Tara (00:50):
Thank you so much for tuning into episode 69 of the Art of Estate Planning Podcast. It's your host, Tara Lucke here.
(00:59):
And today I want to talk about the question of whether young children should receive their own testamentary trust. So how many testamentary trusts should we be establishing in the will? Do we go one testamentary trust for all of our beneficiaries or do we have separate testamentary trusts earmarked for particular beneficiaries? So in the art of estate planning world, when I do my training on this, I call it the single or multi TT decision. And I wanted to sort of step you through my thoughts on this. Now, as usual in estate planning, there's no legislation or cases or strict rules about what to do, but I have developed my own framework and preferences about when I think each of these strategies work best. So I wanted to talk you through them. Now, as always, we cover this in a lot of depth in the online course testamentary trust, the essential guide for Australian lawyers.
(02:11):
So we've got a lot of training in there about what the different clauses look like to establish each of these strategies, the pros and cons, and what this means for long-term planning for the trust. Obviously, this is just a short podcast episode, and I can't go into that same level of detail here, but hopefully this episode gives you some food for thought. I also think you'll see as we're going through, a lot of the conversation ties back into the decision about when we're acting for a couple, whether we are establishing a testamentary trust for a surviving spouse or delaying the testamentary trust until after both of our spouses in the couple have passed away. So I just want to remind you about episode 61 about when a testamentary trust should start for members of a couple. And if you haven't listened to that episode, it's probably a good one to go back and listen to before or after this one.
(03:16):
Now, you might even be confused about why this is a conversation because depending on which precedents you use and textbooks you follow about testamentary trusts, there's a lot of precedent templates for testamentary trusts, which simply default to setting up one testamentary trust per beneficiary. So if there's three children that no matter what their age is, each of those three children get their own testamentary trust. Or if there's six grandchildren, each grandchild gets their own testamentary trust and there's really no customization. Often that primary or nominated beneficiary will also be the controller if they're of age, and there's a lot of focus on just complete control and autonomy for that beneficiary for whom the trust is earmarked. I don't like that approach. I think it will not achieve some of the objectives of the trust in particular circumstances. And so I'm not saying that that approach isn't a viable approach or isn't a strategy that you might end up with, but I don't just default to that approach without considering it.
(04:39):
I really encourage the lawyers who are in the TT Precedence Club and the Essential Guide to Testamentary Trust course to take a step back and look at the objectives of the family, what we're trying to achieve by using the testamentary trust and determine what is the best structure for the trusts for those particular clients. Because I strongly believe that the number of trusts we use is going to depend heavily on the life scenario of our beneficiaries, like what their age is, where they're living, what their particular special needs might be, the testator's values and objectives. Are they just doing this for tax flexibility or do they want asset protection from bankruptcy or even relationship breakdown, or do they just want to have a trust and have a bit of flexibility, but not rule from the grave too much? Considering the relationship and family dynamic is important, and then also the size of the estate that we also are dealing with.
(05:48):
So I like to factor in all of those considerations to determining how many testamentary trusts we set up, but I do have some simpler rules of thumb. So I like to sort of start with like, here's a checkbox of some rules of thumb, and then we can look into the advantages and disadvantages of each approach, which should help us. The checkbox will give us sort of a preliminary answer. And then by actually understanding deeply the pros and cons of each approach and what it means initially and long term, we can then reach a conclusion of, well, this is going to be the best strategy for us to recommend. So for instance, in our course, we have a lot of flyers. In our precedence for the works package, we have meeting agenda and file note templates, which have our decision tree checklists about the number of testamentary trusts to really guide and support the lawyers who are using our resources to make that decision without having to reinvent the wheel each time.
(06:53):
So let's keep it super simple to begin with. And my very high level rule of thumb is that for a young couple with minor children under the age of say 10 or even 15-ish, I would set up a single testamentary trust to benefit the surviving spouse and those children. So I would group all of those beneficiaries together in a single testamentary trust. As you know, if you've listened to this podcast before, that is the client demographic that I personally fall in with my husband and our two children. And that's exactly what I've done under my own will and my husband has done under his will. For a client demographic where we've got baby boomer generation with adult children who are living their autonomous lives might even have spouses or children of their own, that is where I would consider setting up a testamentary trust for each of those children.
(07:58):
So a multi-testamentary trust strategy where each adult child is the nominated beneficiary for their trust. So each trust is earmarked for a particular adult child's family line. Again, going back to that episode 61, if you've listened to that, you'd know that I probably, depending on the nature of assets, but typically we would actually delay establishing those testamentary trusts until after both of our spouses have died. So we're not actually setting up a trust for the surviving spouse. So the last spouse to die, it's their will, which establishes the trust. So that's my very basic rule of thumb, which then we kind of think about, well, what are we hoping to achieve by doing that? So why would I set up a single testamentary trust for a surviving spouse and minor children? And you would also probably consider this even if there isn't a surviving spouse, but I would normally always set up a testamentary trust where there's a young surviving spouse with young children because of the accepted trust income treatment rules, those tax-free benefits that the surviving spouse has.
