Tara (00:51):
Thank you so much for tuning in to episode 51 of the Art of Estate Planning podcast. It is Tara here.
(00:59):
I'm delighted that you are listening and today's topic is all about how to get assets out of a testamentary trust. So this was actually a question that came up in our TT precedents club hot seat and it, it's a really common question that can come up when you're not familiar with testamentary trust. So I thought it was a good one to share my thoughts on the podcast as well. For all of you listening to hopefully help build your knowledge of testamentary trust. So how to get assets out of a testamentary trust or avoid them going in there if it turns out that we don't want that particular asset in the testamentary trust or the testamentary trust is no longer serving the beneficiaries and doing what it needs to do. So there's actually two scenarios that I recommend we consider in this concept. So the first scenario one is what do we do if the assets have not yet been contributed into the testamentary trust?
(02:09):
So we are still in the estate administration phase. The will includes a testamentary trust and it's been identified that the beneficiaries on the executors don't want the testamentary trust to hold those assets. So let's just say we don't want the testamentary trust at all. Perhaps the assets are not large enough to justify the testamentary trust or there's been some radical change in scenario. So that's the first scenario. The second scenario is once the assets have been contributed into the testamentary trust, the trust has been running along doing its thing and after a while we want to pull assets out of the testamentary trust.
(02:55):
So let's deal with scenario one first, and I would say it firstly, it depends on whether there is a pathway for scenario one depends on how your will is drafted. So with the art of estate planning precedents, our default will template includes a power to bypass the testamentary trust, which means that there's a mechanism for the asset or assets to be gifted to one or more of the primary beneficiaries of that trust instead.
(03:36):
Now there's no rules or real legislative basis for this. It's up to you to draught the mechanism that you think might be most suitable. The way that we have drafted it is that the executor is the one who drives this process and they need to obtain consent of particular people. So we've said if the surviving spouse is living at the time that the particular decision has to be made, then the surviving spouse is the one who can senses to the executor's exercise of discretion. And if you've got a very vanilla scenario, it might be the executor is the surviving spouse. So it's not really much of a check and balance. Alternatively, if the surviving spouse is not living or does not have capacity at the relevant time, including for instance if that trust is not being established until after the surviving spouse has died, then each primary beneficiary who has legal capacity at the relevant time has to provide their consent and our clause goes into different things about what happens if they don't have capacity and that type of thing.
(04:48):
But we're trying to just build in a check and balance so it's not the beneficiaries themselves who get to choose without accountability. And I've done that deliberately because I want to avoid a situation where we've got an uninformed and overwhelmed beneficiary making this decision. So I've got the executor, the one initiating and driving the decision. So even if a beneficiary wants to bypass the trust, if the executor is not on board, then the beneficiary doesn't have the power to do it on its own. Contrast that if we've got an executor who may not have all of the beneficiaries needs at heart, maybe we've got a blended family or something like that, then the executor can't alone skip the testamentary trust, the beneficiaries have to consent as well. So that's just standard in our power. We also have an express clause acknowledging that that power can also be used for the purpose of making a contribution to a special disability trust.
(05:57):
So under the Social Security Act, you've got three years from the date of the test, data's death to contribute an inheritance into a special disability trust for a principal beneficiary. Now, that's just one of the reasons, but it's not the only reason that the bypass power can be used, but we just mention it for anyone who might need to use a special disability trust power and use a special disability trust instead of a testamentary trust. So that's one option with scenario two. Once the trust is up and running, we are then looking at the powers in the trust deed to withdraw capital and or vest the trust. So let's say you just want to pull out an amount to help a beneficiary purchase a home. Well, firstly, we actually have to make a choice of is this a capital distribution or is the trustee just lending the amount?
(07:05):
And depending on that strategy, we'll either be looking for a power in the deed for the trustee to make loans to beneficiaries either secured or unsecured, ideally secured or the power for the trustee to make interim distributions of capital. So you might be wondering what is the difference. So once a distribution of capital is made, the protection of the testamentary trust over that amount is lost forever. So they no longer have access to the family law and bankruptcy protection of the testamentary trust.
(07:46):
That amount is intermingled into the recipient's personal assets that they might take into a relationship or might be exposed to beneficiaries. And we really, it might as well have gone to them directly from the estate instead of through a testamentary trust versus a loan, especially if it's a very favourable loan, maybe no interest repayable or just very nominal amounts of interest, repayable at call nowhere really just refreshing the loan over time so that it stays on foot, but it's really quite favourable compared to being on commercial arms length terms that allows a beneficiary to have access to that capital for their personal needs.
