The trustee of a testamentary trust can be your child, another trusted family member, someone independent or a combination of the above. The choice is a trade-off. The more control your child has over their own trust, the more the trust assets look and feel like their money and the weaker the protection against a family law claim becomes.
Why does the choice of trustee matter so much?
The trustee is the legal holder of the trust assets and decides who receives income and capital from the trust, so whoever you appoint has real control over your child’s inheritance. This is the thing we spend the most time on with clients: the arrangement that makes a beneficiary most comfortable is also the arrangement that gives them the least protection.
A discretionary testamentary trust (DTT) works by separating control of the assets from the benefit of them. Your beneficiaries don’t own anything in the trust. Their only right is to be considered by the trustee. That is what makes the trust hard for a creditor or a former spouse to reach. It is also what makes the identity of the trustee so important.
What happens if your child is the trustee of their own trust?
If your child is the trustee of their own trust they control the trust assets and can choose themselves or their own family to benefit, so the trust looks and feels like their money. This is what most people want for their adult children.
What you give up is some of the protection. Because your child controls the trust, it is easier for a Court to treat the trust as property of their marriage or as a financial resource available to them if they separate. The trust still helps, but it does not do the work it would do if the trustee’s discretion was in someone else’s hands.
What happens if someone independent is the trustee?
A trust controlled by someone independent gives stronger protection but less freedom. Your child has to ask the trustee for what they need and the trustee has to actually turn their mind to the request, which is friction your child will feel for as long as the trust runs.
That friction is the point in some cases. An independent trustee suits a beneficiary who may not be ready to manage a lump sum or one with a gambling, drug or alcohol problem. It also suits a beneficiary in the middle of a family law dispute, because the further your child sits from control the harder the argument becomes for the other side.
The practical risks of an independent trustee are worth thinking about before you name one. An independent trustee can lose capacity, die or simply refuse to engage, so your Will needs to say who takes over if that happens.
Can your child have control without being the trustee?
You can appoint your child as the appointor of the trust while someone else acts as trustee, which gives your child supervisory control without day to day control. The appointor is the ultimate controller of the trust, with the power to appoint and remove the trustee at any time.
Whether that middle position gives materially better protection than making your child the trustee is arguable, because a power to remove and replace the trustee is itself a form of control and a Court can look at it that way.
One trust or a separate trust for each child?
Your Will can create a single testamentary trust for your whole estate or a separate trust for each child. Many willmakers are uneasy about giving one trustee complete discretion over every child’s share so they prefer to create one trust per child. In this case, your executor divides the estate into equal shares and each trust receives one share. The trusts receive the same amount, but can have different controllers.
| A single trust | A separate trust for each child | |
|---|---|---|
| Who controls it | One trustee for the whole estate | Each child controls their own trust |
| Who can benefit | One broad class covering your children, grandchildren, wider family and charities | Each trust has its own class, covering that child, their children, wider family and charities |
| The catch | Each child depends on the trustee’s discretion. If the trustee is a sibling that can strain the relationship | More trusts to administer, so more accounting fees and more tax returns |
What does the Court look at in a family law dispute?
In a family law dispute, the Court looks at who actually controls the trust rather than at what the trust deed says on its face. If your child can effectively obtain the trust property, whether as trustee or by removing and replacing the trustee, the Court can treat the trust assets as property of the marriage. If your child cannot obtain the property but is likely to receive distributions, the Court can instead treat the trust as a financial resource available to them, which affects how the rest of the pool is divided.
Does the choice of trustee affect protection from creditors?
The protection from your child’s creditors holds up better than the family law protection does, because it rests on the fact that your child doesn’t own the trust assets rather than on how much control they have. A creditor of your child cannot take assets your child has no entitlement to.
The trust deed still matters. A well drafted deed removes your child as trustee if they become bankrupt, so the trust can keep operating and the assets stay where they are.
Frequently asked questions
Can there be more than one trustee?
Yes. Appointing your child and someone independent as joint trustees is a common middle course, because neither can act alone. It slows decisions down, so it works best where the beneficiary needs a check on their own judgment rather than where speed matters.
Can you leave the decision until after you die?
Yes, to a point. Your Will can make the trust optional, so the beneficiary you have named and your executor decide together after you die whether to use the trust or take the inheritance outright. The decision is then made knowing your child’s circumstances at the time, rather than being locked in when you sign your Will. However, the trust has to be written into your Will in the first place. It can’t be added after you die.
We will work through this decision with you
There is no single right answer here. It depends on which risk worries you most and who you would trust with the discretion to manage the trust. A Will containing a testamentary trust isn’t a simple Will, so we start with an estate planning consultation and work through who your beneficiaries are, what you are leaving them and how much control each of them should have. Call the Wills team on (08) 9220 4433 or read more about testamentary trust Wills.
Related: testamentary trusts in WA: how they work and who needs one
This article contains general information about discretionary testamentary trusts. It is not legal advice. You should obtain professional legal, taxation and financial advice about your estate planning.