(09:21):
So I guess on that note, I'll also remind you about our tax episode, which is episode number 45, explaining the tax-free income for minors. So why are we doing a single testamentary trust for minor kids? And when I say minors, it's hard, right? If your children, beneficiaries are 16, 17, technically minors, but we're on that threshold of them becoming adults, this gets a little bit grayer and you can really sort of argue it both ways. If we're looking at children like my children's age at the time of recording, they're two and five. So we've got a long time before they're going to be adults and an even longer time before I think that they should have financial control over their inheritance. Generally, I would think when the youngest is 25, might be a sensible time for them to actually have financial control. So you probably know this, but one of the beautiful things about testamentary trusts is that we can benefit our people without them having control over the inheritance.
(10:37):
We can put in place the people that we trust, our independent controllers, to manage the inheritance for our children. So our wise independent controllers can seek appropriate accounting advice, financial advisor opinion, tax advice, legal advice, whatever they need to do, set up the investments in an appropriate way, make sure that income is available to provide for our children, but that the capital is preserved and invested in a way that when the children are ready to take over control, that capital is there, it's growing and their inheritance isn't wasted on frivolous spending. So going back to my scenario, I've got a long time ... If I had died yesterday and my kids are two and five, I've got 22 years of our independent controllers managing the inheritance in one or more testamentary trusts for our children. If my husband and I had both died, that's when our independent controllers step in.
(11:44):
So actually, let's talk about that. If I died, but my husband survived, then it's super simple. He's just got one more trust in our group. We've already got three discretionary trusts in our group. So this would just be one more. Four trusts is kind of becoming a handful, but they've all got special purposes and at least he's not setting up getting a trust for himself, a trust for each child, which would then give him three extra trusts. So we'd have six trusts. So one extra discretionary trust, which basically becomes a family trust, but with accepted trust income treatment, so much better tax treatment than our existing trust that we already have. And my husband can just run that as part of our family group. And then when he revisits his estate plan, he'll just consider this assets already in that trust, we'll just hand that over like we're handing over the other trust.
(12:43):
If we both died together, but our children survived, that's where we've got 20 plus years of relying on our independent controllers. So we've each nominated our dads to be the trustees jointly. And if our dads can't do it, then a brother, each of our brothers will step in and fill the vacancy for our respective fathers. So we've got this idea of a representative from each side of the family coming together to make joint decisions for our children so that each family feels like they have a seat at the table and a say and a line of sight about what's going on. So I think in that scenario, it's so much simpler and a lot less admin for our independent controllers for them to manage a single testamentary trust for both our children. We've got a really long time where they have that admin burden. Also, it's simpler in terms of providing for the children because there's going to be a lot of expenditure coming out of that trust in terms of living expenses, education, schooling, sport, all of that.
(13:55):
It just all comes out of one pool for the children. If you have separate trusts, then there's going to be an element of them having to equalise the trust. Our school fee statement, the school fees are paid from the one account, but in the one sort of invoice, because there's two children at the same school, and I know I'm saying my two-year-old is at the school, but our school is set up where it's like two years old through to grade 12, so that is the case. But rather than them having to be like, "Oh, I need separate statements for each trust so that each different trust pays for each child." It's just so much simpler to have one pool. The same with investing it, they've got a bigger lump sum of assets to invest and diversify that portfolio rather than trying to sort of equalise and keep the balance of the assets and expenditure in those two trusts separate for 20 plus years.
(14:55):
I also really want to emphasise the asset protection because we can never say from a family law perspective that a testamentary trust is bulletproof. And on this note, I'm actually working right now on a big presentation for a conference about this topic. So stay tuned because over the months to come, I will be leveraging the work I'm doing on that paper to bring it to the podcast so we can really dive into the asset protection of testamentary trusts. But for now, I will just say the cases sort of indicate that where a trust looks and feels like the assets belong to a single beneficiary, so the trust is really the alter ego of that beneficiary. The assets are controlled by that beneficiary or the income and capital is distributed to that single beneficiary. The range of beneficiaries is so narrow that it's really just that beneficiary.