(08:40):
But if something happens where we want protection over that amount, so the beneficiary goes through a relationship breakdown in family law settlement or they're sued personally and their personal assets are to satisfy a creditor, the trustee of the testamentary trust can call on that loan and has priority ahead of the creditor or the spouse. So we can still preserve the family law and bankruptcy protection over those sums. We can still eventually get that money back into the testamentary trust to contribute to the accepted trust income earning potential without forever losing the benefit of the testamentary trust. So I would strongly encourage as the starting point that you consider a loan as the first preference rather than a capital distribution, I should say, especially with scenario one as well as scenario two, we include in our letter of wishes guidance that before any decision is made to forego the benefits of the testamentary trust, that advice is obtained by the beneficiaries.
(10:00):
The test data has chosen the strategy really deliberately considered all the benefits that it will afford the recipients for their inheritance and has structured this in a deliberate way. So before they undo all of that work that they do get advice. Now I completely understand the need for flexibility and that we don't have the crystal ball when we're drafting the will. So there may be things that have changed or that we didn't factor in. Even the foreign beneficiary rules that have been introduced by governments in the last five or so years, those things might not have been around and we do need the flexibility and the trust may not be suitable, and in that case it's great to have that option, but what we don't want is people acting as a knee jerk reaction because they're intimidated by the structure or just having a really short-term view on that front.
(11:03):
I like to talk to clients when it comes to testamentary trust is this is not a stopgap solution just for beneficiaries until they reach financial maturity. We are setting up a very unique tax advantageous structure that is creating legacies for families and multiple generations. You only get one chance at setting up a testamentary trust when it comes to the accepted trust income tax treatment, right? We can't just go about and set these up during our lifetime and you need a refresher on how that treatment works. Go have a look at episode 45 because I do go into that in a lot of detail there, but you get one chance at setting it up and it has to be in your will when you die. And the tax advantages and the asset protection advantages go from multiple generations in Queensland at the time of recording this from the 1st of August, 2025 with the new Property Law Act in Queensland.
(12:15):
The vesting date or perpetuity period for trusts has been extended from 80 years to 125 years. That's a whole additional extra generation of beneficiaries who can benefit from the assets in these trusts. And these are the types of trusts that make families wealthy because years over years, they are paying so much less tax than anyone else and the assets are protected for the bloodline. So I really encourage beneficiaries and testators to think about these not as a stopgap, but as an ongoing family generational wealth vehicle for a legacy, we are making a legacy and an impact that will last for generations and generations. So the starting point is to have that in mind and not try to erode the assets in the trust. When I was a junior lawyer working at a law firm, we didn't actually have the bypass power for that scenario one of avoiding the assets going in.
(13:27):
We actually were so strict as to say the test data did this so intentionally that if you want the assets out, you put the assets in and then you can wind up the trust. I've since come around and can really see the benefit of having the flexibility with the bypass with the right amount of checks and balances on there, especially when we've got other special purpose trusts in the will, like a superannuation proceeds trust or a foreign person excluded trust or just even the option for a test data to if in doubt put the testamentary trust in, but we're not locked into the testamentary trust, especially for a surviving spouse. So I really can see that by having the bypass power, it allows us on the estate administration side a lot more flexibility to adapt the plan based on the facts at the relevant time of estate administration.
(14:31):
So I do think it's a good thing, but I also don't want it to be used too liberally. Okay, I've gone on a little bit of a tangent about the philosophy of the testamentary trust, but I really just want to hammer that home because I do think some of the old school lawyers think of a testamentary trust is something that is just for minors, just for immature adults and not something that you want to last for the full perpetuity period. And I don't subscribe to that view at all. I really think that you're giving your beneficiaries a huge gift by them receiving the inheritance in the testamentary trust environment and we want to make it as flexible as possible. But that said, sometimes we might need to wind up a trust if they end up the investments are bad or they end up just spending all the money in the trust for the intended purposes, then you can set a vesting day of the trust earlier than the full perpetuity period.
(15:41):
The trustee can make a resolution to distribute all of the capital out to the beneficiaries and to wind up the trust and end it. So that is possible. The assets aren't trapped in the trust forever. You can also, if you want to pay out a beneficiary, then you can also do that with the interim capital distribution. So one beneficiary has their share distributed to them and the other beneficiaries keep on going.
(16:12):
I will say from a stamp duty perspective, if we're distributing assets in species so in their actual form and it is doable property, it's not super clear and it obviously depends on a state by state basis, but in most states you may have to pay stamp duty on having the assets coming out of the testamentary trust if they're in their current form like a property. I believe my interpretation of using the bypass power is most of the state stamp duty exemptions have this requirement that it happens pursuant to the will and because the bypass power is a power under the will, sort of like an appropriation power that it should be exempt and potentially that's the same with the capital distribution out.
