Tara (00:51):
Hello and welcome to episode number 84. So we have been on a journey going back through the high court family law decision where assets in family trusts were attacked and available to be redistributed under property settlement proceedings with Cannon and Spry.
(01:17):
So that's episode 75, our high court landmark decision. We've then looked at all of the cases that are notable and of importance after that in episode 79 through to 83. So if you've listened to all of those, well done, Bravo. That was a bit of a slog getting through that. But I think going on that journey was important to really get a sense of what the courts consider the factors and how the unique factual scenarios really come together to create either outcome where the assets in the trust were either protected or exposed in family law proceedings. So I'm really excited for this episode because I want to tie it all together and explain my rationale for how these principles can be applied in your estate planning practise where you're working with testamentary trust. So let's take the learnings. We're so close to having this finished.
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Let's tie it all up with a nice bow and take those learnings forward into our estate planning practise. Now, of course, there has to be a big disclaimer. Firstly, we can only really take the lessons out of the cases that have actually gone to court. So there's so many more family property agreements that are just settled or negotiated by consent orders. And so we're not going to be able to see that they're private. We haven't got all their juicy details in a judgement for us to pour over. So in one aspect, we're really just looking at the controversial high value cases. The other one I want to point out is winning the outcome at court is not the same as avoiding or sidestepping the decision altogether. And I think that's an important differentiation to make. We all know that going to court is an enormous emotional and financial toll on us.
(03:32):
The stress of it, the distraction from your life, the costs, the costs, oh my God, the costs. It's huge. And so even if you win the decision, that's not the same as just avoiding it all together. And I will be talking about that in some of the strategy decisions. For instance, okay, if you think on the balance of everything that your structure is going to win in a case, it's not the same as just not being part of it at all. Particularly if we're talking about trusts set up by parents being dragged into the family law proceedings of their children, the stress of all of that, even if it's later to be held not a relevant trust, isn't it better if that just doesn't happen in the first place? So what can we do to just make sure it's not court at all and they're just not instantly ... No one's even trying to have the fight.
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So I will just say that, but let's have a look at some of the strategy decisions we have to make when it comes to testamentary trusts and estate planning. And if you have followed me for a while or you have any of our resources from the cheat sheets through to the works package for the precedents, which has the meeting agenda and file note templates through to our online course, The Essential Guide for Australian Lawyers, you will see that I am a huge fan of decision trees to try to distil all the factors we have to think of into a couple of easy principles. So one of the things that I want to explain today is we've built out those decision trees, factoring in the principles from these cases. So I wanted to explain them a little bit more, I guess, in this episode, because if you've got the how many testamentary trusts decision tree, then there's actually a lot of thought that goes into that based on these principles.
(05:42):
We're also looking at other advantages of testamentary trusts. For instance, the bankruptcy protection, which is another set of principles and the income tax flexibility, again, another set of factors, but those decision trees basically distil all of the relevant considerations, including the family law principles from these cases into a quick visual. But I wanted to explain behind it. So let's have a look at some of the key decisions that you might be discussing with a client in their estate planning meeting or factoring in when you're crafting the estate planning recommendations. So the first thing I'll say is these cases have really emphasised that if you don't have a testamentary trust for the inheritance, if you just leave the inheritance to a recipient directly in a basic will, it's game over when it comes to family court protection. It's just no protection. And in the Harris & Harris decision, I felt that was quite ironic because in that decision, the wife had received an inheritance from her parents earlier and they had put most of that into the capital of a property that actually when it came to the judgement , the husband was living in that property and was probably going to end up receiving it under the property settlement and they were arguing over his inheritances, which were in trusts.
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So because she had not received her inheritance in the testimony trust, there was just nothing, no conversation about it at all really, other than just noting that the proceeds from the inheritance had gone towards purchasing that asset. So if you want to at least have a fight, you need a testamentary trust will. And I like to think of it as this, it shifts the onus of proof. So like in Harris, if you receive an inheritance directly, you're the one trying to say, no, it's not included, but the starting point is it's included in the property pool. If you receive an inheritance through a testamentary trust, it's excluded and the owners of proof shifts and your spouse is the one trying to go through all of those factors from the cases to prove whether it should be property under Section 79. So we mentioned this at the very beginning of episode 75, but it's probably worth reiterating again.
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Assets in a discretionary trust will always be a resource of the parties when it comes to a property settlement. What we're trying to avoid is that they are divisible property under Section 79 so that the assets can come out of the trust and be paid to one of the parties of the relationship, usually the spouse outside of the bloodline. So that is the outcome we're trying to avoid. And by having the inheritance come into a testamentary trust, the spouse is the one trying to argue all of those factors from the cases. So control of the trust, the purpose of establishing the trust, the source of the trust assets, the range of beneficiaries, the history of income and capital distributions, that all of those factors together mean the inheritance is not going to be protected in that trust. And instead, some or all or part of that inheritance should come out and go to that spouse, which when you talk to any sort of client with adult children, that's their worst nightmare.
