Tara (00:50):
Thank you so much for tuning in. I can't believe it. This is our last episode for 2025. So I thought I would finish on a fun one, which is Common Testamentary trust myths. So I'm going to debunk all of those myths that I hear. As you know, I run the Art of Estate Planning Facebook group. We have over 2,800 Australian lawyers, accountants, and financial advisors in that group. So I see a lot of posts where we have misunderstandings coming through about testamentary trust, either from practitioners or professionals like accountants and financial advisors, or even clients asking their lawyers for something based off the old chat GPT and Google search and being confused. So I thought let's go through some of the common myths that come up and try to dispel them. So number one, a testamentary trust can prevent a family provision application challenge or your will being challenged.
(02:03):
And it's not true. It's not at all true. The testamentary trust receives the inheritance after the estate has been administered. So for me, the simplest way to think about it is when the executor is doing the final estate distribution, then they're allocating the inheritance to the beneficiaries in accordance to their entitlements. The testamentary trust, the trustee of that testamentary trust is just one of the beneficiaries getting their entitlement. So as we know, the family provision application needs to be resolved before that final distribution can be done. So the testamentary trust itself really does nothing to prevent the family provision application. Now, it can actually be a little bit more nuanced than that in terms of are there beneficiaries who are receiving their entitlement in a testamentary trust where they don't have control? And actually this might be a good podcast episode for the next year because we can look at what happens when the test data has tried to give someone adequate provision through a testamentary trust, but they don't control their testamentary trust.
(03:24):
Can the beneficiary challenge and say, well, actually I don't know what I'm going to receive from this testamentary trust. I haven't received adequate provision that happened in the lemon and Mead decision, that famous case coming out of Western Australia. So maybe we can look at that. But the first thing to remember is the testamentary trust really won't do anything to prevent a family provision application or a challenge against the estate. Also, remember, there's multiple ways that an estate can be challenged in terms of validity of the will and the test status capacity. If you do want to look into that a little bit more, have a refresher check out episode 53 about will disputes, which is a great one. We had a special guest Timothy Morton on. He gave an incredible presentation, so I recommend going back to that. Okay, myth number two, you can just have one beneficiary of a testamentary trust or fixed entitlements for the beneficiaries.
(04:26):
And yes, you can, but it's not a testamentary discretionary trust. It's just going to be a testamentary trust. So remember, testamentary trust is just the phrase we use for a trust established by a will. In this podcast I just use testamentary trust tt, but it's pretty lazy of me to do that because what we really mean is testamentary discretionary trust. It's the discretionary element which brings the beautiful tax flexibility and asset protection benefits. So it has to be discretionary. And if you don't have more than one beneficiary, there's obviously no one to activate the discretion for. So when we've got a beneficiary who has a fixed entitlement where they are absolutely entitled either because the trustee has exercise discretion in their favour, or if there's only one beneficiary, that automatically absolutely entitled subject to any conditions. But generally speaking, you're not going to have the discretion and the mere right to be considered, which gives us the asset ion and tax benefits.
(05:46):
So you really do need to have a full class of discretionary beneficiaries in order for the testamentary trust to give us the benefits that we look for in a testamentary trust. So if you want asset protection, if you want tax flexibility, it needs to be discretionary and have more than one beneficiary. You can of course have one primary beneficiary as long as you have extra classes that includes that broader extended family and entities. So if you need a refresher on the tax planning, then I recommend going to episode 45 of the podcast because we did dive into that. Okay, the next myth is testamentary trusts are too expensive to run. So when I was writing this down, I was actually thinking this could be a really good topic for its own podcast episode about what is actually involved in operating or running a testamentary trust when someone has died.
(06:51):
I will just touch on it briefly, but we might do a full episode on it next year. So basically, I think that a testamentary trust is really similar to set up as if you were setting up a family trust during your lifetime. So you've want to go through the process of applying for a bank account and a tax file number, and you do need to complete annual tax returns. But the accounting return compliance is pretty much the biggest cost that a testamentary trust has. There should not be any hidden fees or fees that crystallise to lawyers once the testamentary trust is set up after someone has died. All of the legal work is done at the beginning when we're drafting the will, and that's why testamentary trust wills are more expensive than basic wills because a lot of the work is done by the lawyer upfront drafting the will in terms of the legal fees in the estate administration.
