Andrew Havers

Aug 12, 20218 min read

Administration of Trusts & Estates

Updated: Nov 27, 2021

Estate Administration Individual Assignment

A fiduciary obligation is undertaken by Karl as the executor on the death of Sally, in favour of Sam, Ruth and Beth who are the beneficiaries of the estate. The beneficiary’s interests and rights to income and capital cannot be made available until probate is granted. Sally’s will may direct Karl to make an immediate distribution to Beth & Ruth and it has made provisions to set up a Testamentary Trust for Sam with Karl as Testamentary trustee.

The duties and responsibilities Karl has as the executor of Sally’s estate may be similar but legally separate to those duties as testamentary trustee. In legal terms, the relationship between an executor and a beneficiary under the will is of fiduciary nature we have established that, however, because of powers given to the executor by the will maker to exercise powers and discretions that affect the interests of the beneficiary. The beneficiary is therefore vulnerable to any abuse by the executor of the position. This is the nexus of why an executor has a duty to act in the beneficiary’s interests.

The Trustee Act 1958 protects trustee’s duties in equity as long as they are not inconsistent with the act or with the deed itself. The act specifies four main duties in relation to trusts which align to equitable duties.

- Exercise powers in the best interest of all beneficiaries

- Duty not to invest in speculative schemes

- Act impartially between beneficiaries

- Take professional advice when appropriate

The executors are accountable to the beneficiaries in the first instance. They are accountable for all decisions, payments and receipts. (CPA Australia March 2018)

In Victoria under the administration and probate Act 1958 the current law allows any person to apply for a court order to challenge the distribution of a deceased persons estate in their favour if they believe that the deceased person had a responsibility to provide for them and did not do so.

The Administration and Probate Act does not limit who may make an application to challenge the estate of the deceased and this approach differs from the law in all other Australian states where family provision legislation sets out a list of those eligible to apply.

In Victoria beneficiaries who are left a specific gift of land, money or goods are not entitled to obtain general information about the estate. If a beneficiary is only to receive a fixed amount or specific asset from an estate, they are only entitled to receive information on those specific assets unless there are insufficient funds then they can access a full set of accounts for the state. Clearly in this case there is sufficient liquid funds to payout Beth and therefore she does not have any entitlement to see the accounts.

Sam as the beneficiary who is entitled to a share of the residual of the residual of the estate needs to see a set of accounts at the end of the administration and approve distribution

In regard to accessing the will the trustee is accountable to the rule of the law which can mean that these qualifications can restrict the benefits trustees can deliver beneficiaries

External influences on accountability of the trustee include duties to the court and of course the law and Internal influences include common law duties as well as duty to the trust terms.

An executor can only become personally liable if they are dishonest or negligent or fraudulent. This is a personal liability.

If Beth wants to obtain a copy of the will she is entitled to do so as a person named in the will as a beneficiary and needs to contact Karl as the executor.

In Victoria the following persons are entitled to inspect or be given a copy of the deceased’s will under Section 50 of the Wills Act: 1997(VIC)

- Any person named or referred to in the will, as beneficiary or not.

- Any person named or referred to in any earlier will as beneficiary.

- Any spouse of the testator at the date of the testator’s death

- Any domestic partner of the testator

- Any parent, guardian or children of the deceased person

The executor must communicate and respond to reasonable requests for accounts which includes dealing with legal proceedings including claims by beneficiaries or third parties against the state. If there is a conflict between executor and beneficiaries, the executor is entitled to engage his or her solicitor to deal with the beneficiaries in particular where the beneficiary has engaged a solicitor. The executor should also obtain legal advice about any duty to disclose to a beneficiary.

Assuming Beth is an eligible person seeking claim for further provision from the estate must do so within strict time limits that vary from state to state. In Victoria this is six months from the date that probate was granted.

If the executor distributes the estate without waiting for the challenge period to expire, and a successful claim is made for further provision from the estate within that period, then the executor may be personally liable for any amounts the court awards the claimant.

Karl may wish to explain to Beth some of the circumstances the court will consider when making a claim in the hope to amicably mediate and resolve the threat by Beth to contest the will. This could save the estate valuable time and avoid considerable cost in the form of professional and court fees.

Sections 91(A) and 91A (2) of the administration and Probate Act provides a list of factors for consideration some of which are.

- Nature of the relationship between Beth and Sally

- Any obligations or responsibilities of the Sally to Beth

- The size and nature of Sally’s estate

- Beth’s financial capacity and earning capacity

- Beth’s physical, mental or intellectual disability

- Beth’s age

- Any benefits previously given by the deceased to the Beth

The great degree of uncertainty in relation to family provision eligibility means that claims are being settled that would perhaps be unlikely to succeed at trial.

A testamentary Trust is simply a trust implemented by a will. Karl is the executor of the estate and the trustee of the testamentary trust established by the Will. The trustee acts like a disabled decision maker and a trustee does not have the powers of a natural person unlike a company.

When an executor has completed all of their duties, their role ends. However, where a Will establishes a trust or trusts within it, the person nominated as executor will often have to take on the role as trustee of those trusts.

The threat of a will challenge, may impact or interfere with Karl setting up the testamentary trust for Sam. The testamentary trust cannot be contested in a will challenge, because only the beneficiaries will receive the assets, and anyone not listed as beneficiaries are not entitled to anything. The trustee can choose how to distribute income from the trust's assets from year to year.