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So the starting point is if you want to even be in the game, you need a testamentary trust will. I also think the testamentary trust will, just by its mere existence, helps with creating a level of separation because it has its own tax return. It has its own bank account and tax file number. So the reporting for it is different. Usually there's oversight by an accountant. So hopefully, if you want to pull assets out of the testamentary trust to use them, for instance, to buy a property or pay off your mortgage, there's a professional advisor there who can say, "That's great. You can do that. Let's do it as a secured loan, not as a capital distribution. Let's have that equity still being back in the testamentary trust." So just the very mere existence of the trust creates an extra level of compliance and a beat to just think about what are we doing with these assets?
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What is the point of it? And they're ring fenced rather than just being intermingled and subsumed with between the relationship party assets. The next thing or lesson I wanted to focus on from the cases is that the structure of the trusts are critical. So we learned from Pittman & Pittman and to an extent, Rigby and Kingston, that the discretionary nature of the trust is vital for protection. Once we start fixing the entitlements, creating irrevocable fixed entitlements, which basically result in certainty, once we have certainty about a beneficiary's entitlements, we lose the protection of the trust. All of those considerations about control and the purpose and the source of the history of income and capital distributions and the range of beneficiaries, those are all reflecting the uncertain nature and the right of a beneficiary to be considered by the trustee, right? All they have is a chosen action to due administration and consideration.
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And now maybe Woodcock is going to change things so that that is valuable. They're still fighting over whether it's even how to value it. So let's put that to the side. But at the law as it stands now, there's no value attached to that right to due administration and consideration for the present being. So without it being uncertain, it then becomes something that everyone can point to and say with certainty that is a set entitlement so we can try to attach a value to it. So you might get a client saying, "I really want that certainty." And it can be tempting to appease them by fixing the trust, but you need to realise that if you fix the trust, it will undermine all of the asset protection benefits from a family law perspective. So the discretionary nature of the testamentary trust is absolutely critical. So always keep that in the back of your mind.
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And I know we've got a trade-off between flexibility and certainty. We can create the certainty in other ways through having the right people as the controllers without fixing the entitlements. So I just wanted to reiterate that if you're ... I know, especially if you're sort of new to testamentary trust, it can be tempting to just offer up the service of fixing the entitlements in the trust, but please note that you will not get the family law protection that we're talking about today. Another factor when structuring or drafting your testamentary trust is the beneficiaries. So in the art of estate planning testamentary trust precedents, it is standard that the spouses of the beneficiaries are excluded. So we do talk about, if you've got a couple, then you might have the surviving spouse of that couple as a beneficiary, but we wouldn't have the spouses of the children as the beneficiary.
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And of course, subject to blended family and all of that, but really your clients might benefit and the surviving spouses might, but spouses below your client level are excluded. And the reasons for that are it helps bring the case of it being for the bloodline. It also helps with the history of distributions. Once you have a spouse actually receiving distributions, that undermines the argument that the purpose of the trust is just for the bloodline. It can be really tempting for people to manage their trusts with a very short-term view, particularly if they've got, for instance, their accountant guiding them on this because they might be looking at everything and not contemplating family law protection and just looking at it and going, "Well, yeah, why wouldn't we save tax? We've got a stay-at-home spouse, they're a homemaker, they're raising the children, they don't have a big income.
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Let's fill up their marginal tax rate while they're in this phase of life so that we are paying less tax overall." It's so tempting and it can make a lot of sense when you've got the tunnel vision goggles on. So by not even having them as a beneficiary means you are just avoiding the distributions going to them and contributing to the case and the argument that this is just for the lineal descendants. Hi, it's Tara here. I hope you enjoyed today's episode. If you're ready to dive deeper into your estate planning practise, there are two ways that I can help you. Go to www.theartofestateplanning.com. Au and check out our free resources. There's so many checklists and tools to help you for free. And while you're there, check out our range of estate planning precedents. We specialise in testamentary trust precedents that are easy to understand, integrate with Cleo, Smokeball, Action Step and Leap, and come with extensive training on how to use them with clients and understand the legal principles behind the clauses so that you can start offering testamentary trusts to your clients with confidence.
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Go check out www.theartofestateplanning.com. Au. It's time to start feeling confident preparing and advising on testamentary trust wills. The next strategy decision that is impacted and that we have built these principles into my teachings on is how many testamentary trusts. So I know some precedent providers just default that everyone gets their own trust. So any child or grandchildren, they're earmarked to have a trust on their own. But if you listen to episode 69, that's not really my philosophy. I have some rules of thumb around if they're minors, if there's going to be independent controllers running that trust for a long time, then I would probably group young children or grandchildren together in a single testamentary trust. Whereas if we've got independent adults living their own life, they want autonomy over their inheritance, they don't want to be grouped together, then I would be more inclined to give them a trust earmark for them.
