Tara (00:50):
Hello, it's Tara here coming at you with episode 57 of the Art Estate Planning podcast. And in today's episode I want to talk to you about the ultimate checklist for auditing or purchasing a testamentary trust precedent.
(01:11):
I actually can't believe I haven't even covered this topic before. I had to go back and triple check because I thought 57 episodes in. Surely I have discussed this or shared this resource with all of you, but I haven't. So this is something I've been sitting on. I don't want to gate keep it for you any longer and it is a checklist that I have for you to download about all the things you should be evaluating your testamentary trust precedent against. So you can use this if your firm already has testamentary trust will precedents, but you are not sure if they are still up to date. It's been donkeys years since anyone has reviewed or updated them. So you can use this just to do a health check on your precedents if you have created and drafted your own testamentary trust precedents, firstly, good on you.
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And secondly, if you just want to check and do a sense test to see if there's anything you've missed, then this will be a really good checklist to use to cross reference. And lastly, if you are in the market to upgrade and invest in new testamentary trust precedents, then this is my list of what a gold standard testamentary trust precedent should contain. So I know it can be hard to compare and evaluate the different precedent providers out there. There's not a lot of us, but there's still a couple. So I've put this together with my view on what needs to be in the precedent so you can at least use this to compare it against any that you're looking at investing in. And also I think it goes without saying, but just to make it crystal clear, the art of estate planning testamentary trust will precedents meet this criteria.
(03:17):
If you've listened to the podcast for a while, you know that I am so passionate about continually updating and investing in the testamentary trust wills that we offer at the Art of Estate Planning. You probably know about our membership, the TT Precedents Club, which has over 250 Australian law firms who are members who are using our precedents. We actually have at the time of recording over 600 law firms around Australia using our precedents. But in terms of the people who are in our weekly membership, there's 250 law firms who are in there and we meet every Thursday where our members come and ask me questions in our Thursday hot seat, which is a live Zoom call about the precedents and how to apply them to clients. So I'm seeing firsthand where the wills need to be customised to meet different client factual scenarios where we might have a gap because we don't deal or it doesn't meet that particular client quirky scenario.
(04:34):
And I will draught a clause and consider if that should be in the actual precedent itself. Alternatively, we also have a clause library for our TT precedents club members, which is over a hundred pages at the time of recording where clauses that don't need to go into the base precedent per se, go in there. So if another member needs to use that clause in the future or needs inspiration for drafting, they can go and grab that clause and drop it into their client document. So I also update the will presidents multiple times a year based on things I'm learning because constantly researching and reading and learning about estate planning, things that our members are feeding back to me in terms of improvements, areas where they might be a gap as well as changes to the law. So reacting to legislation changes, case law changes, that type of thing.
(05:35):
So don't stress about scribbling down like all of the items on this checklist, go to the show notes and you'll see that you can download the checklist yourself and print it out so that you've got the list to use as your audit checklist. So don't stress, but I wanted to actually give some context to each of the items in that checklist so that you sort of understand the rationale behind it. Now some of it will obviously make perfect sense, but then some of the others you might go, okay, but I need to understand why that is important to be included. So let's go through the checklist now. The first one is your will must establish one or more testamentary trusts on the test data's death. And I've been a bit cheeky if you read the checklist, I've actually said obviously, duh. But what I mean by that is firstly I think it's really important, and this is the philosophy that I bring to the precedents that I've drafted for the art of estate planning is they are highly customizable.
(06:51):
So I do not conform to that old school approach where each nominated beneficiary gets their own testamentary trust and that nominated beneficiary is the trustee and appointor and the primary beneficiary of their trust. And you just repeat for every primary beneficiary, my out of estate planning precedents are highly customizable. So I recommend to lawyers that they actually sit down with the test data and discuss how many testamentary trusts are we going to need, what is going to be fit for purpose and how do we customise the plan for that. So for instance, it might make perfect sense where you have got baby boomer clients with adult children who are going to get a testamentary trust ear marked for each of them and they do want to be the sole controller of their own testamentary trust. But if that test data is concerned about relationship breakdown and the inheritance being exposed to any family law, property settlement risks, then perhaps we actually want to add an additional layer of protection and customise the control of each testamentary trust marked for each child so that each child is not the sole controller of their trust.
