Tara (00:51):
Hello, welcome to episode 49. It's Tara, your host here as always.
(00:57):
In this episode I want to talk to you about the notion of skipping adult children and passing the inheritance straight to minor grandchildren. So this topic is inspired by a conversation I had recently with someone who was telling me that this is what they wanted to do with their estate plan. So they had three adult children in their thirties. Those adult children all had minor children, 10 and under, and they needed to update their will. And as part of this, they were anticipating that there was going to be tension in between the siblings or their adult children if they passed away. Family dynamics weren't ideal. One of the adult children has a reputation for being a bit of a spend thrift and not being able to hold on and make sensible choices with their money.
(02:02):
And the person I was talking to, they were like, you know what? I just want to keep things super simple and let's just skip the kids and go straight to the grandkids. And of course, me being me, I had raised the idea of testamentary trusts. They were broadly familiar with them. I think they actually even have testamentary trust in their wills now, and they were like, no, no, I think I just want to keep it really simple. And that was obviously the predominant feedback. Keep it simple, stupid, and let's just sidestep all of this drama with my own children and if I leave everything to the grandkids, then everyone will be happy and they'll just think it's all in aid of supporting the children and they'll get the tensions won't arise. So I have a lot of concerns about this approach achieving their ultimate objective, which let's assume their objectives are to maximise their inheritance.
(03:04):
They don't want to have it wasted on unnecessary taxes. They don't want to have it wasted on going to court and paying all the legal fees that are involved in a dispute. So they want to maximise all their hard earned wealth that they have worked really hard for to build up during their lifetime, and they want to generally see that their bloodline, lineal descendants do benefit from their work during their lifetime. So I've got a little list of concerns that I have. I'm sure your brain is running through this as well in terms of things that you think wouldn't be ideal. So I'm going to step through it. I'd love to hear if there's anything I don't cover. Then let's keep the conversation going in the Art of Estate Planning Facebook group. So you know that I also run a free Facebook group called the Art of Estate Planning.
(04:02):
At the time of recording it has 2,700 Australian lawyers, financial advisors and accountants, and it is just a beautiful supportive space where we can all collaborate on estate planning issues and issues relating to running estate planning businesses. So if you are a Facebook person and you're not in that group, go and jump in there because there's so much happening in there every day. I am the administrator and I know that's some Facebook group administrators have a really hard time with all the moderation that needs to be done, but we have the most amazing group because things rarely pop up. I never really have to pull anyone into line and it's just really supportive space. So let's keep that conversation going in there and I'm going to work through my list of concerns that I have about this strategy, not really achieving our test data objective.
(04:58):
So the first one I have is I think this is driven by avoidance and trying to sidestep the tension between the adult children, let's call them siblings, between the siblings, the testators adult children. So we still need executors. Let's not even talk about what happens under the enduring power of attorney while they're still alive. Let's just focus on death. So they still need executors or an executor, so someone still needs to run the show, make decisions about which assets are sold, how we process the administration phase and all of those things. So we are going to have an issue where either people need to work together or people are left out. If you just choose one child, then they're the chosen one, the others are left out, they are going to have their decisions examined and have to be accountable. Alternatively, all three of the children or two of the three children are going to have to make decisions together and find a way.
(06:07):
So I feel like just ignoring the issue is still going to create problems on the executorship side, especially if there's not discussions had in terms of the test data explaining to their children what they want to happen and why they're making these choices. So this alone is not going to avoid any kind of conflict arising. Secondly, in terms of the estate plan being challenged, just because a child's own children is receiving their share of the inheritance, that doesn't necessarily stop an adult child from challenging the estate plan. And in fact, if they don't like the way things are set up for their children, they could bring a family provision application challenge and say, well, I've actually been overlooked here and try to disrupt the inheritance, skipping them. So even if the will says that we are trying to skip a generation, it's not bulletproof, and if there's a disgruntled child who doesn't understand the reasons why this decision was made or they understand it but they don't like it, they could challenge.
(07:21):
And as we all know, bringing a family provision application, an arguing one is just so expensive it can erode the estate plan like nothing else. The lawyer fees for the executor, for the other beneficiaries, for the beneficiary challenges, it could easily be a hundred thousand dollars plus to try to cover off all the advice for all the parties and the estate ends up funding that so everybody misses out the entire share that they all get, the pool of that is reduced. So it penalises everybody by test data, not addressing things during their lifetime. Another thing that I know about this unique scenario is that the test data has a lot of wealth in superannuation and super requires you to either name the recipients who have to be death benefit dependents under the superannuation industry Supervision Act or pay or nominate the super to go into the estate to be distributed under the will.