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But as you might have seen from the cases, the simplest way to protect the trust is to share the beneficiaries and the control. So my kind of rule of thumb is if you want maximum family law protection, then group everyone together in a single trust because shared control is akin to no control and you build up the argument and purpose that this is for the bloodline, the lineal descendants, the future generations, and it's an intergenerational wealth vehicle. Whereas each individual having a trust earmarked for them, if the trust is named after them, if they're the sole primary or nominated beneficiary, if they're the main controller, that builds a case that the trust is their alter ego. Now, there's a lot of other factors like in Caldwell, there wasn't the sole factor about control. It wasn't given all the weight, but this getting the structure right really can make or break the strategy.
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I will say your clients' beneficiaries have to live with this structure. So there's no point creating a trust strategy and putting all of the kids and grandkids into a single trust together that is unsustainable based on their relationship and their goals because what's going to happen is they'll either be paid out by taking a capital distribution and exiting the control and disclaiming their rights to the trust, or they might vest the trust all together and then we are back at the basic will, no trust type outcome, which we know is game over. So putting children in a trust that's earmarked for them and then manipulating the control of that trust is a better outcome in some circumstances than lumping all the children together in a shared trust because at least we know that that trust earmarked for them is better than a basic will, and it's more likely to go the distance and be something that they can live with.
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But if your client is sitting before you and the most pertinent priority for them is family law protection, then putting everyone in a single trust makes a lot of sense. It is the best way for you to be able to help protect it. And we can never tell people we have a silver bullet solution or it's bulletproof, but as we've seen from the cases when families are sharing trusts, though that's when we're more likely to get the protection. So go have a look at 69, especially if you from a firm who does like to just set up a trust for every child or to grandchild, regardless, because I really build out the other considerations for sharing a trust and when you might share a trust and when it makes sense and when each beneficiary can have a trust earmarked for them. So that's episode 69.
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There's no right or wrong. It's something that I would definitely take instructions on from a client, but if family law is your main objective, sharing a trust can make a lot of sense. And it is worthwhile thinking about the weight that we do give to all of these factors. Some people, family law protection will be more important and have more weight than autonomy. And others will say, "Well, autonomy is really the most important thing. Family law protection is a bonus." So that's why I think it's important to always talk it over with your clients. Now, this leads into control of the trust, and this is really the main thing considered in all of the cases as you would've picked up. So I'll just mention a few things. Sometimes people get confused about what to do with the appointal role and the trustee role. So just a reminder, the appointor, it will depend on the deed, but typically they will have powers to unilaterally hire and via the trustee.
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So they can change the trustee. Often they might need to consent to things like variations. So the appointer is like the overall supervisor of the trust or the guard of the trust. The trustee decides who receives a benefit from the trust, how much and when, and has the day-to-day management of the trust and is the legal owner of the trust assets. The court looks at all control roles of the trust, the same. So appointor, trustee, director of a corporate trustee or director of a corporate appointor, they look at it all the same. So whatever you're doing at the trustee role, you have to do at the appointor role. So if you've got, for instance, two adult children as the co-trustees of a testamentary trust e-marked for one adult child, but that adult child who is the primary beneficiary is the sole appointer, I don't think that's going to achieve a lot.
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You need to share control at the appoint or end trustee level if you want to have that like Morton and Morton style protection because they know that the appointer can just change the trustee. So they are the ultimate controller. So ultimate control rests with one child if you only have one child as the appointor. So if you're sharing control, you need to do it at all the levels basically. So you also have to be careful if you're sharing control, that it stacks up. So there was the case of Bernard and Bernard about the testamentary trusts where you might remember there was two testamentary trusts, the brother was the nominated beneficiary and the primary beneficiaries were his children and lineal descendants, and his sister was the controller of that trust. And then for the sister's testamentary trust, the brother was the controller of her trust. So they swapped control and that was protected.
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And the wife tried to bring a case to say, "Well, they're really just like, you scratch my back, I'll scratch your back," and treating the trust as their own. But the court there found that they had actually done everything by the book. It was squeaky clean and yeah, maybe there was some reciprocal favour giving, if you treat my trust well, I'll treat your trust well. But at the end of the day, the sister was in control of the husband's trust and he actually didn't have a say. And that was because she was not acting as his puppet, it wasn't a sham. So if you are going to put siblings in as joint controllers of testamentary trusts or accountants or financial advisors or anyone in as a co-trustee to try to boost the family law protection, they have to do everything by the book. They have to have proper meetings and document those minutes of meetings.