(08:21):
Our precedents allow that to be customised based on instructions and the advice that the lawyer gives. Alternatively, if you are looking at a test data who has got minor children, like in my scenario, I've got two children under six and if my husband pass away, we don't want a trust for each of those children set up. It would make more sense for our family, for the trust to benefit both of the children together. So they're sharing a single testamentary trust and we have got independent controllers running the trust for those children and we can then customise when is control handed over ultimately to our children, how are we going to manage that? Is it in the letter of wishes or in hardwired into the deed itself? We are probably looking at 15 to 20 years at least of relying on independent family members and trusted people to manage the trust before our children will be financially responsible.
(09:31):
That's if I'd had been hit by the proverbial bus yesterday. So it makes more sense for us to consolidate all of the inheritance into a single trust per test data and not have all these trusts around for minor children. That increases the admin and bureaucracy for our independent controllers for 20 years. So rather than just defaulting into, all right, here's the testamentary trust structure and one size fits all, ours are highly customizable and I really think in today's day and age that's so prudent. Obviously there are some really old dodgy testamentary trust will precedents out there as well that just say we are setting up a testamentary trust, but there's actually no terms of the testamentary trust, like there's no trust deed or powers. So that is a really problematic approach to drafting a testamentary trust. As much as people hate it, the testamentary trust does need to be long in the same way that an inter vial family trust deed needs to be like 20 or 30 pages and we need all of those terms that you would have for a family trust for a testamentary trust and those have to go into the will.
(10:56):
So be really careful if your testamentary trust is super short. My supervising partner, when I first started working in a states as a junior solicitor, used to sort of have this joke or standard thing he did in client meetings. If a client brought their will to them, he's like, alright, I've got a really super easy sophisticated test to work out if your will contains a testamentary trust. He wouldn't even open it up, he would just pick it up and drop it and if the will was three pages long and floated down to the desk, he's like, no testamentary trust. It's not long enough. I should just make the disclaimer. I always use the term testamentary trust and what I mean is a testamentary discretionary trust. Testamentary trust is a technical term which just means any trust created under a will by a testamentary document. So in theory you can have a bare fixed testamentary trust where there's only one beneficiary and very bare bone terms that import the trust or trustee legislation.
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That's not what I'm talking about. I'm talking about the testamentary discretionary trust, but just for the sake of my tongue not getting scrambled, I've just sort of shorten it to test ary trust. So that's number one on the checklist. Number two, plain English drafting easy for the clients and their advisors to understand. This is so critical in today's day and age and it is an ongoing challenge that I really struggle with because like I just said, the will for a testamentary trust will needs to be long. It's like 30 pages, 25, we've got bulk pages there. It needs all of that for it to be effective, but at the same time, we are battling with client overwhelm and also the advisors who ultimately will need to administer and manage this trust. So it's a fine line and a tightrope that we have to walk along, but please try and do your utmost to make sure that the will is in plain English, especially at least the first couple of pages which set up the gifts which have the residual estate, which explain how the trust is structured, who's benefiting, who's in control so that a lay person looking at the document can at least understand and see here's the testamentary trust, here's what the testamentary trust is receiving, as well as all the standard who the executors are, are their guardians, personal items and belongings, that type of thing.
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So here's a good way to work it out. If you are reading the precedent and you've been told it's a testamentary trust, well precedent, but you can't really work out how the testamentary trust is structured or set up, then it is not plain English enough. It should be pretty obvious if it's not. Firstly, if you are not confident in the document, all of the advisors and clients will smell your fear and they will lose confidence. Secondly, if you are sending it to them and they can't interpret it or understand it, again, they're going to completely lose confidence. And lastly, it's going to be too risky for you to work with this document in terms of customising the drafting and being confident that what you're preparing achieves the client's ultimate goal. So it has to be easy in plain English. Now switching gears, I want to talk about a technical issue which is foreign persons Now from about 2020, this has become a real hot button issue when it comes to all trusts, but including testamentary trusts, we need to be proactive within the document to firstly cater and have expressed clauses about foreign persons, but also as a user of the precedent for you to have clear direction and user nodes about the strategy for dealing with foreign persons.
