Intersection between Estate Planning & Family Law

A Testamentary Trust Will (TT Will) is a mechanism used in estate planning and is type of will that establishes one or more trusts upon the death of the will maker. Unlike a simple will that distributes assets directly to beneficiaries, a TT Will places some or all of the estate’s assets into a trust. It specifies who owns and manages the assets (known as a ‘trustee’) and who benefits from and receives the assets (known as the ‘beneficiary’). The trust is for the benefit of the beneficiary with the trustee being responsible for overseeing the distribution of the trust’s assets and income to the beneficiary. These trusts are created within the will itself and only come into effect after the will maker’s death through Testamentary Discretionary Trusts (TDT).

Whilst a TT Will is designed to protect inherited assets from risks such as divorce, bankruptcy, and family disputes, it does not offer absolute protection. There is a significant intersection between succession law and family law, particularly in how inheritances are treated in property settlements following a relationship breakdown.

Under the Family Law Act 1975 (Cth) (FLA), inheritances received by a party are considered "property," as confirmed in Bonnici & Bonnici (1992). The fact that an asset is an inheritance does not, by itself, exclude it from the matrimonial asset pool. Each case is assessed on its own facts, and as such, there is no guarantee that inherited assets will be excluded from a property settlement under the FLA.

Although TT Wills aim to keep inherited assets distinct from relationship property, the Family Court has broad powers to treat trust assets either as property of the parties or as a financial resource of one party. For example, in Ward v Ward [2004], despite a TDT used to pass an inheritance to a son before his separation, the court treated the trust as a financial resource available to him.

A key factor in the court’s assessment is the structure of the trust, particularly whether the beneficiary also holds control as trustee or appointer. Where the same person is both trustee and beneficiary, the court may “look through” the trust, concluding that the individual has effective control and benefit of the trust property.

In contrast, Bernard v Bernard [2019], demonstrates how a well-structured TT Will can protect inheritance. In that case, the husband’s sister was the trustee of his TDT, and he held no control over distributions. The court excluded the trust from the matrimonial pool, relying on the following several factors:

• the husband was not the settlor of the trust;

• the husband was entirely dependent on his sister, the trustee, to distribute and accumulate income from the TDT;

• the trustee had complete discretion in determining any distributions;

• the husband was a discretionary beneficiary and did not hold any other entitlement. There were many classes of beneficiaries including his mother, and his parents’ children, grandchildren and great-grandchildren; and

• the assets in the husband’s TDT had never been meshed with matrimonial property.

The court found that the husband’s lack of control over the trust was decisive, and it would breach the trustee’s duties to other beneficiaries if the assets were simply handed to him.

Whilst these risks cannot be entirely avoided because a TDT is still open to scrutiny by the courts in these matters, there are measures that can be implemented now to minimise these risks. In line with the decision of Bernard v Bernard, a TDT (when set up correctly) is the best strategy to protect an inheritance from forming part of the marital property pool.

If you are considering an amendment to your Will or implementing a TT Will with these measures to best protect your assets, please reach out to our experienced estate planning team for assistance.

This article is intended for general information purposes only and does not constitute legal advice. You should not rely on the content of this article as a substitute for obtaining detailed legal advice.

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