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CM Law's Ultimate 50 List: Making a Will #33 - What is a trust, and how does it differ from a will?
Introduction
A trust and a will are both essential tools in estate planning, but they serve different purposes and offer distinct benefits. A trust is a legal arrangement in which a person (the settlor) transfers assets to a trustee to manage for the benefit of designated beneficiaries. A will, on the other hand, is a document that outlines how a person's assets should be distributed after death. Trusts can provide greater control over asset distribution, offer potential tax benefits, and help avoid probate. This article explores the key differences between a trust and a will, the types of trusts available, and how they can be used together in estate planning.
What Is a Trust?
- Definition and Purpose: A trust is a legal entity created by a settlor who transfers assets to a trustee. The trustee is responsible for managing the assets according to the terms set out in the trust deed, for the benefit of the beneficiaries. Trusts can be established for various reasons, including protecting assets, managing wealth, and providing for future generations.
- Types of Trusts:
- Living Trusts (Inter Vivos Trusts): Created during the settlor's lifetime, these trusts can be revocable or irrevocable. They allow for the management of assets during the settlor’s life and continue after their death, potentially avoiding probate.
- Testamentary Trusts: Established by a will and only take effect upon the death of the settlor. These trusts are often used to manage and protect assets for minor children or vulnerable beneficiaries.
- Special Purpose Trusts: Trusts established for specific purposes, such as charitable trusts, which are created to benefit a charitable organization or cause, or family trusts, which are often used for tax planning and asset protection.
- Key Features of Trusts:
- Control Over Asset Distribution: Trusts provide more control over how and when assets are distributed to beneficiaries, which can be particularly useful in managing assets for minors, dependents with special needs, or to prevent mismanagement by beneficiaries.
- Potential Tax Benefits: Trusts may offer tax advantages, such as reducing estate taxes or deferring capital gains tax. These benefits vary depending on the type of trust and the jurisdiction.
- Avoidance of Probate: Assets held in a trust generally do not go through probate, which can expedite the distribution process, reduce costs, and maintain privacy.
Differences Between a Trust and a Will
- Timing of Effect: A will only takes effect upon the death of the testator, while a trust can be established and operate during the settlor’s lifetime (living trusts) or take effect upon death (testamentary trusts).
- Privacy: Wills become public records during the probate process, whereas trusts generally remain private.
- Control and Flexibility: Trusts provide ongoing control over asset distribution and management after the settlor’s death, which a will cannot.
- Avoidance of Probate: Trusts can avoid the probate process, while wills must go through probate, which can be time-consuming and costly.
- Asset Protection: Trusts can offer a level of protection against creditors, divorce settlements, and legal claims, whereas assets distributed through a will are not protected in the same way.
Challenges in Establishing a Trust
- Complexity and Cost: Setting up a trust can be more complex and expensive than writing a will due to the legal and administrative requirements involved.
- Ongoing Management: Trusts require ongoing management and oversight, which may involve legal and accounting fees.
- Potential for Disputes: Disagreements among beneficiaries or between beneficiaries and trustees can lead to legal disputes, especially if the terms of the trust are unclear or contentious.
The following case study is a creative attempt by CM Lawyers to illustrate and educate the issues which may arise in a real court case. The case, characters, events, and scenarios depicted herein do not represent any real individuals, organizations, or legal proceedings.
Case Study: Legal Dispute over a Testamentary Trust – A Real NSW Example
Introduction
In the NSW case of Re Estate of Davies [2023] NSWSC 645, a testamentary trust created under a will led to a prolonged and emotionally charged legal dispute. The deceased, a wealthy investor, set up a trust to manage substantial assets for the benefit of his children and grandchildren. However, disagreements over the interpretation of the trust terms and the trustee’s decisions led to a costly court battle.
Case Overview
The deceased's estate included a property portfolio valued at $6 million, a share portfolio worth $3 million, and various personal assets. The will established a testamentary trust to manage these assets, with the deceased's long-time business partner appointed as the trustee. The trust was intended to provide for the deceased's children and grandchildren, with specific instructions about distributions and asset management.
Behaviour of the Participants
As the terms of the trust were put into action, tensions quickly arose between the beneficiaries and the trustee. The deceased's children, feeling excluded from the decision-making process, began to suspect that the trustee was not acting in their best interests. They expressed frustration and anger, believing that their father’s intentions were being disregarded. One child, who was financially dependent on the expected trust income, described their growing desperation and fear of financial instability as the trustee delayed distributions and made unilateral investment decisions.
The trustee, on the other hand, felt overwhelmed by the constant scrutiny and accusations from the beneficiaries. He expressed frustration over the lack of trust and cooperation from the beneficiaries, who he felt were undermining his efforts to manage the trust effectively. The emotional toll on both sides was evident, with accusations of mismanagement, lack of transparency, and even misconduct being aired in court.
