When a person passes away and leaves a legacy, their named Executor’s task is to carry out their wishes embodied in the Will they left. However, there are instances when, aside from the Executor of the deceased estate, another person rises to the occasion to act as the estate trustee. Now, you may wonder, isn’t the estate trustee and Executor one and the same?
In this blog, we’ll go over the basics of being an Executor and distinguish their role from that of an estate trustee. So if someday, you are making a Will or placed in the role of either trustee or Executor, you’ll have a clear idea of what will happen and what is expected of you.
But first, you need to know what a Will is and what makes it different from a trust.
Table of Contents
1. What is a Will?
A Will is a written document that expressly communicates the wishes of a testator or the deceased person who has left a legacy to certain heirs or beneficiaries.
With a Will, you can appoint guardians to take charge of one’s minor children, bequeath cash assets or valuable objects to certain friends, relatives, or even organisations or charities.
A Will is activated only after one’s passing. And no matter which state or territory the testator was domiciled and held assets when they were alive, a Will is required to undergo the process called probate. The Executor of the deceased’s estate applies for Grant of Probate in their State’s or Territory’s Supreme Court, and an authorised court administrator examines the application.
The estate administration process could take a while and potentially cause friction among family members if anyone feels left out or unfairly treated, leading to contesting the Will (but this is another lengthy topic on its own).
2. The Role of Executor
As previously touched upon, a testator can assign a person (or persons) to act as the Executor of their estate in the event of their passing. The Executor’s job is to ensure the terms of the Will are carried out according to the instructions of the deceased.
The role of Executor involves several obligations and duties, such as the following:
- Finding the actual Will
- Transporting the body of the deceased and making funeral arrangements
- Applying for Grant of Probate, as needed
- Evaluating the assets and liabilities of the estate
- Arranging for the payment of debts of the estate
- Collecting and managing the assets of the estate
- Locating the beneficiaries and distributing the estate to the heirs in a timely manner
- Lodging estate tax returns if required according to Australian Taxation Office (ATO) regulations
- Preparing estate accounts
- Defending the estate (if required) from any claims against it
In general, once an Executor is done completing all of their duties, their role ends. But in cases where a Will establishes a trust or trusts, and the person nominated as Executor is also designated by the deceased to be the trustee, they would have to take on the role.
3. What is an Estate Trust?
There are many types of trusts, such as unit trusts, charitable trusts, hybrid trusts, etc. But the sort of trust referred to here is the type of trust embodied in a trust deed or a Will. This is called an estate testamentary trust or simply a testamentary trust which, just like a Will, takes effect after you die.
A trust is essentially a legal relationship between a beneficiary (or beneficiaries) — the person who benefits from the trust — and a trustee who is appointed to administer, manage or look after the trust.
Like a Will, a trust is also a method of estate transfer. It can be used to hold different kinds of assets, including a certain portion of your estate or the entirety of the estate. Moreover, it is possible to establish multiple trusts in a single Will. This means you could create trusts that come with varying conditions designed to address the different situations or needs of your beneficiaries.
A trust is also useful in relation to superannuation death benefits, which are generally not included as a part of your estate. In this case, you may want superannuation benefits distributed through a trust.
To do this, you may decide to set up a superannuation proceeds trust (a special type of testamentary trust) where you can nominate a beneficiary. For this beneficiary to receive proceeds from your superannuation fund, they must be a dependent of yours while you were alive.
4. The Role of a Trustee
The assets embodied in a testamentary trust are managed by the nominated trustee. In this fiduciary relationship, the trustee is legally mandated to look after the trust property. They are required to invest the trust and manage it wisely and carefully for the sake of the beneficiaries.
A trustee should ideally be someone you know and trust. You also have the option to nominate an independent professional.
To make things easier for your trustee and ensure the terms of your trusts are followed according to your wishes, you can describe how you want your assets distributed in an estate plan. Of course, you may also leave the decision to your trustee by leaving a discretionary testamentary trust. If you have multiple trusts, you can also select different trustees to manage them.
In general, a trustee’s roles may include:
- Keeping and managing estate assets for minor beneficiaries until they reach age 18
- Preserving and managing estate assets until such time a beneficiary reaches a certain age required by the testator (e.g., 25, 30, etc.)
- Managing estate assets placed under a testamentary trust established upon the passing of the testator
- Keeping detailed and meticulous records of all accounts
- Lodging tax returns with the ATO for any trusts created under the deceased’s Will
- Treating all beneficiaries in an impartial manner
The trustee can be one person or a private company chosen by the deceased. A beneficiary of the estate may also act as a trustee. However, a beneficiary cannot take on the role of trustee if they are the sole beneficiary of the estate under the Will.
Unlike an Executor whose role ends once the estate has been disposed among the beneficiaries, a trustee’s job is not done until the trust is officially dissolved.
5. Reasons to Use a Testamentary Trust
Testamentary trusts have certain uses and provide specific benefits. It can help you in controlling any legacy you would like to leave your beneficiaries and potentially help provide some tax advantages.
However, in general, people make use of them for the purpose of tax planning and asset protection.
- Tax benefits: A testamentary trust may be used to achieve certain tax outcomes. According to the ATO, a trustee in a discretionary testamentary trust may opt to pay different amounts to various beneficiaries with variable incomes. This opens the possibility of minimising the tax paid on the total sum.
- Asset protection: Testamentary trusts may be used to protect assets from being taken or seized by people or establishments they’re not intended for. For example, during a divorce, the spouse may claim part of the assets their soon-to-be ex beneficiary is set to inherit. But if the beneficiary’s inheritance or superannuation death benefit is held in a testamentary trust, the Family Court cannot claim any income or assets. This is because assets held in a trust are generally not considered to be owned by the beneficiary as long as the assets are still in the trust.
Aside from the above reasons to create a testamentary trust, the following circumstances may benefit from the same arrangement:
- When the beneficiaries are children who may not be capable of handling the estate or assets on their own
- When the beneficiaries are involved in risky professions or businesses where claims of negligence are possible
- When dependents of the deceased have addictions or issues with gambling or financial mismanagement
- When dependents have disabilities that prevent them from being able to manage the assets or estate
6. Potential Disadvantages of Testamentary Trusts
Although testamentary trusts provide certain advantages, there are also disadvantages to look out for:
- Testamentary trusts can be expensive, especially if the trustee is a company or an independent professional. You need to ascertain if the income generated by your estate can sufficiently cover the fees involved in maintaining the trust whilst also ensuring your beneficiaries are provided for.
- Consider the beneficiaries’ other sources of income and the tax implications of receiving benefits from the trust.
- Trusts may be subject to abuse as the trustee has full control over the management and distribution of assets. Therefore, it’s best to seek independent legal advice to ensure your beneficiaries’ best interests are protected. Better yet, get legal guidance on specifying the conditions for release or the management of your assets in an estate plan.
By keeping the above things in mind, you may be in a better position to ensure your beneficiaries actually gain from the trust you leave behind.
7. Know Which Tool to Use
Both estate planning and administration can be potentially stressful undertakings.
But knowing the differences among the tools at your disposal — in this case, a Will and a trust — and the distinctions between the role of Executor and trustee can help you choose the right tool to make the administration of your estate in the future less complicated for the Executor.
You can also use the many estate planning tools available at simplyEstate or refer to other helpful information on our website.