(07:53):
There may be some legal fees in terms of educating beneficiaries, educating trustees and appointor about their duties and the nature of their role, but that's more just about proactively informing everybody and giving everybody the confidence and information they have to run it. You don't need that if already, if my husband dies, God forbid I'm already familiar with trust. So when I inherit his testamentary trust, there's no extra fees attached to it from a legal perspective, and I already have multiple trusts. I already understand how these trusts work. So there's no extra fees. The only fee from our family perspective will be our accounting fees might increase because there's an additional zero file, there's an additional tax return and set of financials that needs to be prepared every year. But I also have two children where that income generated from the inheritance will generate however much per year.
(09:02):
The first $44,000 of that will be tax free and the rest will be at a lower tax rate than if I had received that inheritance directly from my husband and invested it in my own name and then paid tax on my marginal tax rate. So for me, those massive tax savings far outweigh what might be an extra thousand dollars a year in tax accounting fees. So I really don't think that they're not that expensive to run. If you have actually got enough assets in the trust to justify it, then you should be well ahead in tax savings and also the Unquantified asset protection benefits compared to the cost. So I would just say perhaps have a listen to our recent episode 63 about when a testamentary trust is over the top, because I do sort of talk about how much do you need to justify the testamentary trust and when, so if you haven't got enough assets in that testamentary trust generating any kind of income, you might feel like that tax compliance is a burden, and that comes down to justifying the trust's existence.
(10:18):
But where you have got enough assets in there, they're really not expensive to operate. It's just the same as if you have a family trust. But remember, testamentary trusts get this supercharged tax treatment and they're far superior than your ordinary family trust. So they really do justify themselves if you're sort of like, oh, why are they so much better than family trust? Go and listen to episode 46 where we compared family trust and testamentary trust, and that will just give you a little refresher. Okay, how about this next myth where a client comes to you and says, I want a revocable trust. So firstly, I always kind of roll my eyes because we know who they've been Googling or asking chat GPT, because a revocable trust is an American strategy. It's not an Australian strategy. And look, I don't know anything about American inheritance law, but I do follow on social media, a couple of lawyers in America who do estate planning, and they do seem to comment a lot about needing a living revocable trust to manage or avoid probate.
(11:36):
So I don't really know. I assume maybe it's something to do with inheritance tax and avoiding that, but in Australia, all of our trusts have to be irrevocable. So under section 1 0 2 of the Income Tax Assessment Act 1936, they have to be irrevocable, which means we've got a settle law who contributes the inheritance into the testamentary trust or settles the initial gift into the family trust. And so obviously with the testamentary trust, it's not going back to the test data settle law because they are dead with a family trust. You'll see all these clauses throughout the deeds which say the settle law and none of their spouses or children can ever, ever receive any kind of benefit from the trust. Once they've gifted it into the trust, that's it. It is irrevocable. They cannot ask for it back, and they can't ever receive a benefit or become a beneficiary.
(12:38):
And that is because of section 1 0 2 of the Income Tax Assessment Act, which says from memory, if your trust is not irrevocable, IE, it is revocable so it can be clawed back or revoked or undone, then it will not be taxed as if it's a trust. So it'll undermine the whole tax treatment of the trust. So we do not want to fall foul of section 1 0 2. So in Australia, all of our trusts are irrevocable. The testamentary trusts are obviously irrevocable. The family trusts have to exclude the settle law. That's the mechanism by making it irrevocable. So yes, if your client is going, I want one of these revocable trusts, then you can just maybe gently let them know that the content they've been researching is for the US legal system, which is completely different to what we have in Australia. And then you can maybe set them straight and say, we don't have this revocable trust, but we do have a testamentary trust.
(13:43):
And then grab the beautiful testamentary trust flyer from the works precedents package at the Art of Estate Planning and start bringing them up to speed on what they can do from an Australian perspective. Now the next myth is you can just say that the trust ends when the beneficiary turns 21, which is true, you can do that, but why would you want to? I think people who approach a testamentary trust to just be short term, while our beneficiaries are minors are really shortsighted and maybe not appreciating the full benefit of the trust. For me, the trusts are intended to be long-term wealth accumulation vehicles from intergenerational wealth. They are really meant to make wealthy people more wealthier and change the lives and the families and entire financial future for people who are not yet wealthy but will be wealthy because of their inheritance and testamentary trust.
(14:46):
So we are getting asset protection from bankruptcy and risk exposure. So that's for people in business who are running trading companies and have directed duties and personal liability. We've also getting asset protection from people in high risk occupations who are at risk of being sued for negligence. So I'm talking about engineers, doctors, lawyers, those types of business owners, accountants, we are getting asset protection or a level of asset protection from relationship breakdown. We have got these multi-generational tax benefits like no other tax environment gets the tax concessions that a testamentary trust does. You cannot set it up while you're alive. The only reason a testamentary trust gets these benefits is because somebody died to set up this testamentary trust and the government recognises that. So why would we end the trust when our beneficiary turns 21? We've got this once in a lifetime. Incredible asset protected, tax efficient structure.
