Testamentary discretionary trusts have become increasingly popular due to the various benefits it provides. One of the benefits is that it provides the testator a measure of control over their assets after death. Another benefit is that due to the control given to a trustee of a discretionary trust over the distributions they have the ability to allocate trust income in a tax efficient manner.
However, testamentary discretionary trusts can be affected by the family provisions laws. For example, if under a discretionary trust a family member is left without adequate provision, the member has the ability to apply to the Court to obtain further provision. This may mean that assets that were intended to be held in a testamentary trust might be used up to satisfy the family provision claim.
An example is where Alan, a wealthy entrepreneur, dies leaving his large estate. In his Will he:
- leaves 60% of his estate unconditionally to his wife, Betty.
- leaves the residual amount of the estate to his daughter, Katrina, in a discretionary trust.
The rationale for establishing a discretionary trust for Katrina was due to Alan’s concerns over Katrina’s over indulgent behaviour. Alan therefore, established a testamentary discretionary trust that required Katrina to apply to the trustees in order to obtain money when she required it. No other benefit was directly conferred upon Katrina in Alan’s Will.
The issue with Alan’s Will is that Katrina has the ability to apply to the Supreme Court to obtain further provision under the family provision laws. It is irrelevant that if Alan had directly granted the amount to Katrina under his Will, she would have been adequately provided for. Katrina being Alan’s daughter would be classified as an ‘eligible person’ under section 57 of the Succession Act 2006. Under this Act, the Supreme Court has the ability to determine whether there has been adequate provision for Katrina in terms of her ‘proper maintenance, education or advancement of life’ (section 59(1)(c) Succession Act 2006). The Court also determines whether further provision is necessary in Katrina’s favour.
The fact that Katrina has received less than her mother does not necessarily mean that there has been inadequate provision for her. In order for Katrina to obtain a positive outcome, she would be required to prove that she has been inadequately provided for under Alan’s will and that she is not independently wealthy herself. This is merely one of the various factual scenarios that can arise.