One of the benefits of the use of a testamentary discretionary trust in making a Will is that – by giving the gift to a trust for the benefit of a particular class of people – if one of them is bankrupted then the gift will potentially be protected from claims by the trustee in bankruptcy as the bankrupt beneficiary was not the “owner” of it, due to the discretion of the trustee to apply the benefit among different people. That is linked to the ability to distribute income amongst potential beneficiaries which may have taxation benefits.
It is common for these sorts of Wills to be accompanied by a letter of wishes which provides guidance to the trustees of the testamentary discretionary trust. It is important however to ensure that these letters of guidance do not form binding directions which would otherwise create a situation where the trust is no longer discretionary but a fixed trust, undermining the effectiveness of the trust structure so that the gift can be taken by the trustee of a bankrupt beneficiary.
We have recently seen an example of such a document which in this case was characterised as instructions to the appointors of the trust. In this case, the letter of instructions, signed by the Will maker, went into some detail to explain that the purpose of the trust structure was to protect the assets of the beneficiary in the event that a claim was made against her and there was a risk of creditors accessing those assets. It then went on to set out what should be done if there was a risk of the bankruptcy of the beneficiary, or matrimonial proceedings.
This sort of document might evidence that the purpose of the structure is to hinder or delay future creditors from recovering their debts and thereby trigger the entitlement of the trustee in bankruptcy of the bankrupt beneficiary to claw back the estate gift under section 121 of the Bankruptcy Act. It might also create some question as to the effectiveness of distributions of income, for taxation purposes although that is something that a taxation specialist would need to consider.
For questions concerning testamentary discretionary trusts and Wills, please contact Peter Muller at peterm@qbmlaw.com.au or Jessica Murray at jessicam@qbmlaw.com.au