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If you don't know what I'm talking about, go and listen to episode 15 about foreign persons. There we're talking about the ferb approval and also the land tax foreign person surcharge and stamp duty surcharges as a very headline explainer In around 2020, the deceased estate exemption for testamentary trusts and deceased estates was removed. So any residential property passing into a testamentary trust that does not exclude foreign persons as beneficiaries will be treated as if the foreign, there's a foreign buyer and will firstly need firm approval. But secondly, probably won't get further approval, at least at the time of recording because there's an embargo on foreign persons acquiring residential property in Australia for about two years. So this is a big problem. Secondly, the application fees for ferb are huge. If it's under a million dollars, it's still something like $60,000 over a million dollars. It's like $80,000 plus plus scaling up.
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So even if you do get approval, you have just cost the estate like a big lump sum of cash. It's very easy to manage. We exclude foreign persons from being beneficiaries of the trust. Now in the art of estate planning precedents, we have different drafting strategies available. Some people are totally happy to just do a blanket exclusion of foreign persons. Others are saying, well, hold on, what about the longevity of this trust? The world is becoming an increasingly open place. Who knows where my grandchildren or great-grandchildren are going to live? Am I excluding them now inadvertently by not allowing foreign persons to be beneficiaries of the trust. So for clients who have those types of concerns, we have a special purpose foreign person excluded testamentary trust option for residential property and other assets which require verb consent, and then we can include foreign persons as in our main or head testamentary trust for all the other assets in the estate.
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Now, this is probably going way too deep on a complex topic for this episode, but I just wanted to mention that to highlight to you that if your will precedents for testamentary trusts are totally silent about foreign persons, they're out of date, your knowledge is out of date even you don't have to know this inside out, but if this is the first time you're hearing about foreign persons and testamentary trusts, you really need to uplevel your knowledge and you're in the right place because we have so many resources on that. I'd start with episode 15 of the podcast, but our online course testamentary Trust, the Essential Guide for Australian Lawyers goes into this in a lot of detail too, as well as the training videos that come with our testamentary trust precedents. So we've got you covered on that front, but if you're looking at buying precedents or auditing your precedents and there's just nothing about foreign persons, they're out of date.
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That's a really easy way to tell. Okay, another way to tell if your precedents are out of date, and this goes for all will and power of attorney precedents, is whether there are powers relating to digital assets and digital accounts. So the takeup of people owning cryptocurrencies, but also just how much our lives have moved online and everything requires a password and double factor authentication. You just need to make sure that you have the right authorizations and a strategy for communicating the practical information around those digital assets in the estate plan. So if you don't have those mentioned in your documents, if there's nothing in there at all about digital assets and accounts, they're out of date. Now, I'm not going to say that I'm an expert on that. I actually engaged a social media law expert to audit and draught what her best practise clauses would be for transferring ownership of those assets and we incorporated those into our precedents because I totally knew that this is not an area that I'm an expert in, so I brought in the big guns to get that updated.
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The next one, another easy way to tell if your precedents are out of date or just not comprehensive is whether there are powers to establish a superannuation proceeds trust. So if you're not sure what a superannuation proceeds trust, again, we cover that in a lot of depth in our online course. Testamentary trusts the Essential Guide for Australian Lawyers, but in a nutshell, as you probably know, there's only a certain class of people called death benefit dependence under the tax legislation who can receive superannuation death benefits without paying tax. So as a really short example, minor children and spouses can receive the super proceeds tax-free adult children who are over 25 or over 18 and not financially dependent on the member will pay tax. So what happens when we don't have an individual receiving the death benefit? We actually have a trust. And under that trust there's a broad range of people who can benefit, which might include a mix of people who can receive the super tax-free and people who can't receive the super tax-free.
