The Importance of When a Testamentary Discretionary Trust Commences

This article discusses why the commencement date of testamentary trusts is important for legal practitioners and accountants in estate planning. The question of when a testamentary discretionary trust (TDT) commences has been the subject of a quiet, but continuing debate, between trust and estate practitioners for some time. This article has previously been published in the first issue of the 2023 STEP Australia newsletter. The contents of the article are copyright to Peter Worrall.

1.Why is Commencement Important?
A review of twelve articles about TDT’s showed that with five there was no discussion; one noted the obvious that they can only be created by a Will; one suggested that TDT’s commence on the first transfer of assets; one incorrectly noted that it happens on distribution of the residue (incorrect because the fund of for the trust may come out of another portion of the estate); another suggested that the Executor establishes it; another suggested that it was when Probate is granted, and yet another on the death of the Willmaker.

None of the articles noted provisions in wills that provide for ‘each Trust established under this Will is deemed to be established on my death’1 or wills that provide ‘each Trust established under this Will is deemed to be established on and from the date on which my executor first transfers an asset from my estate to the trustees of the trust’2 or, as Hutley’s Australian Wills Precedents provides, ‘I create a testamentary discretionary trust.’3

Commencement is important from the point of view of the rights arising from the choses in action being available.4

2. What are the necessary elements of a trust?
For the purposes of this article, the following is adopted: there are four essential elements in every form of trust ‘… the trustee, the trust property, the beneficiary… … and the personal obligations annexed to the property’.5 Dal Pont states the essential elements as being three: ‘… that the essence of a trust is the holding of property by its legal owner (“the trustee”) for the benefit of others (“the beneficiaries”)’.6 ‘This is the more traditional view of there being property held by a Trustee for the objects (Beneficiaries) of a Trust.’7 Based on these two definitions, and Livingston, no trust is in existence until there is property. Livingston requires the transfer of property from the estate to the TDT for commencement; nevertheless, a TDT may have a form of existence if it is possessed of a chose in action.8 It can only have those rights, from death, if the terms of the will do not provide for the commencement or, in Hutley’s terms, ‘creation’, of those rights on a date different, or potentially different, from the date of death.9

3. Livingston
The first principle in Livingston is that there is no interest at law, in the sense of property, held by a beneficiary in an estate where the interest of that beneficiary derives from the unadministered part of that estate: ‘there is no property in Queensland over which the respondent (beneficiary) can claim to exercise powers as the administrator of Mrs Coulson.’ Livingston was dealing with the rights transferred on the death of a beneficiary to her executors in the estate of her deceased husband at para 41; see also Tucker, Le Poidevin and Brightwell, Lewin on Trusts (Sweet & Maxwell, 20th ed, 2020) vol 1, 9.

The second principle, on which there are many authorities including Livingston, is that a beneficiary holds a right to enforce due administration of the estate and related rights: citing Livingston and other cases at footnote 39 on page ten (paragraph 1-008). Mitchell at page 1 notes: “Livingston therefore establishes that duties can be imposed on an owner of property respecting her stewardship of the property and that another person can be given corresponding rights against her”. A TDT is a beneficiary in this sense.

The second principle affects the first principle – to what extent does a right to enforce due administration; and to what extent does the ability to trace or ‘follow’ misapplied assets amount to a non-proprietary right; and a right for a distribution, constitutes something of value.

4. Drafting Errors and Lack of Assets
A TDT cannot commence if there are no assets to pass from the estate to a testamentary trust.

5. The ATO View
The Australian Tax Office’s (ATO’s) view of when a TDT commences is, if the TDT is created out of residue, on the completion of the administration of the estate. It commences earlier if assets are transferred to it from the estate at an earlier date.10

6. Provisions in Wills
I have used the word ‘commence’ and its derivatives in this article as there is a wide range of terms used for the ‘starting’ of a TDT. Commence is a term of convenience rather than of art. Other terms used are ‘comes into operation’ or ‘established’.

There is no doubt that a TDT has commenced when it has assets transferred to it from the estate, provided the other elements of a trust exist. Under the second principle in Livingston, if at law it is in existence (because there is no contrary provision in the will), it has commenced in the sense of holding valuable rights as choses in action.

Some wills are silent about when there is commencement of the TDT created under them. Others provide for the commencement on death by specific provision. A third class of wills provides for the commencement only on the receipt of assets from the estate. A fourth class of wills provides for a part of an estate to be appointed by either a beneficiary, the executor, or both, to a TDT and on that appointment happening the TDT commences.

It is the third and fourth class of commencement date that gives rise to a difficulty.

Both the third and fourth classes give rise to the difficulty that a TDT that has not commenced or brought into existence cannot be possessed of the choses in action referred to in Livingston or the bundle of chose in action referred to in Mitchell; which gives rise to a right to enforce the due administration of the will, to pursue rights against third parties where the executors have acted wrongfully and to pursue rights for a distribution.

The importance of when a TDT commences is best illustrated by considering a potential TDT that cannot commence because of the (deficient) will drafting which results in a loss, or suspension, of the rights to the enforcement of remedies under the choses in action.

If there is a dispute between potential trustees of a TDT (potential in the sense that if the TDT comes into existence, those trustees will possess those choses in action as valuable rights), but the TDT has not come into existence (in the sense of the second principle in Livingston) because of the terms of the will, then it is difficult to see how a court will recognise the right of the potential trustees of a TDT to enforce those valuable chose in action rights.

7.Practitioner Guidance
It is considered as risky for practitioners to draft wills that provide for the commencement of a TDT to only occur at the point in time that the ATO deems it to occur for tax purposes. Any suggestion that it is necessary to comply in the document itself with tax law commencement seems to be spurious, because tax law commencement will not be affected by a will that clearly states the common law position about the choses in action being available from the death of the will maker. The preferred drafting is that adopted in Hutley or the form ‘each trust established under this Will is deemed to be established on my death’.

Peter Worral
Principal
Peter Worrall – Consultant Lawyers
peter@worralloffice.com.au

Peter Worrall is a Trusts and Estates lawyer who practices in Hobart in a four lawyer firm, Peter Worrall – Consultant Lawyers

This article has previously been published in the first issue of the 2023 STEP Australia newsletter. The contents of the article are copyright to Peter Worrall.

1. From a copy will in my possession
2. From a copy will in my possession
3. Craig Birtles et al, Hutley’s Australian Wills Precedents (LexisNexis, 10th ed, 2021) 345. This gives commencement at death as the Will is read as at the date of death.
4. Charles Mitchell, ‘Commissioner of Stamp Duties (Queensland) v Livingston (1964): Rights of Estate Beneficiaries and Trust Beneficiaries Compared’ (2019). Chapter in Brian Sloan (ed), Landmark Cases in Succession Law (Hart, 2019) 4.
5. J D Heydon and M J Leeming, Jacob’s Law of Trusts in Australia (LexisNexis Butterworths, 8th ed, 2016) 3.
6. Gino Dal Pont, Equity and Trusts in Australia (Thomson Reuters, 7th ed, 2018) 485.
7. Ibid.
8. Commissioner of Stamp Duties (Qld) v Livingston [1964] UKPCHCA 9.
9. See Charles Mitchell’s article on Livingston and the comparison of the rights of trust and estate Beneficiaries.
10. Taxation Ruling No IT 2622, [13], about TDTs deriving from residuary estate.