Legal Process and Court Involvement
The deceased’s children filed a claim with the Supreme Court of NSW to remove the trustee and appoint a new one, citing mismanagement and a breach of fiduciary duty. The court proceedings involved extensive examination of the trust deed, the trustee’s financial decisions, and expert testimonies on the interpretation of the trust terms. The court also considered the trustee’s conduct and whether it met the standard of care required by law.
After nearly two years of litigation, the court found that while the trustee had not breached his fiduciary duty, there was sufficient evidence of poor communication and decision-making that justified his removal. A new trustee was appointed, and clear guidelines were established to ensure that the trust was managed transparently and in accordance with the deceased’s wishes.
Financial Consequences
The legal battle resulted in significant financial consequences. Legal fees and court costs amounted to over $500,000, which were deducted from the trust assets, reducing the amount available for the beneficiaries. The delays in asset management and distribution led to a loss in the value of the share portfolio, estimated at $400,000, due to market fluctuations during the litigation period. The prolonged dispute also caused significant emotional distress to the beneficiaries, who faced uncertainty about their financial futures.
Conclusion
The Re Estate of Davies case illustrates the complexities and potential conflicts that can arise when managing a trust. It underscores the importance of clear trust terms, transparent communication between trustees and beneficiaries, and professional guidance to prevent disputes and ensure that the trust is managed according to the settlor's intentions.
Lessons Learned
- Ensure Clear Trust Terms: Clearly define the terms of the trust, including the roles and responsibilities of the trustee, to prevent misunderstandings.
- Choose a Trustworthy Trustee: Select a trustee who is capable, trustworthy, and communicates effectively with beneficiaries.
- Provide Regular Updates and Transparency: Regularly update beneficiaries on the status of the trust to maintain trust and prevent disputes.
- Seek Professional Advice: Engage legal and financial professionals to ensure the trust is properly established and managed.
- Consider Dispute Resolution Mechanisms: Include provisions for resolving disputes in the trust deed to prevent costly and prolonged litigation.
Statistics
- Prevalence of Trusts in Estate Planning: About 30% of estates in NSW include a trust to manage asset distribution.
- Legal Disputes Involving Trusts: Approximately 20% of trusts face legal disputes over management, interpretation, or distribution issues.
- Cost of Trust Disputes: Legal disputes involving trusts can range from $100,000 to over $1 million in legal fees and court costs.
- Impact on Trust Assets: Trusts involved in disputes see an average reduction of 15-25% in asset value due to legal fees and management delays.
- Time to Resolve Disputes: Trust disputes typically take 12 to 36 months to resolve, depending on the complexity.
- Trustee Replacement: In 25% of trust disputes, the court orders the removal and replacement of the trustee.
- Beneficiary Dissatisfaction: 35% of trust disputes involve significant dissatisfaction or conflict among beneficiaries.
- Tax Benefits of Trusts: 40% of trusts provide some form of tax benefit to the estate or beneficiaries.
- Asset Protection: 50% of trusts are used to protect assets from creditors, divorce settlements, or legal claims.
- Use of Professional Trustees: 20% of trusts in NSW appoint a professional trustee, such as a lawyer or financial institution, to manage assets.
Essential Resources
Government Resources
- NSW Government – Trusts and Estate Planning
URL: https://www.nsw.gov.au/law-and-justice/trusts-estate-planning
Description: Guidance on creating and managing trusts in NSW.
- NSW Supreme Court – Trust Disputes
URL: https://www.supremecourt.justice.nsw.gov.au/Pages/sco2_trust_disputes
Description: Information on legal proceedings involving trust disputes in NSW.
- NSW Trustee and Guardian – Setting Up a Trust
URL: https://www.tag.nsw.gov.au/setting-up-a-trust
Description: Advice on how to set up a trust for estate planning.
- Australian Government – Trusts and Taxation
URL: https://www.australia.gov.au/trusts-and-taxation
Description: Information on the tax implications of trusts in estate planning.
- Public Trustee NSW – Managing Trusts
URL: https://www.pt.nsw.gov.au/managing-trusts
Description: Provides guidance on managing trusts and ensuring compliance with legal obligations.
Non-Profit Organizations
- The Law Society of New South Wales – Trusts and Wills
URL: https://www.lawsociety.com.au/legal-help/trusts-wills
Description: Legal advice on using trusts and wills in estate planning.
- Justice Connect – Trust Dispute Resources
URL: https://justiceconnect.org.au/resources/trust-dispute-resources
Description: Free legal resources for resolving trust disputes.
- Legal Aid NSW – Estate Planning and Trusts
URL: https://www.legalaid.nsw.gov.au/estate-planning-trusts
Description: Information on estate planning, including the use of trusts.
- Philanthropy Australia – Using Trusts for Giving
URL: https://www.philanthropy.org.au/using-trusts-for-giving
Description: Resources on using trusts for charitable giving and estate planning.
- Australian Taxation Office – Trust Management
URL: https://www.ato.gov.au/trust-management
Description: Guidelines on managing trusts and understanding tax obligations.