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How does the A TO treat it? Well, they assume because with the testamentary discretionary trust, it's fully discretionary. The people who are not death benefit dependents and would have to pay tax, there's a chance that they can receive a hundred percent of those super death benefits. They might receive 0%, but they could receive a hundred percent, we don't know. And the a TO doesn't know. So they deem those super death benefits as having been paid a hundred percent to people who are not death dependents for tax purposes. So short answer, you have to pay tax on a hundred percent of the super death benefits that go into a T tree trust unless you utilise a super proceeds trust. So it doesn't mean that we don't use a testamentary trust for super death benefits, especially because for a lot of clients, super and life insurance will be their major asset that they want to put into the testamentary trust.
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All we do is actually use a super proceeds trust, which narrows the range of beneficiaries for the Super death benefits and life insurance and super to only the people who could have received the super tax-free had they received it directly. So your will precedent should include this as an optional clause at the executor's discretion and have it in there all the time. We do sort of build this into the planning strategy upfront, but also a member's classification as a death benefit dependent or not can change from the date of drafting and signing the will to the test data's death if someone wasn't dependent but they became dependent, had an accident or something like that we just needed in there all the time. Again, I was actually looking and going, I don't have an episode on that either, so I'm going to do a standalone episode on the super proceeds trust, but for now, just check.
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Have you got something that would look like a super proceeds trust in your will precedent? If not, it's out of date. Now the next categories actually sort of align with what you would want to see in a inter vials family trust deed. So what we want is to see all the trustee powers which would satisfy the financier requirements, authorise the trustee to make varied investments, make loans, borrow, invest in different asset classes. You might've heard me speak about this before, but a trustee, because they are a fiduciary, they need to be expressly authorised in the trust terms before they can take an action with respect to the trust assets and property. So they can't just go and pick out the type of investment they want to use. They have to be expressly authorised in the terms before they can go and do it. There's also issues about conflicts of interest.
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Can they deal with themselves where you've got a young family and one spouse has died and the surviving spouse has inherited the testamentary trust and they want to use the inheritance in the trust to discharge the mortgage with their financier, pay out that loan and have their home debt free. They can't do that unless we have the powers in the deed. So you've got to have all of that in there, which is why I said at the start of this episode, we need our testamentary trust terms to be pretty substantial and long. We also need to have our beneficiary classes really dialled in and customizable. So thinking deeply about are we including spouses of beneficiaries in the testamentary trust beneficiary classes or are we excluding them? What are our family law objectives? Obviously the strings of cases about family law protection for trusts indicate that where we have a history of spouses of the beneficiaries who are going through a relationship breakdown, if those spouses are listed as beneficiaries and also have evidence of receiving a history of income or capital from the testamentary trust that is going to weaken the asset protection of the assets in the testamentary trust.
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We also need to think about, okay, we've got blended families, step families, adopted children, children born by artificial conception means how extensive, how many generations are we going with these beneficiary classes? So a deep that really thinks deeply about how all of that works is really important for all the longevity of the trust and making sure that we're getting the balance right between including the right people but also protecting the inheritance from third party risks. Number nine on my list is about succession for the controllers. So what I'm talking about here is being able to hand on the roles of trustee and appointor when the people currently in those roles die or lose capacity. So planning for this trust to be a multi-generational wealth accumulation vehicle where we are going to have to pass control through multiple generations. So making sure that we've got extensive control succession mechanisms in there is really important.
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And when it comes to, so that's important for family trust as well obviously, but when it comes to a testamentary trust, we also have an additional layer of complexity because you might have a test data who wants to either build in some contingency planning or rule from the grave. So it's quite common. I've done it in my will. I've said, well, my husband is the first controller of the testamentary trust, but if he has predeceased me or has lost capacity at the time, we need a plan B. And so the plan B is my dad and my husband's dad together, but they are like approaching their seventies now. So that plan is not super robust. So we need a plan C. And our plan C is that my brother is going to fill my dad's role if there's a vacancy and my husband's brother is going to fill his dad's role if there's a vacancy, and hopefully we'll end up with some combination of two of the four of them if my husband and I both can't act.
