What Is a Testamentary Trust in NSW?

A testamentary trust is established by a person’s Will upon their death. Once a testamentary trust has been established, the trustee is responsible for managing and administering the trust assets on behalf of the beneficiaries for the life of the trust. 

Testamentary trusts can be discretionary, where the deceased has given the trustee discretionary power to decide when and to which beneficiaries to distribute trust income and capital according to the trust terms, or fixed where each beneficiary’s entitlement to the testamentary trust are set by the testator.

There are many reasons why a person may choose to create a testamentary trust. Generally, a testamentary trust is used to provide benefits including:

• Asset Protection: Assets held within the trust are generally protected from risks. A testamentary trust is particularly useful to protect against wastage by the beneficiaries (i.e., gambler, alcoholic, drug addict); claims by the beneficiaries creditors; or a beneficiary’s bankruptcy or divorce.
• Tax Advantages: Allows for potential tax benefits, particularly through income splitting among beneficiaries, resulting in lower tax rates on distributed income from the trust.
• Control and Flexibility: The testator can specify directions for the timing and destination of distribution of the assets in the trust, whilst providing the trustee of a testamentary trust the flexibility to make additional distributions to beneficiaries if certain requirements are met.

Legal Grounds for Contesting a Testamentary Trust in NSW

A testamentary trust can be contested by challenging a testamentary trust’s validity through the will that contains it, or by questioning the fairness of how the trust has been set up. In effect, this may require the person to challenge the validity and/or fairness of the will itself. Grounds for contesting a testamentary trust typically surround:

Lack of testamentary capacity

One way to contest a will that contains a testamentary trust is to establish that the testator lacked the mental capacity to understand the nature and effect of the will itself or the nature of the testamentary trust created under the will. 

One a person raises questions regarding testamentary capacity, the executor will be required to establish the testator had testamentary capacity including that the testator understood the nature and effect of the will; the extent of property being disposed of, and the moral claims of potential beneficiaries. 

If the testator is found to have lacked testamentary capacity, the whole will is invalid, including any testamentary trusts it established.

Undue influence or coercion

If there is evidence that the testator was pressured or coerced into creating the will, the will and the trusts created by it may be invalid. An example is where, for instance, a child who stands to benefit subjects an elderly and feeble parent to excessive persuasion, resulting in a will that was not the product of the testator’s free will.

Fraud or forgery

The trust may also be contested if the will that established the trust is a product of fraud of forgery. Fraud may arise where the testator was deceived into signed a document they did not intend to sign or where the testator’s signature has been forged.

Failure to adequately provide for dependents

Where a beneficiary of a testamentary trust believes the testamentary trust does not provide adequate provision for their proper maintenance, education or advancement in life, they may contest the will which created the trust by bringing a family provision claim against a testamentary trust for proper maintenance, education, or advancement in life.

An example of where a testamentary trust may result in a family provision claim is where a spouse leaves their home to their children and makes the surviving spouse a beneficiary of a testamentary trust. 

Depending on the circumstances, the widow or widower may be able to bring a claim against the deceased’s estate on the basis that the spouse had a ‘moral duty’ to provide housing and the testamentary trust is inadequate for that purpose. Here, the type of trust may be important, as a discretionary trust may further increase the risk of a claim as distributions would be at the discretion of the trustee.

Breach of trustee duties

Trustees are required to act in the best interests of the beneficiaries and according to the terms outlined in the trust deed. Where there is evidence of a trustee breach in a testamentary trust, such as acting in their own interests or failing to follow the trust terms, a beneficiary may bring proceedings against the trustee.

Ambiguities in will or trust documents

The terms of the will or trust documents may result in multiple interpretations. Challenges can arise when the terms are open to multiple interpretations, leading to confusion among the trustees and beneficiaries about each party’s rights and obligations. In some cases, the executor or trustee may be required to seek judicial advice regarding the interpretation of the terms of the will or trust.

Who is eligible to contest a testamentary trust?

In New South Wales, a person’s eligibility to contest a testamentary trust will depend on the particular facts and circumstances. Eligible people may include:

• Beneficiaries of the Trust: Individuals explicitly named in the trust who may feel that the terms of the trust do not provide adequate provision for their proper maintenance, education or advancement in life.
• Disinherited Family Members: Close family members who were unexpectedly left out of the trust, especially if they were financially dependent on the deceased, may have grounds to contest the will and any trusts established by it.
• Former Spouses or De Facto Partners: If these individuals have been named as a beneficiary in a testamentary trust which does not provide them with adequate provision for their proper maintenance, education or advancement in life or does not comply with any prior binding financial agreements.
• Creditors of the Deceased Estate: Creditors of the estate may have grounds to contest the trust if they can show that it was established to unlawfully circumvent the creditor’s interests.

Steps to Contest a Testamentary Trust in NSW

Obtain advice

Seeking early advice helps you understand the process and increases the chance of a favourable outcome when you dispute a testamentary trust. A person who is looking to contest a trust should seek legal advice for an experienced solicitor who will be able to review the documents and advise on the grounds and prospects of success of a claim.

