefore needed to be taken into account to ensure the just and equitable division of the property of the parties. The court divided the pool 57.5% to 42.5% in favour of the wife.

A similar fate awaited the husband in Mantel v Mantel {2020} FMCAfam. Once again, while the court deemed that the assets in the testamentary trust were not to be regarded as property of the parties they did however provide Mr Mantel with a financial resource from which he would benefit in the future. It needed to be taken into account (with other matters) to ensure the just and equitable division of the property of the parties. The court made adjustments in favour of Mrs Mantel.

IN SUMMARY

Perhaps the assets in testamentary trusts are somewhat “untouchable”, however the cases indicate that such assets are nonetheless taken into account when Family Courts determine what is just and equitable in settlement proceedings.

“It is extremely difficult to protect assets of a person from being accessed by the court for the purposes of a matrimonial property settlement…The provisions of a trust deed cannot be relied on to be effective in this regard” (Birtles & Neal, 2018).

Will makers who wish to include a testamentary trust for such purposes should obtain financial and legal advice. Flanagan Legal Newcastle can provide advice in such situations.