(28:52):
So we've built that in and it should in theory take effect on day one of the trust being in existence, whoever is able to act as stepping up, and that's the decision protocol to work out who are the trustees and controllers. But then we also need flexibility because we've also directed to them in their letter of wishes that when my youngest is 25, I want our family to step down and put our sons in as the controllers. So they need the right powers to be able to do that. And then also if we have a situation where my husband and I have passed away, my dad and father-in-law have both passed away or don't have capacity, and our kids uncles, so my brother and brother-in-law are running the trust, it's really prudent for them to nominate successes for the role in case something happens to either or both of them before our sons take takeover control.
(30:00):
So they need to have power to nominate their own successes, who they think are appropriate. There is a default plan as well, a backup plan. So we're not left with the public trustee stepping in, but the default is the current controller. If there's joint, then the survivor of them act, and then the last surviving or last person standings, legal personal representative, which could be their spouse or it could be if they God forbid, go through a relationship breakdown and then have a new relationship and a new spouse. It could be someone I've never ever met and maybe the better plan if they sat down and thought about it, they'd go, oh, well why don't we actually appoint the sisters instead or another sibling or something else that's more appropriate. So we need to have the test data's ability to nominate their line of succession. We need the people who are currently in the role.
(31:04):
Once the trust is enlivened to be able to disrupt and override that line of succession, then we need a default plan to revert back to the test data's chosen line of succession. And then ultimately we need a fail safe so that if no one's planned anything and all the people nominated car act, then we at least have someone who's not the public trustee. So I can tell you having sat down and drafted that and tried to plug all the holes and been working away at that various iterations of it for multiple years, that that's complex. We just did a huge update of that in May, 2025 where I'm thinking it's looking really perfect. But people in the TT precedents club do find holes and gaps in that when they try to massage these clauses through particular client scenarios. So who knows, maybe they will come and say, what about this scenario?
(32:03):
And we'll keep working on that. But that is something that you really do need to turn your mind to and make sure that your precedent covers the next one. Number 10 is the variation power. So this is critical especially for a testamentary trust that we are using as an ongoing wealth accumulation vehicle because as chi, as hard as we do, we simply cannot anticipate everything that might be needed in the trust terms in cases of changes to the law, who would've predicted the government would bring such a strict foreign person policy towards trusts in 2020? All of that. So we need a broad variation power that allows all of the terms of the trust deed to be varied. If you're in our TT precedents club, you know that we always get examples where old deeds say you can only vary the powers here and before declared.
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So if your variation power is in clause 15, you can't vary anything after clause 15, just crazy drafting that people didn't contemplate. So that's not such a concern in modern trust deeds, but you need to make sure that you are not repeating any issues like that in your testamentary trust wills in episode 55 about can the trustee change the appointor? We had an extensive conversation firstly about variation powers, but also about whether you can have this cyclical effect of the trustee varying the deed to remove or change the role of appointor, but then the appointor using their power to change the trustee and on and on. So it goes and we discussed that the simplest way to avoid that is to make sure that the appointor must consent to any exercise of the variation power. So if you read still the Staley and Hill Family Holdings decision from the Queensland Supreme Court out of 2025, that will sort of give you a bit more context to that.
(34:13):
But that's an important thing to make sure you've included in your variation power, those checks and balances. Now, some of the others I'll just run over quickly because they're just standard family trust requirements as well. If you've heard of the banford decision, know that doing a banford update is a real pain in the neck, but it's also absolutely critical that modern trustees include the powers for streaming capital gains and frame to dividends to allow the trustee to classify receipts as income and capital and to just be really clear about what is income capable of distribution by the trustee. Your trustee needs to be granted a right of indemnity for standard asset protection reasons. You want to power to allow the trustee to delegate so that if they need to enter into a power of attorney, they can. And we also want control or protection so that if anyone who is in our control role of trustee and appointor goes through debt incapacity, bankruptcy or insolvency or potentially even a relationship breakdown, that they are automatically disqualified from being in the role with the view that the documentary trust and the assets in that trust are not brought in and mixed up with any claim happening against that trustee or appointer personally.