(15:55):
And particularly we might say, for my children, that their children and grandchildren are the beneficiaries, but they're minus, they don't have children or grandchildren of their own yet. So there really is just a single beneficiary in the primary beneficiary class. When we have everything looking and feeling like it just is the trust is earmarked for one beneficiary, that makes it a lot easier for a spouse to argue for a claim that the assets of that trust belong to the family law property pool of that relationship so that they can be attacked. So one strategy, and the cases sort of indicate this to boost protection of a testamentary trust is to group beneficiaries together in a single testamentary trust so that like in my case, the inheritance is for my whole bloodline and lineal descendants. It's for my sons, but also I'm trying to create generational wealth here.
(17:01):
So my sons are custodians of that wealth once they come into control and I fully have directed them to make sure that that wealth is available for their children and their grandchildren. So there's no one child who is solely entitled to the assets of the trust. It is a true family discretionary trust and because no one of them should have control of it, it should make it harder for a spouse to attack. Now, I'm not saying it's bulletproof. I'm not saying the cases won't change. It is an evolving area of law, but putting multiple beneficiaries in a single shared trust does lean towards better asset protection from a family law perspective when those children ultimately end up going through relationships and relationship breakdowns if that happens. So I think it can just make a lot of sense for that young family demographic to just have a single testamentary trust.
(18:05):
Keep it simple, stupid. We don't need all these extra trusts, especially when they're going to be running for a long time before those children could ultimately take control. There is obvious concerns about once those children becoming adults having to share their testamentary trust, which can be very challenging where their relationship is not in a position where they're going to be able to cooperate and get along with their shared inheritance. It can be very difficult lumping children in a testamentary trust where they're just at different stages of life, particularly if there's a large age gap between them. If you've got a 16-year-old and then a 28-year-old child and the 28-year-old is married or having children of their own and running a business or in a higher risk occupation or just living their own adult life, is it fair to lump those two children who are at very different life stages into a single testamentary trust and forcing them to come together to control their finances?
(19:14):
It can be a lot of pressure on a relationationship. The other thing to also think about is the long-term consequences. So for instance, with my testamentary trust, my sons will eventually, by the time they're in their 30s, I would hope, assuming I'm dead by that time, touchwood, that's not the case, but this is a contingency plan. So yeah, my sons would be running that trust together. So I would expect that they would be the joint trustees and the joint appointers of that trust. And then they will have to work together about how they distribute the income between their respective families each year and also their own succession plan. So when they are looking at their estate plan and dying, they will then have to hand that on to their next generation. And we will actually have a situation where first cousins are managing and sharing that testamentary trust together.
(20:13):
So that can also bring challenges. Whether that will come to fruition, my hope would be that it does because we've set up enough capital in that trust and hopefully there's appropriate management so that capital grows and grows and the assets are available for multiple generations. And in which case, we have strategies where we can bring in a corporatized control structure or independent controllers or something like that so that we can have an appropriate control of a discretionary trust for first and second cousins. Or alternatively, maybe those assets have been distributed out longer term, they're no longer in a trust, they're in a new environment, and our son's got the benefit of that and the tax and asset protection on the way through, but that trust ultimately gets wound up. So I will acknowledge that it is harder for second and third generations to share, but at the same time, keeping the assets in a single trust means that there's actually likely to be assets available for those future generations compared to them being eroded if we're just linking one trust per child.
(21:26):
So that's not going to work all the time, but I do think it's really worth considering, just keep it super simple for that minor beneficiary demographic. I generally think for clients in that baby boomer age with adult children, my first starting point is, well, firstly, I would actually empower them to make a decision about what they think works best, but I would probably be leaning towards a trust per child. And I know if I were to ever receive an inheritance, being 40, having my own family, my own idea of the risk profile I like to take and that being different to my siblings, that I would prefer my own testamentary trust rather than inheriting a shared testamentary trust. That said, if we got a shared testamentary trust, it would be great for our family law asset protection, and I'm sure we'd make it work. So the reason I like a testamentary trust per child for adult children is autonomy.
(22:33):
And also, if you don't have children who have a relationship that will make it feasible for them to manage their inheritance in a single trust, then I think you're much better off going for a structure that has a little less asset protection, but is going to work for them long-term because if you group children together in a trust that's unworkable, the trust is probably going to get liquidated and wound up or assets will be pulled out as capital distributions and that trust won't be there long term. So you go from a structure that was the best for asset protection, but they've actually decided it's unworkable. So then they go to a structure that has no asset protection and no tax flexibility versus if you give them their own testamentary trust, yeah, it's not going to offer as much family law asset protection, but it's far better than no testamentary trust at all.
