Attempting to control assets beyond the grave can fall foul of family provision laws.
Testamentary discretionary trusts are becoming increasingly popular as a means of estate planning, refer to our article, “Testamentary Discretionary Trusts. What are they and do you need one?”. They have a number of benefits. First, they allow the testator a measure of control over his/her assets after death. Secondly, because the trustee of a discretionary trust has control over the distributions, benefits can be conferred in a tax efficient manner.
On the other hand, testamentary discretionary trusts can also fall foul of the family provision laws because the establishment of the testamentary discretionary trust may mean that a family provision claimant is not left with adequate provision with the effect that he/she can apply to the Court for further provision. That may mean that assets, intended to be held in a testamentary discretionary trust, might be diverted to satisfy a family provision claim.
A brief example illustrates the point.
Robert, a wealthy businessman, died leaving an estate worth several million dollars. He:
(a) left half of his estate to his widow, Wendy, on a “no strings basis”; and
(b) left the other half to their only son, Daniel, in a testamentary discretionary trust.
Daniel has a history of being a spendthrift and lazy but he is able to manage his assets and is able to earn income.
Robert had sufficient assets to provide amply for Wendy and Daniel, but whereas he has no concerns about Wendy managing her bequest, he had concerns about whether Daniel would simply “fritter away all of his money”. Robert, therefore, established a testamentary discretionary trust in his Will so that Daniel would have to apply to the trustees named in his Will for money as and when he needed it. Robert did not confer any direct benefit on Daniel in his Will other than making him a potential beneficiary of the testamentary discretionary trust to be established on his death. In his Will, Robert nominated independent trustees of Daniel’s testamentary discretionary trust so that neither Wendy nor Daniel would be involved in making these decisions. The decision to confer benefits on Daniel lay solely with the trustees.
The difficulty with Robert’s Will is that the Supreme Court, in a family provision claim, can make orders for further provision in favour of Daniel and effectively undo the testamentary discretionary trust notwithstanding the fact that, if Robert had bequeathed the funds directly to Daniel, Robert would have made adequate provision for Daniel in his Will. Daniel, being Robert’s son, is an “eligible person” in accordance with section 57(1)(c) of the Succession Act 2006 (NSW) and, therefore, is able to bring a claim against Robert’s estate. In accordance with section 59(1)(c) of the Succession Act, the Supreme Court will determine whether “adequate provision for the proper maintenance, education or advancement in life” of Daniel has been made in Robert’s Will to determine whether further provision should be made in Daniel’s favour and in what amount.
In addition to being Robert’s son, Daniel will need to prove that adequate provision has not been made for him in Robert’s Will. In this (rather extreme) example, Daniel can prove that he has not received adequate provision because, other than being a potential beneficiary of the discretionary trust, he did not receive any direct benefit in the Will. Daniel will also need to prove that his circumstances are such that he is in need of provision; that is, he is not independently wealthy.
Family provision claims cover a very broad range of circumstances. This is only one of the many different fact situations which can arise. There will be other blogs posted concerning different situations which affect family provision claims from the perspective of both the executors of the estate and potential claimants.
Care always needs to be taken when considering bringing a family provision application. The fact that a person feels “badly done by” in a Will does not automatically mean that he/she will be entitled to further provision. The failure of a testator to deal equally with his or her children will not necessarily mean that adequate provision has not been made for one beneficiary who receives less than others.