(35:44):
So you want to make sure that's included. And then lucky last requirement is integration with your practise management software. So if you've heard me talk about this before, I am such a huge advocate of streamlining your document production process so that you are free to spend your time on the client strategy, bringing in more clients, having a better client experience, or simply just self-care looking after yourself, working out, taking care of your kids, spending more time with your family, whatever it is that you want to do to fill up your cup. So drafting your testamentary trust will for a client should not be any harder than drafting a simple or basic will if you have the right precedence. And in particular, if you've got a basic will with a lot of specific gifts or rights to occupy or preemption rights or anything like that versus a vanilla straightforward testamentary trust will, the testamentary trust will should take no time at all to draught compared to that complexity of the basic will.
(37:00):
So if you are under the notion that a testamentary trust will takes more to draught, it's time to update that thinking because you should be able to draught one in a minute or two. And in fact, I actually have some videos that show you how quickly we can draught the testamentary trust wheel in action step and in Smokeball and in Clio, just to show you, it's like under three minutes, the smoke ball one is a bit longer, but that's just because you can see in the video the computer is just thinking and the cursor is just going round and round and round, but you can go make a cup of tea or something while it's doing its thing. You are not sitting there hands on keyboard typing. So gone are the days where you are manually amending a 30 page document on every page where you're trying to find the client old details or check if there's a random clause in there from a previous client matter.
(37:55):
That's not how we're doing testamentary trust anymore. We are not doing a save as from another client matter. You are generating it from the clean precedent in your practise management system or if you don't have a practise management system from the base global replace document so that we are eliminating our hands on keyboards, eliminating getting the client name incorrect because it's drawing from your client matter data in your practise management system. Doing that will amplify your profit, reduce your risks, and ultimately result in a much more enjoyable experience for you to deliver testamentary trust but also a higher quality outcome for clients. So the practise management systems set the art of estate planning precedents integrate with the action step, smoke ball, Clio Leap, and we have a no coding version as well if you don't use any of those practise management systems and that is critical.
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So check out on our website, you can see demonstration videos to show you how it works, the quality for the action step and smoke ball at the time of recording at least it's like you just select from the dropdown menus, are you setting up a trust per beneficiary or a trust for all the beneficiaries? Are you including foreign persons? Excluding foreign persons? Type in who your controllers are going to be, including all those backups and it will produce a perfect document for you in like three minutes and then you just need to check it. If there's anything customizable like rights to occupy that need to go in there particular specific gifts, you pop them in there. But that's it. It's so fast. It should be really quick for you to do, which means you are increasing your profit, you are increasing the time that you can spend on the strategy rather than playing around with word processing and fixing typos.
(39:57):
It's easy to delegate to team members. And for me, if you don't have a testamentary trust precedent that integrates with your practise management system, then you are just losing money every single time that you do a cemetery Trust matter. And in fact, if the reason you don't actually do many test symmetry trust matters is because it doesn't integrate with your practise management system and it feels really hard to draught a test symmetry trust will. You're just leaving so much money on the table. It's actually a form of subconscious self-sabotage. I think by not having a decent precedent that you can trust and feel confident in, it means that you are not going to be recommending testamentary trust to your clients as often as you should with just holding your clients back and holding your firm back. So I hope that is not too harsh of a truth, but I talk to people at conferences and they sort of go, oh, I know I should be doing more, but it just feels too hard.
(41:04):
And I want to tell you that it does not have to be hard with the right precedence. It's not hard. It is no harder than a basic will. You've got this. You just need to make the investment in the right precedent. So I'll leave it there. I hope that has been helpful and of interest. Don't forget to download the checklist from the show notes and I will see you next week.