(08:28):
So if the super is nominated to pass to the legal personal representative to be distributed under the will, then those super funds form part of the challengable pool, the funds that are available to satisfy a challenge if one of the adult children is disgruntled with the plan. One way to decide that in most jurisdictions except for New South Wales could be to name the ultimate recipients directly in the binding death benefit nomination, but in this scenario, grandchildren are not eligible as death benefit dependence under the CIS Act. So the super cannot go to them directly from the super fund. It has to go into the estate to be distributed under the will and therefore form part of the challengable pool. So firstly, I can just see this going wrong if they're not working with an experienced estate planning lawyer and secondly, I feel like a lot of laypeople would just overlook how that would work.
(09:36):
Now if you are wanting to find out more about that, have a look at episodes 41 and 43 because we dive deep into how that works in under the superannuation regime and how it aligns with the estate planning. Now probably my main issue is around the trust arrangement for those minor grandchildren because most likely when our test data dies, there will be minor grandchildren. They'll probably all be minors, some of them might be over 18 and we'll come to that, but let's say they're so just by skipping the adult children and going straight to the minor grandchildren, you still need controllers and trustees to manage the inheritance for the minor grandchildren. If you are doing a basic will, so not a testamentary trust will, then what you're going to end up is like a bear or fixed trust. So a trust on limited terms that uses the terms in the trust legislation in the relevant jurisdiction and perhaps any extra terms that are in your simple or basic will.
(10:46):
And again, it depends on who's drafting that will. If it's a post office or DIY will provider, then it's probably going to be really short and not so sweet and pretty much deficient not really having much powers for the trustees. If it's an art of estate planning, simple will then we do our best with our simple will and we have quite a few extensive powers, but it's still very basic type of trust. So you still need somebody who is in charge of running that trust for the benefit of the minor child or children, so the grandchildren and who makes decisions about investing and distributing the inheritance in the interests of the minor child and grandchildren. And there's a few things that I have a problem with on that arrangement. Firstly, I'll just say straight off the bat, it's significantly inferior to a testamentary trust. So the types of investments or assets and purposes that can be used for the money held on this bear trust for the minor grandchild is really narrow compared to what you might be able to do in a testamentary trust.
(12:07):
Basically every investment or use of that money has to measure up to the test that it's in the best interest of that particular minor child. So you are really tying the hands of the family about what they can do with that money. So for instance, things like it can be invested in managed funds, it's got to be set to a particular investment standard, so not too aggressive or risky, very safe investments and every expenditure as well has to come back to being in the best interest of that child. So if we looked at the family as a whole, let's say we take one of the children, the adult children who is not the spend thrift child who has a really steady head on their shoulders responsible with money and in the normal case would be fine to receive their inheritance and manage it by skipping them and putting the money into minor bear trust for those minor grandchildren, the children of that child, we are really missing an opportunity for that adult child to look at how is this inheritance going to make our whole family's life better?
(13:30):
They could not, for instance, pay off their mortgage. They could not choose to have one of the parents take time off work or work reduced hours so that they could stay home and look after the children instead of bombing the children out to childcare. So for instance, it's a really clear nexus to say, okay, this child goes to childcare and we're going to use the money from the trust to pay the childcare fees. That's a clear nexus that it's the money is being expended for the benefit of that child. It's a lot less clearer where the money is just sort of going to the parents of that child to fund the lost income earned so that the parent of that child can stay home and take care of their own children. But when you look at it, you would say, well, that is a really nice outcome for that family that both parents don't have to work full time.
(14:26):
One of them can work reduced hours or not any hours at all and be at home looking after their children while they're little. That's a beautiful thing for a family to be able to achieve if it aligns with their values and objectives. But with the Bear Trust option where you're skipping the adult children, they can't technically do that because the nexus isn't there and someone who is not that minor child is technically benefiting from the money. The same with the idea of paying off the family mortgage because it's the parents who are benefiting technically not the children though of course, of course those minor children are benefiting and the whole family benefits as a whole or those funds to be able to be used in an offset account. For instance, I actually have in front of me a website from the Australian Institute of Health and Welfare by the Australian government and it's looking at the change in household affordability.
(15:31):
And so we all know that household affordability for families, young families with young kids is at an all time low. And this graph that I'm looking at starts in 1984. So pretty much 40 years ago, for instance, they said 15% of households in 1984 were spending more than 30% of their income on housing. Comparing that to now, 46% of Australian households are spending more than 30% of their income on housing. If you've got an adult child who can't even afford to buy a house and they're renting or they're in a house that is too small and they need to upgrade to a more suitable house to give their children better lifestyle, then using this generation skipping bear trust method means that the inheritance cannot be used for the family to upgrade their housing. It has to be in a investment that an arm's length third party reasonable investor would say is a safe investment that is in the interest of that minor child specifically.