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They have to have everyone who needs to sign the distribution resolutions and actually when that co-trustee is on the stand, if they're giving evidence, they have to and just be able to say, "Yeah, I know what's going on with this trust. This is how we make our decisions." Because as soon as it looks like a sham or that they're acting as a puppet for the child it's earmarked for, it undermines the entire strategy. So I do think having coach appointers and trustees is a nice compromise where you want to set up a trust for each child instead of everybody sharing the trust, but it has to be legitimate. Your professional advisors need to actually implement it appropriately and follow it through because again, it will all unravel like a house of cards if we don't follow it. So I think the main lesson from all of this is it has to be a structure that everybody can maintain and live with practically because we can try and make it as protected as possible from a family law perspective.
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But if the clients don't actually implement it after you say, "See you later, thanks very much, close the file, enjoy your life," if they don't actually follow through on it, it is not going to provide the protection that we were hoping for. Another thing to factor in is whether you're going to include an automatic disqualification trigger for family law in the deed which removes the appointer or trustee automatically when they go through a relationship breakdown. So this is something that was not originally in our precedence after feedback from the TT Precedents Club and much discussion, we have brought it into the precedence as a condition and I think it's really worthwhile turning your mind to it when you're drafting because having an appointer or trustee removed and disqualified automatically can be really helpful to sidestepping or avoiding the whole fight together and just say, "Well, yep, they're not a controller anymore." They've lost control, particularly if it's like a trust where say it's your trust, but your brother is going through the relationship breakdown, he was a co-trustee and a pointer, and if he stays in as a co-trustee and appointor, is there a chance that your brother's spouse is going to try and drag your trust into their family court proceedings and you've got to provide evidence, you've got to dig up all the materials, you're involved in this case when you really are a bit removed and shouldn't be.
(27:36):
Whereas if they're automatically disqualified as soon as the separation occurs, then it increases the likelihood that your trust just isn't involved in that at all. So having that automatic disqualification on a separation can be useful. I think there's some big warning signs that need to come with that clause though, because firstly, it can be unclear to people when this happens, especially with something like a relationship breakdown. Well, actually losing capacity is also not the right example. How about bankruptcy? The bankruptcy order is made and then after the certain amount of time, it is lifted. So there's a clear start and end date, but relationship breakdowns can be trickier. Relationships are fluid. Did you still keep living together even after you stopped being in the relationship for a while? Is it on again, off again? When does it actually end? Is it the property settlement, consent orders?
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Is it the divorce? So that can be a little bit unclear about when the timeline is. And the other risk of that as well is people are disqualified and inadvertently removed without anybody realising. So if you still have someone who is not a trustee, but they're acting like a trustee, or especially if they're the sole trustee or a pointer and they're automatically removed and time marches on and no one realises they've been removed, it can create a lot of problems, especially from a tax perspective where distributions might be invalid or you're left without appropriate trustees. So that is something if you're going to use it to turn your mind to and be alert to, but it can be helpful in a family law protection context as well. So as you can see, there's things that we do every day in our estate planning practise where we talk about the number of trusts and who should be the controllers of the trust and do you even need a testamentary trust and explaining the discretionary nature of the trust to beneficiaries.
(29:55):
All of those factors are rooted in the principles from these family law cases. So there is a lot of method to the madness of what I teach in terms of the rules of thumb and the decision trees that we have sprinkled throughout our precedents and in our coding and automation in the precedents as well. So hopefully that has given you some context to tie everything together from the family law perspective into what we do for estate planning. This is a special interest topic of mine. As you know, I love testamentary trusts. I think they are such a value add to clients and family law protection is one of those. So as new cases come down, especially if they are altering any of these principles we're talking about, I will make sure to be sharing them with you and the principles. And we also, of course, factor that into any changes we make.
(30:56):
One of the things we're thinking about at the moment, you might've seen evident in Rigby and Kingston and Caldwell and Caldwell is statements in the estate plan about purpose and the purpose being the intergenerational wealth transfer and to continue benefiting the lineal descendants of the founders. So we're giving more thought to how far do we go with documenting the purpose. This is something we talk about in the TT Precedents Club, and I won't go into that discussion here, but we are taking our lessons from these cases and looking at how can we serve our clients the best based on the principles from the cases at the time to really future proof these testamentary trusts we're setting up for them. Well, thank you for coming on this ride with me. I hope you enjoyed this series about family law protection of trusts and testamentary trusts. I really enjoyed researching and summarising it for you.
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We will be back to sort of usual programming from here on out with a mix of technical and practical and the business of estate planning type episodes. But thank you. I hope you enjoyed it and I will see you next week.
