Tara (00:50):
Hello and welcome to episode 63, is Tara Lucke, your host. I'm so excited you've joined me today I want to talk about when is a testamentary trust over the top?
(01:04):
You all know I love testamentary trust. I think they are such a valuable tool in a comprehensive estate plan, but I am not just blindly recommending them to people without making sure they actually get a benefit from them. So in this episode, I did want to talk through five of the key scenarios when I think a testamentary trust may not be warranted. So I know testamentary trust can sometimes be divisive and there are practitioners around who say things like testamentary trust are the flavour of the month, or you were just trying to flog an upsell with a testamentary trust. They're not needed because they're too complicated. I personally think that they are a highly underutilised estate planning tool. I think that sometimes these comments are made out of ignorance or overwhelm about how they're used or not really understanding the modern context for how tary trust can be utilised.
(02:14):
But I also don't want to say that every client needs a testamentary trust. So I love testamentary trust for the following benefits. One incredible income tax treatment, the only environment where miners can be taxed as adults and get $22,000 tax-free income per minor per year, or an inheritance for generation after generation. If you want to dive into those income tax benefits further, I did an entire podcast episode on that at episode number 45. So go and have a look at that. They're incredible for asset protection, both in a bankruptcy context, but they also set families up in a proactive position for family law protection as well. They also allow the test data to set up the succession plan for future generations because when assets go into the testamentary trust, we are not relying on that gift recipient's will to then gift it to the next person.
(03:28):
The assets remain in the testamentary trust when our intended gift recipient or primary beneficiary dies, and we need to hand over control and the next level of beneficiaries can benefit. So I will talk a little bit about that actually, but that's another incredible benefit as well. So they offer so many opportunities for setting families up for success, their life changing for young couples with minor children who have lost a breadwinner, they really help give baby boomer generation clients peace of mind that their hard earned wealth is going to stay with their bloodline and lineal descendants. So I just think they are so important to consider. Now, if you've heard me speak, you probably know my philosophy is to give the test status or clients enough information so that they are empowered to make a choice about whether the testamentary trust works for them or if they want to opt for that basic will I give everything to the spouse and then to the kids?
(04:33):
Sometimes, I got trained that that was an I love you will or an I hate you will. I like to call it now a basic will because yeah, you're basic and it really doesn't offer anywhere near the benefits and comprehensive succession plan that a testamentary trust does. So let's dive into some of the instances where a basic will is entirely suitable and appropriate and if I was advising the client, I may not even discuss a testamentary trust. So that very first one is where you have a small estate. So we have discussed in the podcast about how much money you actually need for a testamentary trust back in episode eight. So October 2024, Carrie and I really talked about how much money justifies a testamentary trust, and in that episode we discussed that around $500,000 of investible assets is needed to really get the benefits of a testamentary trust, especially if the main objective is the tax-free amounts for miners.
(05:51):
So if you've got in a state where it is really small, we're well under that 500,000. Then you might actually not mention it. Now I got called out after that episode or very kindly given some input I should say, from a wonderful financial advisor in our community, David Lund, and that actually prompted us to have him come and do a dedicated one hour webinar for the Art of Estate Planning Facebook group about how much a financial advisor thinks you need to have in a testamentary trust. And David actually gave us some really good examples of even where the estate is far less than 500,000 that he has really seen benefit to clients about having a testamentary trust. So that might include where there is an asset larger than 500,000, but it's not income producing like a family home and some of the strategies there to manage the mortgage and use some of the equity in that property to invest and earn an investible asset as well as just generally benefits for miners even where that is below 500,000.
(07:12):
So I'm going to put the YouTube link to that in the show notes. It is really worth watching that I thought about making it a podcast episode, but you really need to watch it because David uses some specific examples on the screen and look, maybe if you're a financial advisor or accountant or just better numbers minded than me, you'll be able to listen and get it, but I really need the visuals because some of David's calculations were too fast, more for my poor little brain, but it's really worth watching and I think that's really helpful. So interestingly, we saw some statistics a while ago where it actually revealed that the mean final estate in Australia is around $773,000. Now this was back in 2021. The median final estate is about $480,000, and overall more than 50% of total estates that went through probate were valued more than $500,000.
(08:17):
So if like me, you need a little brush up on the difference between mean and median. So mean is like the average, the sum of all the values divided by the number or the count of the values, whereas median is the middle value. So the median was 480,000 just shy of 500,000 and the mean was 773,000. So that's not actually surprising when you add in life insurance and super, I think a lot of people have more wealth than they actually think. So when I say 500,000 is the sort of benchmark to warrant a testamentary trust, of course 480,000, you would be having the conversation of would a testamentary trust be valuable? If it's like $150,000 estate including super and life insurance, I probably wouldn't put the testamentary trust conversation on the table, but if it's a higher number and we're really getting close, then I really would be just having that conversation and empowering the test data to make the choice about whether there are benefits that would work for their family.
