Testamentary Trusts and the Notional Estate

6 Aug

Testamentary Trusts and Notional Estate Provisions Under the Succession Act 2006 (NSW).

Estate planning is a crucial step in ensuring your assets are protected and distributed according to your wishes. Two significant concepts under New South Wales law are testamentary trusts and the notional estate provisions of the Succession Act 2006 (NSW). In this blog post, we’ll explore the advantages of testamentary trusts, explain the notional estate provisions, and discuss their practical implications with reference to recent case law.

What is a Testamentary Trust?

A testamentary trust is a trust created by a will, coming into effect after the will-maker’s death. Rather than assets passing directly to beneficiaries, they are held and managed by a trustee for the benefit of named beneficiaries, according to the will’s terms.

Key Benefits of Testamentary Trusts

Asset Protection: Testamentary trusts can shield assets from creditors, bankruptcy, or family breakdowns affecting beneficiaries.

Tax Advantages: Income distributed to minor beneficiaries from a testamentary trust is taxed at adult rates, not the higher penal rates applied to minors for trust income. This can result in significant tax savings for families.

Flexibility: Trustees can distribute income and capital according to changing needs and circumstances of beneficiaries.

Protection for Vulnerable Beneficiaries: They allow for management of inheritances for individuals with disabilities, addictions, or spendthrift tendencies.

Preservation of Family Wealth: Testamentary trusts help ensure that assets remain within the family, through the generations, even if a beneficiary divorces or remarries.

Testamentary Trusts in Action

In Morton v Morton [2012] FamCA 30, the court considered the importance of beneficial trusts in protecting assets from family provision claims. The court acknowledged their effectiveness in safeguarding the interests of intended beneficiaries, particularly when structured to address potential challenges.

Understanding Notional Estate Provisions

The 2009 amendments to the Succession Act 2006 (NSW) introduced the concept of the notional estate, which allows the court to consider assets that are not technically part of the deceased’s estate but were disposed of in certain circumstances prior to death. The aim is to prevent will-makers from avoiding family provision claims by moving assets out of their estate before they die.

When Do Notional Estate Provisions Apply?

Sections 74–86 of the Act allow the court to designate property as part of the notional estate if, for example, assets were transferred within three years prior to death, or where the deceased retained a benefit or control over the asset. Typical scenarios include:

Superannuation proceeds paid directly to a nominated beneficiary instead of the estate
Assets transferred to trusts or joint tenancies shortly before death
Forgiving debts, gifting property, or changing ownership structures

The Notional Estate in Practice

In Philips v James [2014] NSWCA 4, the court exercised its power to designate property as notional estate after the deceased transferred assets to family members before passing away. This allowed an aggrieved child to make a successful family provision claim, despite the assets not being technically part of the estate.

Similarly, in Simpson v Simpson [2011] QSC 196, the court reaffirmed that the notional estate provisions are a powerful tool to ensure fairness and prevent will-makers from circumventing their moral obligations through strategic asset disposals.

Practical Implications for Estate Planning

When drafting a will, it’s essential to consider both testamentary trusts and the notional estate provisions. Testamentary trusts provide ongoing protection and flexibility for beneficiaries, while understanding the reach of notional estate laws can help ensure your estate plan is robust and not easily challenged.

Professional advice is vital. Estate planners must be aware of recent legal developments and structure wills to achieve the client’s preferred balance between asset protection and flexibility for subsequent generations.

Testamentary trusts are one of the most powerful tools in modern estate planning. They offer protection, flexibility, and ensure that your wishes are respected—while also providing mechanisms for fairness through the courts. Recent cases such as Morton v Morton, Philips v James, and Simpson v Simpson demonstrate the practical application and importance of these legal concepts. Always consult with a qualified estate planning professional to make the most of these strategies for your unique circumstances.