Prepare your evidence

If you have a claim, your solicitor will assit you to prepare the required evidence.

File your claim

This step formally initiates the legal process required to dispute a testamentary trust in NSW, ensuring the matter is properly before the court.

Mediation and settlement

Attempting mediation before proceeding to court can often lead to a resolution acceptable to all parties. Mediation can be a more efficient and cost-effective way to settle disputes outside of the courtroom, potentially leading to faster settlements that preserve family relationships and minimise costs.

Court process overview

If mediation is unsuccessful, the case may require a final hearing where a judge can decide the matter. If a matter proceeds to court, both sides have an opportunity to present their arguments and evidence, and a judge will make a decision based on the merits of the case. This process can be lengthy and requires detailed preparation.

What to do after the decision

Once the court makes a decision, it’s important to comply with the court’s orders. If the outcome is unfavourable and there are grounds for appeal, discussing further steps with your lawyer is advisable to determine the viability of an appeal.

Key Evidence When Challenging a Testamentary Trust

A person looking to contest a testamentary trust should engage a solicitor to assist with identifying and preparing the evidence. Key types of evidence which may be relevant when challenging a testamentary trust include:

• Documentary Evidence: This can include the will itself, correspondence, financial records, the trust deed, and any previous versions of the will or trust documents. These documents can help demonstrate inconsistencies or changes in the testator’s intentions.
• Witness Testimony: Statements from individuals who can attest to the testator’s state of mind, their intentions regarding the trust, and any pressures or influences they may have been under.
• Expert Testimony: Medical experts can provide insights into the testator’s mental capacity, while other experts might analyse the legitimacy and execution of the trust deed.
• Financial Evidence: Detailed accounts of the trust assets and how they have been managed or distributed by the trustee are important, especially if mismanagement is alleged.

Time Limits to Challenge a Testamentary Trust

Understanding the time limits to contest a testamentary trust in NSW is crucial. Contesting a testamentary trust in NSW can be time-sensitive, and adhering to legal deadlines is imperative for a successful challenge. The key timelines include:

• ASAP: A person looking to challenge the validity of a will after the death of the person, on the grounds of testamentary capacity, undue influence, or fraud, and thereby challenging the validity of any testamentary trusts established by the will, should seek legal advice as soon as possible. Urgent actio, including registering a probate caveat, may be required in this case.
• Within 12 Months: A person looking to make a family provision claim against the estate for adequate provision must commence a claim with the court within 12 months of the deceased’s death unless extended by court order or consent.
• Issues regarding the management of a trust: Claims against trustees should be considered and dealt with without delay. A beneficiary who allows a trustee to commit breaches may find themselves unable to recover their losses.

What Happens After You Contest a Testamentary Trust?

When contesting a testamentary trust, it’s important to understand the potential outcomes, which can vary based on the nature of the challenge and the facts and circumstances of the particular case, but may include:

• Invalidating the Trust: Where a person successfully challenges the validity of the will and the will is found to be invalid, any trusts created under that will are also invalidated.
• Varying the Trust: Where a person brings a family provision claim and money is required to be taken from the proposed trust and given to the person, if there is inadequate funds remaining in the trust, or no need for the trust, the trust may be wound-up.
• Modification of Trust Terms: The court may vary the trust terms.
• Removal of Trustees: Where a trustee is found to have breached their duties, the court may remove them and appoint new trustees.
• Settlement: Often, parties may reach a settlement out of court through negotiation or mediation, potentially adjusting the trust’s terms or cancelling the trust altogether.
• Termination of the Trust: In some cases, the beneficiaries may be able to request the trustee to vest the trust and transfer the property to the beneficiaries.

Why Legal Advice Matters in Testamentary Trust Disputes

Legal representation plays a pivotal role when contesting a testamentary trust. An experienced lawyer ensures that the claim is filed correctly and within time, provides expert guidance on evidence preparation, and where required, representation in court.

Empower Wills and Estate Lawyers practice in trust and estate law and understand the laws in relation to the establishment and administration of trusts.

For Legal Assistance in Sydney and NSW Contact Empower Wills and Estate Lawyers

Thinking about contesting a testamentary trust in NSW? Call Empower Wills and Estate Lawyers on 1300 414 844 for confidential advice. Whether you’ve been left out or believe the trust is unfair, our experienced team can guide you every step of the way.

We offer tailored fee structures to suit each client’s circumstances, including “no win, no fee” agreements under certain conditions. Call now and let us guide you through your legal needs with confidence and professionalism.

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Disclaimer: the information in this article relates to NSW law as at the date it was written and is general information only. It does not constitute legal advice and should not be relied upon as legal advice. It may contain information or links to sources which are no longer current. If you have a question or legal issue, we recommend you contact a lawyer and obtain legal advice that takes into account your specific facts, circumstances, needs and objectives.