What Powers Do Trustees Have Over a Testamentary Trust?

A testamentary trust is a trust that is created by a Will and only comes into effect after the person who made the Will (the testator) has died. It is a way of passing on assets in a more controlled and possibly protective way, especially if:

• The beneficiaries are minors or have disabilities
• You want to protect assets from bankruptcy or divorce
• You want to reduce tax for your beneficiaries

The trust is managed by a trustee, and is usually a trusted family member, friend, or professional. The trustee holds and manages the assets on behalf of the beneficiaries.

What Powers Does a Trustee Have?

In New South Wales, a trustee’s powers can come from three places:

1. The Will (which sets up the trust)
2. The Trustee Act 1925 (NSW)
3. General trust law principles

1. Power to Manage and Invest Assets

A trustee can usually (subject to the terms of the trust deed) manage, sell, lease, or invest trust assets including property, shares, and cash as long as it is in the best interests of the beneficiaries.

Under section 14A of the Trustee Act 1925 (NSW), trustees have wide powers to invest trust funds, but they must do so with care and skill, just like a prudent person would when managing their own money. This is often referred to as the "prudent investor rule".

They must also consider factors like:

• The purpose of the trust
• Diversification of investments
• Potential income vs risk
• Tax consequences

2. Power to Distribute Income and Capital

One of the most important powers is deciding when and how much to distribute to beneficiaries.

Some testamentary trusts are discretionary, meaning the trustee can decide which beneficiaries receive money and how much. Others are fixed meaning each beneficiary gets a set share.

The trustee must follow the instructions in the Will carefully. They cannot distribute trust funds for their own benefit unless they’re also a beneficiary (and if permitted under the terms of the trust).

3. Power to Appoint Professionals

Trustees often need help from accountants, lawyers, or financial advisers. Under section 53 of the Trustee Act 1925(NSW), trustees can appoint professionals to assist with the administration of the trust and can pay them reasonable fees out of the trust assets.

4. Power to Maintain or Advance Funds for Minors

If a beneficiary is a minor, a trustee may be allowed to use part of that child’s capital share to pay for their maintenance, education, benefit or advancement. This is called an advancement.

The power to do this usually comes from the Will or trust deed, and also from section?44 of the Trustee Act 1925 (NSW) which allows trustees to advance up to half of a beneficiary’s capital entitlement, provided it is beneficial for the child.

What Can’t a Trustee Do?

A trustee must always:

• Act in the best interests of the beneficiaries
• Avoid conflicts of interest
• Follow the terms of the Will and trust deed along with all relevant laws
• Keep proper records and accounts

If a trustee fails in these duties, they can be removed by the Court or possibly even made personally liable for any losses.

For more information about the role of the trustee, contact us for a free thirty-minute consultation with a lawyer.

Any information on this website is general in nature and should not be taken as personal legal advice. We recommend that you speak to a lawyer about your personal circumstances.