Consider a typical family scenario.

John and Mary bought their house in 1972 for $350,000.

It’s now worth $2,500,000 and the mortgage has been paid off.

They have other assets (including super) totalling $2,500,000.

They have 2 adult children – Sam and Sue.

Sam has 2 young children, but his marriage is under pressure.

Jill has 3 children and unfortunately has gone guarantor in a bank loan concerning a business venture which is about to collapse with serious consequences.

John’s dies and leave his estate to Mary. Mary takes their house by survivorship. So, Mary’s estate is now valued at $5,000,000 and she wants to secure, by her will, the financial well-being of her children and their families.

If Mary leaves her estate to Sam and Sue absolutely in equal shares (each child taking a distribution of around $2,500,000), their entitlement could be jeoparded immediately upon their receiving it.

• Sam’s wife could claim half (or more, depending on their circumstances) in a matrimonial property claim, and
• Sue could lose all of her entitlement if the bank sues her as the guarantor of a substantial business loan.

The last thing John and Mary intended was for their children’s inheritance to be lost almost immediately in those ways. In fact, it’s a catastrophic, unintended outcome for the entire family including their future generations.

Properly drafted testamentary trusts included in Sam’s and Mary’s wills take effect after Mary dies. She leaves the inheritance equally to Sam’s Trust and Sue’s Trust (not to Sam and Sue personally). The beneficiaries of Sam’s trust are Sam and his children and his grandchildren (not yet born).  As Sam is not the sole beneficiary, he does not take a vested interest in the inherited amount and therefore the prospect of Sam’s wife claiming from him a share of the funds held in Sam’s Trust is remote.

Similarly, with Sue’s Trust, the bank claiming under the guarantee has no claim against the $2,500,000 held in Sue’s Trust because Sue does not personally own those funds.

This is precisely the succession planning that John and Mary should require.

John’s and Mary’s grandchildren (not yet born) will forever be grateful that their grandparents set up the testamentary trusts that have paid for their education over many years and also provided them with other funds in many other ways, during their lives. And it goes without saying that Sam and Sue are also thankful that the sensible succession planning of their parents provided themselves and their families with the long-term financial security that may otherwise never have eventuated.

There are other compelling reasons for having testamentary trusts. In particular, tax savings achieved by the trusts are significant. But also, testamentary trusts may be necessary to protect beneficiaries who are handicapped or who are irresponsible or spendthrifts or who are living in unhappy domestic relationships (and that includes the beneficiaries who will be John’s and Mary’s bloodline).

But to ensure the trusts are effective and provide the necessary protections, they must be properly and professionally drafted, and they should take into account additional specific requirements of the will-makers or other complexities relating to their families. That should not be a difficult task, although we have seen many testamentary trusts which do not provide the necessary protections because they are poorly or unprofessionally drafted. We have also seen absurdly complicated (and expensive) testamentary trusts which verge on the incomprehensible.