(09:35):
Now the second example of when a testamentary trust might be over the top is where we have no assets passing through the estate to justify a testamentary trust. Now this could happen in a couple of instances. Firstly, the test data has just intentionally set up their asset holdings so that they don't have assets passing through their estate. So whether they've been doing that deliberately or just in and it's part of a proactive plan where everything's in already in discretionary trusts or they've set up reversionary pensions or nominations directly to a gift recipient for super or assets held jointly, then yeah, if there's no value, if this is really tied to that first reason, if there's not enough value going through the estate, even though our client actually has a lot of assets available to them, if there's actually nothing logistically passing through the estate, then yeah, there's no point setting up a testamentary trust.
(10:45):
We actually talked about this in episode 61 in the context of couples where you might delay setting up a testamentary trust for a couple where there's a surviving spouse, but everything is going as joint tenants or through super. So again, we've got two questions here. Do we have a testamentary trust at all in the estate plan or are we just delaying setting up a testamentary trust and choosing which beneficiaries our level one or our backup level two beneficiaries actually need the testamentary trust. Now, I would also just note back in the day before, it was super easy to actually bypass the testamentary trust and when I worked at a firm that made the testamentary trust mandatory to establish this question of do we include the testamentary trust or not? Had a lot more gravity to it these days, I think for a client who's sort of on the fence because at the art of estate planning, our testamentary trust precedents do have bypass powers that can be utilised.
(11:58):
I'm leaning towards including provision for the testamentary trust that can be bypassed or not opted into if they don't actually need it or the assets don't warrant it at the time. So if you want to find out more about that, have a listen to episode 51 where we talk about bypassing and breaking up with a testamentary trust. Now, reason number three why you may not use a testamentary trust is if you have all of your intended gift recipients overseas and don't really have an ongoing connection with Australia. Now the reason for this is I just think it's a pain in the neck for someone who's got no connection with Australia to inherit an Australian trust, and you might be being a little bit too smart for your own good by trying to leave them a testamentary trust. Now, I definitely think it would be worth having a conversation with those beneficiaries about would they like a testamentary trust or not, but to keep things super simple where you have just got the assets are going to leave the Australian network and go overseas and the beneficiaries just really have no intention of ever living in Australia, then I think it can in many cases just be simplest to have the estate liquidate and pay the tax and then just cash going offshore to those beneficiaries.
(13:30):
Now, there's a whole host of complicated issues around this in terms of having testamentary trusts where the beneficiaries include foreign persons and the trust owning residential property. We're going to be looking at navigating foreign person land tax and stamp duty surcharges as well as verb approval. So that can be if you are going to include foreign persons in your testamentary trust range of beneficiaries in the will and the estate is going to include residential property, you really need to make a plan for that. Now, we discuss that more in episode 15 of the podcast, so go back and listen to that. The flip side is sometimes a testamentary trust can be used to defer CGT event K three from happening. So CGT event K3 is a CGT event that happens when non-taxable Australian property leaves the Australian tax net. So a classic example is listed shares because it's just the last opportunity for the Australian government to tax the gains on those shares before they leave the Australian tax environment.
(14:57):
So things like property, because it's not easily movable like the government is going to know when you sell it and realise that capital gain and they can tax you there, but things that can sort of move to overseas registries, then this is their last chance to really tax those latent gains. So if you have assets that are non-taxable Australian property going into a testamentary trust where the foreign persons are beneficiaries of that trust, which is totally fine, provided there's no residential property, then that is one way for those overseas beneficiaries who aren't Australian tax residents to not have to pay CGT event K3 because as long as the testamentary trust has one Australian tax resident as the trustee, then the taxpayer is an Australian trust and CGT event K three won't be triggered. So if you've got a large estate where there are a lot of moving parts with respect to phone persons, then it's definitely worth working with someone like a tax specialist who can navigate all of these rules to optimise the best plan.
(16:15):
But if you've got a reasonably small estate, the test A is just happy for any tax to be paid by the estate and for their gift recipients to just receive autonomy and control in the simplest way, then I would think that a testamentary trust could be just making things too complicated unnecessarily without really adding value to our beneficiaries. Our next reason is if your test data is using a different type of trust under the plan. So for instance, if they want to gift assets to an existing inter-vivos family trust instead of to the testamentary trust. So they've already got these existing group structures set up and they just want to contribute the assets in their personal name into those structures rather than setting up an additional trust. Now it's a big warning sign or warning bells around that. So have a look at episode 46 because we really dive into the advantages that a testamentary trust has over an inter-vivos family trust that really need to be considered before you go down that path of using a family trust over a testamentary trust, but it is warranted in some situations.