(15:56):
Let's keep it going for multiple generations in Queensland. Now the trust can go for up to 125 years. In most other states it's 80 years South Australia, it's unlimited. It just feels incredibly shortsighted to only plan for the trust to be there while our children are minors and to not let them get the benefits as adults for their children and their children, so on. So I don't know. That's not really a myth, but it is just a way that I see people approaching testamentary trusts that I personally don't agree with. Okay, our last myth is if you can just say the gift is on trust when you're drafting the will and you have a testamentary trust. So again, that is sort of correct. I mean, you don't even need to really say on trust to get a testamentary bear trust because as you probably know, an inheritance that goes to a minor is held on trust if they're under 18.
(16:58):
So that is just going to be a bear trust arrangement created by the fact that the minor is not able to control their own inheritance. You don't even need to have to say on trust at all. Now, if you're like, okay, I'm not following, go listen to episode 60 because I talk about mine's trust and testamentary discretionary trust in a lot of detail there and sort of unpack these bare or fixed trusts, how they work, why they're not as good, obviously as a full testamentary discretionary trust. Now, if you want a proper testamentary discretionary trust where you have asset protection and tax benefits, you can't just write on trust and you're good to go. You need to have extensive testamentary trust terms dealing with a whole range of things, and the trust terms need to be in the will. So kind of imagine your basic will and then slap at the back your family trust deed.
(17:58):
But please don't do that. That's actually not. But in a simple method of thinking about merging this two documents, that's kind of how our testamentary trust is structured, but it obviously needs very special drafting. So in episode 57, we talk about how to identify a strong testamentary trust precedent. So that is a really good episode to go through and listen to all the different things that we need to address. But you do need to have your beneficiaries, your trustee powers, the trustee powers in relation to income and the entitlements to that your trustee powers in relation to the capital when the trust will end the capital distribution entitlements. I can't tell you I've spent weeks drafting some of these clauses, particularly our clause about what happens on the trust vesting in default of the trustees exercise of discretion. I spent weeks and weeks shopping that clause trying to work through all the different nuances and plans, and then obviously the tax and asset protection and trust law considerations.
(19:12):
The same goes to with planning for the succession of the control of the trust in terms of trustee nominations appoint or nominations handing that on default succession plans. Again, when I do these trust deed updates to the testamentary trust precedents by the art of estate planning, I spend so much time workshopping and testing and troubleshooting these clauses. So don't just slap a family trust deed at the back of your basic will. But in terms of just wrapping your head around the structure, that is kind of what it's like. You really can't say, oh, I'm delivering you a testamentary discretionary trust and just have a few pages of clauses or a few paragraphs saying it's held on trust. It really does need very considered terms, and again, as I sort of mentioned in the earlier myth, we do all this work upfront in drafting the will correctly so that when the test data does ultimately die in the testamentary trust comes into effect.
(20:15):
Everything is smooth sailing. There's not any more work to really do in relation to the terms of the trust and how it's going to operate. It's just a matter of it being enlivened by applying for a tax file number and setting up a bank account and then doing your financials. So I would love to hear if there's any other testamentary trust myths. Perhaps I can do a part two episode sometime in 2026 if you have any, send them through or post them in the Art of Estate Planning Group, but I might wrap it up there. So as I mentioned, this is our last episode for 2025. We'll be back in 2026 after a few weeks break. I just want to say before I finish that, I appreciate all of you listeners, so very much it is a bit random sort of just sitting here and doing a brain dump into a microphone.
(21:12):
So when I get messages and emails from listeners letting me know which episodes were helpful, what topics you like, if you've got input or comments on it, it really means so, so much to me that people are listening. I really try to help raise awareness about these estate planning strategies, help people identify when they want to be able to work in the testamentary trust space, let you know the resources that are available to get you really confident. So the fact that you are listening just means so much to me. Okay, I'll just keep saying that over and over again, but hopefully you get the picture like I'm truly grateful for all of you supporting the podcast. It is very niche topic, but I know that I've got my tribe when it comes to our listeners and the people interested in this, and I'm so grateful for you. Well, that's it for me. I really hope you have an incredible, restful, enjoyable, festive season, and I will see you on the other side in 2026. Take care.