(16:49):
Another example would be if the adult child has got major health issues where they need medical treatment, they can't work, they can't afford the treatment, and the money cannot be available to help that adult child. So we're talking about the child of the test data with some unknown or unexpected medical issue where there is money lying around available, but it can't be used for that child because of this generation skipping their trust versus if this money had instead gone into a testamentary trust with a lot more flexibility to benefit the adult child and those grandchildren, that whole bloodline from the adult child, there's so much more flexibility and we are able to trust the adult child who in this case we've said is trustworthy to decide what is going to be in the best interest for the family as a whole. That little family dynamic there.
(17:51):
What is going to maximise everybody's happiness and be the ultimate best financial strategy? So for me, just this narrow idea of the bare trust is so unnecessarily restrictive. In an instance where we've got trustworthy, reliable adult children, even in the case where one of those adult children is a spend thrift, I really don't think skipping them and going straight to their child on the bare trust solves anything because let's assume that that adult child who's a spend thrift, they're going to have to be the trustee of the trust for their minor child, right? Maybe we could have the other children, the nons spend thrift children, so technically that minor children, child or children's aunts and uncles or whoever they are running the trust for the spendthrift child's children. If we're talking about avoiding family tension and issues, I can't see how that achieves anything because the spend of child is really going to feel like they've been left out ostracised and probably take it quite personally and they're also going to have to be putting out their hand and begging for reimbursement and funds to be made available for the children to their siblings who they don't have a good relationship with.
(19:22):
So I just think that entire scenario is unworkable. So it's most likely going to be that the spend thrift adult child is the trustee for their own children, in which case, yes, we have got a higher standard of accountability and requirement for spending because we've got the trust arrangement, we've got all the trustee duties, we've got the investment standards, but who is checking and holding them to account on this? Who has got a line of sight as to whether they have breached the trustee duties or not and whether they're doing the right thing. It's going to be really hard for anybody to firstly find out that information, see it happening in real time or do anything to prevent it. Once money is spent, especially by someone who is a spend thrift who doesn't have any other asset, there's really no remedy other than getting them removed.
(20:20):
If all the assets have been spent and there's nothing left for those children or grandchildren of the deceased, there's no real remedy that's going to be suitable. So I can't see how this bear trust that skips a generation where we're dealing with a spend thrift person achieves anything, even if the spend thrift doesn't bring a family provision application, there's just no accountability for in terms of being the trust. Okay, so I'm going to take a little breather, have a sip of my cup of tea, and I think you might all be familiar with one of our members, Lydia Vicca. She always contributes so much. We actually had an episode from her about her journey in law, episode number 42, and Lydia just has a little bit more to share with us in this little ad break about how she uses the art of estate planning resources.
Lydia (21:14):
Hi, my name is Lydia Vicca. I from Vicca Law and I'm an estate planning lawyer. I got the Art of Estate Planning Testamentary Trust will precedents package at the beginning of this year and it's absolutely revolutionised my business. I was finding that I had clients coming to me with more complex problems and I needed to find better and clearer solutions to be able to provide. Since I've gotten the precedents package, I'm finding that it is easier and quicker to do my wills. It's easier to explain to people, they seem to just get it because it's so clearly laid out, you're able to change it and modify it depending on the scenario for your clients. And I'm just so thankful that I have it. Tara and her team at the Art of Estate Planning are so helpful and I'm just absolutely loving elevating my wills with the help of the art of estate planning, testamentary trust will priest pack.
Tara (22:13):
Okay, so I haven't even talked about the risks of a bad trust to our minor grandchildren and particularly if they are minors or they are young adults. So we have discussed on this podcast before the rule in Saunders and Vautier, well actually this is such a throwback episode, I just have to keep referring to our other episodes. So Saunders and Vautier is episode number 13, so way back then, and basically in Saunders and Vautier it says even where you've got assets held on a trust where there is only one person entitled to the trust one beneficiary. Once they become an adult, they can basically demand that the trust is ended and the assets are distributed to them. So that is what would happen with each of these minor grandchild's interest in their inheritance. Once they turn 18, they can demand that the trust is ended even if the will says they don't get it until they turn 25 or 30.
(23:21):
That age is kind of meaningless when it comes to Saunders and Vautier. So once that adult grandchild gets their inheritance in their own name, they can blow through it, spend it all on drugs, cars, holidays, risky investments, anything they like while they're financially immature, there's no protection on their relationship breakdowns and it's fully exposed. And so you could end up with a situation where you've got adult parents or adult children who are the parents of the grandchildren who are maybe in their fifties and they're just having to stand by and watch their children, the adult grandchildren of the original test data blow through this inheritance, which is kind of heartbreaking and especially more heartbreaking if there's a financial need for those adult children of the test data. They don't have much by way of their own superannuation. They have housing issues of their own. I don't know the financial situation of these adult children here, but that could just be an absolutely devastating outcome for the whole family.