Karl as trustee of testamentary trusts needs to consider a number of important factors in setting up and managing the trust such as.

- Review the Will for a testamentary trust, or draft the deed outlining the instructions and distribution of the estate through the trust.

- determine the trust’s address.

- Apply for a Tax File Number with the Australian Business Register

- Apply for an Australian Business Number with the Australian Business Register

- Register for GST if the trust revenues exceed $75,000 annually.

- Open a trust bank account.

- What assets are available to invest from the estate.

- What structure the assets take.

- Assess the primary needs and purpose of the trust with regard to providing for Sam

After having set-up, a trust, you will need to maintain it for its duration. This will include:

· maintain a record of all assets held by the trust.

· maintaining and paying for bank accounts.

· prepare financial statements at least annually.

· complete income tax returns.

· meet at least once a year with the trustees and Beneficiaries to review the trust.

· record all decisions that are made for the trust; and

· comply with all legislative requirements.

If the Trustee is well organised and know how to maintain a trust, the general administration and lodging of tax returns can be done by the Trustee. Alternatively, we recommend seeking advice from an accountant who specialises in trusts to assist or take on the trust administration and maintenance.

Review the Will to determine which assets will be transferred to the trust or where this is not defined, decide with a tax specialist or accountant and the Beneficiaries which assets to bring in.

A trustee also has other specific duties

- including:

- (1) The duty to comply with the terms of the trust deed.

- (2) The duty to keep accounts and provide them to the beneficiaries.

- (3) The duty to act personally and not fetter their discretion.

For example, as Sam is aged 42 and a financial dependant at the time of Sally’s death then Karl will have obligations not only as per the trust deed, but he will be required to develop investment strategies and objectives for the capital in the fund to meet Sam’s income needs for decades into the future. Karl may want to seek the assistance of an investment manager.

One of the more important powers is the power of investment. The Trustee Act 1958 (Vic) contains a very broad power to invest trust funds in any form of investment and, at any time, vary such an investment unless expressly prohibited by the trust deed.

Karl also needs to be mindful of the rules around excepted income and non-excepted income in relation to the sale of assets within the testamentary trust. According to the ATO this means some forms of income are taxed at the same rates as an adult. This may apply to Sam’s employment or business income, Centrelink payments and income from the deceased estate.

Excepted income includes:

employment income
taxable pensions or payments from Centrelink or the Department of Veterans’ Affairs
compensation, superannuation or pension fund benefits
income from a deceased person's estate, including income derived by a testamentary trust from property of the deceased person's estate
income from property transferred to you as a result of the death of another person or family breakdown, or income in the form of damages for an injury you suffer
income from your own business
income from a partnership in which you were an active partner.

It also includes:

net capital gains from the disposal of any property or investments listed above
income from the investment of any of the amounts listed above.

Income derived by a testamentary trust

The income from a testamentary trust that is generated from property of a deceased estate, such as a deceased person's mortgaged property, remains excepted income.

Property of a deceased estate includes real property and money from the deceased estate. It can include accumulations of income or capital from property of that deceased estate, and conversions of such property from one asset type to another. For example, if a trustee of a testamentary trust sells a rental property transferred to the trust from a deceased estate and invests those proceeds in shares, the income from those shares is income from property of the deceased estate.

Your income from a testamentary trust is not excepted income if it is generated from assets:

acquired by or transferred to the trustee of the trust on or after 1 July 2019, and
that were unrelated to property of the deceased estate.

If you're a beneficiary or legal personal representative, you acquire the asset on the day the person died. Capital gains tax (CGT) does not apply when you acquire the asset, it may apply if you later dispose of the asset. The date of the person's death may be relevant when you calculate the capital gain.

There is no capital gains tax payable on transfer of property from your estate to your testamentary trust or on the transfer of the initial trust property of your testamentary trust to a beneficiary. However, the cost base and terms of acquisition rules should be considered separately.

A trustee generally has a duty to invest prudently so if the trust is being set up to make speculative investments there would need to be a specific power to permit that.

In addition, Karl will need to ensure that there is adequate cash and liquidity to pay distributions to Sam as well as taxes, trustee and professional fees. Collaboration and education with key advisors and everyone effected by the trust is paramount to ensuring positive outcomes across generations. (Perkins & Monahan, Estate Planning 2015)

There is also the matter of payment to Karl as executor and trustee which according to the Victorian Law Reform commission is commonly in the form of a commission. The commission is often expressed as a percentage of the capital and income of the estate.

References

Accountants & Estate Work; CPA March 2018

Executor Toolkit, Equity Trustees, 1 June 2020

Family Trust Governance: An Often Overlooked Necessity;

Cindy Radu, Partner, BDO Canada LLP, FCA, LLB, LLM, TEP, ICD.D, FEA

Michael Perkins, Partner, Perkins Fahey Rosenblum Lawyers, Sydney, Australia, TEP

ITR 2622; https://www.ato.gov.au/law

Law Institute of Victoria https://www.liv.asn.au/for-the-community/legal-fact-sheets/wills-and-estates

Mitchells Solicitors; https://estatebattles.com.au/testamentary-trust/

State Trustees Victoria https://www.statetrustees.com.au/trustee-services/types-of-trusts-we-manage/testamentary-trust

Testamentary Trusts; https://www.simplyestate.com.au

Trustee Act http://classic.austlii.edu.au/au/legis/vic/consol_act