(17:07):
But I feel like a lot of state revenue offices are not extending the deceased estate stamp duty exemption that far contrasting that with the CGT position where currently they are more liberal. I actually saw in a recent weekly tax bulletin from the Tax Institute, they have a newsletter that comes out every Friday that in 2026 I think this is a topic that the ATO is going to release like a practise direction on or a ruling on. But at the moment, at the time of recording we're relying on is the deceased estate exemption in section 128-15 of the Income Tax Assessment Act 1997 plus PSLA 2003/12, where they basically said the atos practise is to not recognise any taxing point in relation to assets owned by a deceased person until they ceased to be owed by the beneficiaries named in the will.
(18:18):
It's not legislated. Well in the 2011 and 2012 federal budgets, they were talking about legislating and they made some announcements that they would legislate that exemption. But then in November, 2013 it was announced that those amendments would not be implemented. So we're sort of just relying on that practise statement, but I think we can at the current time of recording this, which is in August, 2025, say that at least getting capital assets out of the testamentary trust, the treatment in section 128-15 is quite generous. Of course, if you liquidate the assets within the trust and you're just distributing cash, then there's no issue there. So tax advice is vital before anyone goes and does this as so is asset protection advice and understanding the consequences of vesting, the trust and losing that beautiful environment. So I do just want to make another comment because at one point I have had a few questions about say a test data sets up a trust for a surviving spouse and children and what happens when that surviving spouse dies?
(19:42):
So the answer is the trust keeps on keeping on the trust doesn't just end and break into trusts for the children. Once assets go into a trust, they stay in there unless we follow one of these mechanisms, particularly for scenario two to get the assets out historically, I mean maybe people are still doing it, but I believe it was more popular in the nineties and maybe early two thousands at least of what I saw in practise, people were doing what we call cascading trust so that your first trust or say, let's call it the master trust, it had a vesting date of the surviving spouse's date of death and it actually had set capital distributions where it's set up two new trusts or a trust per child. Let's say there's only two kids, so two new trusts and it's divided 50% of the assets into a trust for each child and set up those new trusts.
(20:55):
So that is kind of the idea I guess that was floated and we call that a cascading trust. I really don't like them. We don't draught those options at the art of estate planning because I don't like having an undetermined vesting date. I don't like triggering tax and stamp duty consequences and events at a random date that we don't know. And I really doubt that you are going to get the stamp duty exemption on any doable property moving from that master trust into the children's trust. And I also have concerns about the accepted trust income treatment of those children's subtrusts. Perhaps you could get it, I don't know, under the new integrity rules new, they're like five years old, but under those integrity rules where the assets needed to come from the original test data, whether you would still get that would be interesting to apply for a private ruling on that to see.
(22:02):
But generally speaking, I don't like the cascading trusts. I think it's too risky if you're going to invest in any kind of doable asset. But I think wrapping your head around these trusts as being long-term wealth accumulation vehicles then takes away the pressure for you to need a cascading trust. And especially when you think about, okay, we might end up with multiple children sharing their inheritance in a single trust, but that is actually really ideal from an asset protection and family law protection point of view and gives us some benefits. And then ultimately what we have when that second spouse dies is under their will, they've set up a single trust per child and we end up with a nice hybrid strategy where some assets are in a single trust where each child can run their own race and other assets are in a group or shared testamentary trust where we've got increased protection.
(23:04):
Now, I've probably gone a little bit deep there for this topic. One thing I will say is if you are curious about this and learning more about testamentary trust, then we go into this in detail in the online course, Testamentary Trust: The Essential Guide. So it really is the ultimate resource for getting more confident with testamentary trusts and it's the thing that I also encourage our TT Precedents Club members to do. So I love work shopping these questions and scenarios live with our members in the TT Precedents Club weekly hot seats because there's always new variations and different scenarios that we can talk about live as well, but the cause is also an incredible resource. Thank you so much for tuning in. If you do ever have any questions that you'd like to bring to the podcast and like me to discuss, you can post them in the Art of Estate Planning Facebook group for me to consider.
(24:07):
And it really does help me to know where you are at the types of things you'd like me covering. It's a pretty broad range of topics that we cover depending on my whims at the day in the podcast. So if you do have any scenarios or topics that you want me to address, feel free to bring them to the Facebook group for me to consider. Thank you so much for tuning in. I appreciate you listening so much, and I'll be in your ears next week.
