When Testamentary Trusts Pass to the Next Generation

A growing estate planning issue

Over the past 25-30 years, testamentary trusts have become a common feature of Australian wills.

Many clients from the baby-boomer generation inherited assets through testamentary trusts established by their parents in the late 1990’s and early 2000’s. these trusts often hold substantial family wealth, including property portfolios, investment portfolios or interests in private companies.

As those beneficiaries now prepare pr update their own estate plans, an increasingly common issue arises:

What happens to an existing testamentary trust when control passes to the next generation?

Why governance issues arise

Most testamentary trusts were drafted with broad trustee powers and a wide class of beneficiaries. This flexibility allowed the primary beneficiary to distribute income, manage investments and access capital while achieving tax efficiency for children and grandchildren. However, these trusts were usually designed with one controlling person in mind, in the child of the will-maker.

When that person later passes away, control of the trust often needs to pass to multiple children or grandchildren, and many trust deeds contain little guidance on how those controllers should work together.

Questions frequently arise such as:

·         Whether trusdt property should be sold or retained

·         Whether a beneficiary can occupy a trust property

·         How expenses or improvements should be funded

·         How income should be distributed

·         How investment decisions should be made

In practice, the trust can begin to resemble a family partnership without a governance framework, which can create tension between siblings, particularly where significant assets are involved.

A practical solution: Testamentary Trust Governance Deeds

One approach tha tis increasingly useful is a Testamentary Teust Governance Deed.

This is an agreement between the next generation of trustees or controllers that sets out how the trust will be managed once control passes to them. It operates in a similar way to a shareholders’ agreement or partnership agreement, providing clear rules fro decision making and dispute resolution.

A governance deed can address matters such as:

·         How trustees make decisions (majority or unanimous)

·         Procedures for resolving disagreements or deadlock

·         How trust assets such as property can be used

·         Guidelines for distributions

·         Mechanisms for separating or selling trust assets if beneficiaries wish to divide their interests

These arrangements can significantly reduce the risk of disputes and provide clarity for families managing shared assets.

How we can assist

Where clients have inherited assets through a testamentary trust, we commonly assist with:

·         Reviewing the existing trust structure and powers

·         Identifying who controls the trust and how that control will pass

·         Preparing governance arrangements for the next generation

·         Aligning the trust with the clients own estate plan and will

Many testamentary trusts effectively operate as family investment vehicles, holding property portfolios, share portfolios, or interests in private companies. As a result, this work often sits at the intersection of estate planning and commercial structuring, and we frequently work alongside accountants and financial planners in advising families.

Key Takeaway

If a client controls a testamentary trust created under a parent’s or grandparent’s will, it may be worth reviewing how that trust will operate once control passes to the next generation. With the right governance structure in place, families can help ensure that trust assets continue to be managed smoothly and in accordance with the original intentions of the will-maker.

If you need advice in relation to a testamentary trust, please get in touch.

This article is not legal advice, and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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