(24:38):
I also want to wind back, we were talking about where our spendthrift child, it doesn't even have to be the spendthrift child. Any of the children die. The inheritance has gone to their children, so the grandchildren of the testator, but if they're under 18, there still needs to be a guardian. And I think in this case, the person I was talking to as the test data was envisaging that other than perhaps with the spend through child, their adult child would be the trustee of the children's minor children's trust. But where they died, the trustee is most likely going to be the other biological parent of the minor grandchildren. So the testators like son or daughter-in-law, which depending on their relationship and how they feel may be not their ideal outcome, especially if that son or daughter-in-law. After a little while Repartner has new spouses and goes into a new relationship and that inheritance is kind of just the whole control of it's gone outside of the bloodline.
(25:49):
Perhaps they were envisaging that their other children, so the aunts or uncles of the minor grandchildren would control it instead. And of course, if we're using a proper testamentary trust, we can really build in a plan on the succession of the control as to different contingency plans and making sure control always stays in that bloodline, but it can be much more difficult with the bear trust. And then of course once the minor grandchildren turn 18 anyway, they can basically demand it and it goes to them. So just really lack of control and a big opportunity for the inheritance to go outside the bloodline. Another thing I keep going on about this with testamentary trusts about the tax-free income for minors, and not just our minor but multiple generations. So haven't listened to episode number 45 where I talk about how the tax free income for minors works.
(26:52):
But basically with this bear trust, the minor grandchildren will get tax free income, but once they are over 18, that's it, it ends and they can't apply it for their children or their grandchildren. It's just that first generation that gets it. Contrast that with the testamentary trust, it's multiple generations, as long as the trust can exist gets the tax free income and they also have the tax streaming opportunity around the whole family dynamic, whereas the income, there's no flexibility with the bear trust, it has to go to that particular child. So no opportunity to minimise the tax paid, no asset protection as I just discussed. Now, probably my biggest concern, and I've left this for last, is that when it comes to estate planning for people who are parents doing your estate plan and the way that you allocate your assets in your will, it is truly your last act of love towards your children.
(28:05):
It is the last thing your children will receive from you in terms of feeling love from the parent and where you are skipping them, even if it's to benefit their own children. I really don't think you can underestimate the hurt and pain that could be triggered by that if you don't have an appropriate conversation with them. If it comes as a surprise and it's not what they're expecting, if there's a history of that child not always feeling loved or if there's just any old wounds or anything, even if this is not the intention of the test data and the attest in this case, the test data seemed largely driven by keeping it simple and I would say avoiding conflict, it's going to press buttons and it's going to cause pain and hurt even if that is not the intention. And of course once somebody has died, there is no way that that pain and hurt can ever be clarified or cleared up.
(29:14):
So you are going to have adult children who don't already get along that well triggered upset and possibly making very irrational decisions that cannot be remedied because they've died and they just can never have the conversation about why was this done or I don't understand. So that's probably my biggest concern about this is that it's just got alarm all over it. Secondly, I really think the decision to go with the generation skipping in this case with this information that I have as a working example is really out of alignment with legacy goals. So I think if you sat down and said, in your ideal world, what would you like your legacy to be? How do you want people to remember you? How do you want your life's work to be used for your bloodline? Think if you sat down and had that conversation and wrote down the answers and then you had a separate conversation about why do you want to skip the adult children and go to the minor children, the reasons would be really out of alignment.
(30:27):
And so we're kind of having a plan that doesn't affect their legacy goals, and that's what an estate plan is. It's a legacy plan. And here I think the test data is making decisions to avoid conflict or hard discussions. And if I was advising this person, this was just like a casual chat that we had the old barbecue chat, I would be encouraging a family meeting. I would be encouraging some reflection rather than just being ascribe and drafting up the simple will. And I think even if they decide that they're still going to go with the generation skipping bare trust for minor children, a family meeting and communication with the adult children to explain firstly what the plan is, that there's no surprises, that the children can get answers while our teer is still alive and the test data can see their point of view.
(31:30):
And if people are upset, then they're having it out and having the conversations. And it's not easy. And I think the only way to get past this and to get to the great outcome is to go through the difficulty, but I think on the other side of that difficult conversation, there's so much upside and a legacy that will truly make a difference. So anyway, I just wanted to share that it's been playing on my mind and I feel like this does come up a fair bit. Obviously I'm sure I've missed things or not gone deep enough into some of the reasons, but it was just a bit of a brain dump. I thought if I'm going to nut this out, I might as well chat it through with you. But yeah, I'd love to talk it further in the Art of Estate Planning Group, if you've seen these scenarios actually work really well, if you've thought of something that is another downside that we should factor in. And yeah, hopefully if this comes up on any of your matters, then this will be a resource where you are armed to have the discussion and set the test data on the right path. And I'm not saying this is the wrong path, but there are downsides that I think a lay person just would not think through and really overlook to the detriment of their bloodline. So thank you so much for listening and I'll see you next week.