(17:35):
Another example of where a different type of trust might be used is where there's a special disability trust. So either we're setting up the special disability trust in the will or there's an existing one in place for that principle beneficiary. So I think that's all pretty self-explanatory, but that is a good use case for when you don't need an additional testamentary trust. That said, with special disability trusts, it really depends on the facts at hand. Sometimes you might leave the door open for both. So giving the executor power to choose between a special disability trust or a testamentary trust, if you just want to give them maximum flexibility, sometimes that will be useful In other cases, especially where there's already an existing special disability trust, it just makes sense to contribute more assets into the special disability trust. And then I think our last reason is where we are really not expecting any need to distribute income to miners over multiple generations, and there's really no need for any kind of asset protection, and our testators are not worried about ruling from the grave.
(18:55):
So one example might be where you've got clients who are of a baby boomer generation and they have a single adult child who is not in relationship and is past the age of expecting children, and they really are not expecting to have any minors or children or grandchildren or great-grandchildren in the family. Again, I think this scenario requires some discussion with the will maker because the facts can really change the outcome. You want to make sure they don't need asset protection from a bankruptcy exposure perspective, so they're not a professional or in a high risk occupation or running a business. We are not worried about any relationship or repartnering risks, and also the test data doesn't want to rule from the grave. So one thing that I think people overlook with a testamentary trust is you can, as the test data set up the plan so you're not relying on your initial beneficiary's own will.
(20:06):
Now of course, depending on how much autonomy you want to give or not give to your intended beneficiary, they could potentially circumvent or disrupt any long-term plan you put in place if you are putting them in control and empowering them to run the trust and treat it as their assets. But if you've got a nonchalant intended beneficiary who you think may not bother getting a will or is happy to honour your intention with the next generation's plan for the trust, then sometimes a testamentary trust can be a way that you lock in where the rest of the assets go. So say you do have clients who have a single adult child who has no children and is unlikely to but does have a spouse and under that child's will, they are most likely going to leave everything to their spouse. But your clients, the test status actually want nieces and nephews to benefit from any remaining assets that their adult child has not spent during their lifetime.
(21:17):
So you could use the testamentary trust to just make sure that when that adult child does die, then the nieces and nephews who are living are the next people who benefit from the trust and we've locked in who's going to control and manage it for them rather than relying on our adult child to sort of ringfence the inheritance for the nieces and nephews under their own will, but leave the other assets to their spouse. So that's one way of making sure that those assets still remain in the general bloodline or with the families that it's intended. So I still think sometimes if we've got a reasonably sophisticated solve single beneficiary, then a testamentary trust is fine for them, and there could be opportunities where it's useful, especially where we've got the bypass power if they really don't want it. If we've got really simple circumstances, a small asset pool, then yeah, a testamentary trust very well may be over the top where we really can't justify the immediate benefits of distributing income tax-free to mins.
(22:31):
So I haven't created an exhaustive list. I just wanted to work through five examples where you could see that if we go back to the core principles of why do we need a testamentary trust, it's for the income tax, it's for the asset protection for bankruptcy and family law, and it's the ability to sort of plan ahead or rule from the graves, so to speak. If we can look and evaluate the need for a testamentary trust against those factors for the particular client facts, then we can sort of tell is a testamentary trust going to achieve the objectives and long lasting benefit for the beneficiaries? Or is it really just adding a bit of complexity? Because let's base it a testamentary trust is more complex than a basic will. For anyone who has a family trust already or a level of sophistication, they can easily learn how to manage their testamentary trust.
(23:35):
I don't think the complexity on its own or the compliance around it is enough in most cases to deter people from using a testamentary trust. But where the circumstances are super simple or we are just getting too smart for our own good with the testamentary trust, then I do think that our basic simple will is a good viable option. So I hope this episode has just demonstrated to you how to help a client evaluate whether a testamentary trust will be beneficial or not, and also given you some tools to decide are you going to recommend the testamentary trust conversation to the client? As always, I'm not just about pushing a client into a testamentary trust without them actively choosing it and making an informed decision. We're not flogging a product here. We want a win-win outcome where you are obviously able to demonstrate that you can deliver a really high level of value and charge accordingly, and the clients can see the value and get the peace of mind, and then we're setting it up for their beneficiaries to actually reap the value as the long-term plan is implemented.
(24:52):
So thank you so much for tuning in. I hope this has been helpful, and I look forward to seeing you next week.