(23:32):
And we can do things like looking at who the trustees and appointers are and sharing control so we don't have one child in charge of their trust solely, which can boost the asset protection a little bit. So I definitely think don't set yourself up to fail. Have a testamentary trust for each child if you think it's not going to be workable. You can also do a hybrid where if the estate is large enough, then we've got some assets or the bulk of assets in a shared testamentary trust, and that works particularly well if you've got intergenerational family businesses or sentimental value assets can go into a shared testamentary trust, but then we've also got an extra testamentary trust per child where they can run their own race and manage their own pool of assets separate. So we've sort of got two rules of thumb and the shared family trust might have a set of understandings or rules about how it's managed, but then each child can do their own thing.
(24:41):
If they want to invest it all in cryptocurrency, blockchain technology or real estate or whatever they like, that they don't have to agree with their siblings on the appropriate investment. So I definitely think less shared decision making long-term can help the longevity of the trust. You also don't have that issue, or you're deferring a generation of first cousins and second cousins sharing a testamentary trust. So we're sort of pushing it back at least one generation of that issue with the wider family sharing the trust. So there's a lot of considerations to bring into the decision-making process. What I like to do is give the clients the options, the pros and the cons, map out in your estate planning flowcharts for them what it could look like, and let them make a decision that will work best for their family and their values. Some clients, the family law protection is the most important thing.
(25:46):
Other clients, they think, "Well, great, it's a bonus if we can get some asset protection, but I mostly just want to make sure my children don't waste their inheritance and we've got tax flexibility and tax-free income." So depending on what their priority is and also their values around joining the children together or giving them autonomy, they can then help make a decision about what will suit them and their family as they know it best. I know when we have these conversations, one of our members in the TT Precedents Club sort of said to me, she's like, "90% of my clients, regardless of whether they have adult children or minor children, go with a single testamentary trust." And it must be something to do with the way she explains it and also her particular client demographic and their values and understanding about trust where they end up going through with that decision, which I think if everyone can work with a single testamentary trust, I do think it's a great option.
(26:50):
I'm not against the multi TT. And as I said, if I'm a beneficiary of my parents' estate, that that is actually the option that I would like for myself, but I would be happy with anything and I think both is workable. So my main message for this episode is it's important to customise the strategy for the client. I don't believe in this cookie cutter one size fits all testamentary trust. I think when we look at some of the critics of testamentary trust and the basis for them criticising it, a lot of those criticisms can stem from this one size fits all no customization approach for drafting. And a lot of the people who say, "Oh, I got a trust and it was awful." Again, I think they just sort of got this one size fits all trust rather than one that the test data has tried to customise for them to suit their needs.
(27:58):
So I hope this episode has been helpful. If you would like to discuss this in more detail or learn more about it, I would really encourage you to join us in the TT Precedents Club membership and the online course, Testamentary Trust, the Essential Guide for Australian Lawyers. We really dive into it in a lot more detail. And my goal is to have you empowered enough to really understand the nuances about the pros and cons of each approach, how to explain it to clients, what happens longer term as well. We've got to factor in this consideration that we can't merge testamentary trusts anymore under the accepted trust income integrity rules where if you've got a couple and both of those wills set up a trust per child, then we're going to end up with, each child is going to end up with two sets of testamentary trusts.
(28:58):
We've also got to factor in extra things like super proceeds trusts, if we're having special purpose trusts that exclude foreign persons for residential property. So you can actually end up with quite a lot of trusts floating around before you know it, which is why I really advocate for doing a flowchart approach. If you're sort of thinking, "Oh my God, where do I even start for a flow chart?" We have diagrams and templates for you in our precedent packages and TT Precedents Club membership to help you draught those. We've got the main diagrams available for our key demographics that can really sort of show you, you just have to say which assets are going where. On that note as well, I'm going to be here all day, I think with an extra thing, an extra thing, but hopefully this is the last extra thing. The value of the estate is also going to weigh into the decision of how many trusts we need because if you go back to listen to episode 40 five and actually our very first episodes too about how much money we want.
(30:07):
If you go back to episode eight as well about how much money do you really need to justify a testamentary trust, in there we talk about the fact that maybe around 500,000 of investible assets is a good number to outweigh the administrative burden of tax returns and advice around the trust. So if you've got a smaller estate that also lends itself towards a single testamentary trust where each beneficiary's share might be 200,000. And on its own, it's not really enough to justify a trust per beneficiary, but grouped together as a family, they will get the benefits of the tax-free income and have a sizable sum that can be invested to generate an income for them. Whereas if you have got a much larger estate, if we're dealing with a multimillion dollar estate, we've got significant sums that we can play around with the number of testamentary trusts we want to tailor that.
(31:13):
But the general rule is less trust the better. That said, we want to set them up in a way that will be feasible long-term and that people will actually keep and use their testamentary trusts instead of wanting to bypass them or shut them down or pull assets out. So I hope this episode has been useful. Thank you so much for listening and I will see you next week.
