Tara (00:50):
Thank you for tuning in to the Art of Estate Planning Podcast and this episode is all about the impact of the federal budget announcements from 2026-2027 on testamentary discretionary trusts.
(01:07):
Wow. So yeah, we got a big shock, I guess, on the 12th of May when there was an announcement about a big overhaul to the taxation regime, particularly in relation to things like capital gains, tax discounts, negative gearing, but especially in relation to the taxation of discretionary trusts. So the Art of Estate Planning Facebook group and the TT Precedents Club Facebook group have been going bananas with everybody trying to process what this means. We've been doing a lot of work in the TT Precedents Club for our members to help navigate this. So we've got a very detailed one-hour training that we released two days after the announcement for everybody. We also have a proforma letter that you can use to email to your clients as a broadcast or reply to any inquiries or even turn into a flyer. So that's available for our TT Precedents Club members as well as some decision tree social media templates as well.
(02:20):
So we are really supporting the TT Precedents Club members to wrap their heads around this and to show them how they can be proactive with communication and leadership for their clients, including people who have remained testamentary trust wills and clients who are considering them because it's a pretty crazy landscape out there at the moment. There's a lot of media attention on what this means for trusts. Is this an inheritance tax? What promises have the Labour government failed to keep? And it can be a very overwhelming landscape for a client trying to understand if they've done the right thing, if they need to make any changes and a pivot on any plans. So I think the most important bit and what I'm trying to do with this episode is set out really clearly what we know, what we don't know already, and what we think the right strategies could be, as well as to just give you an action plan on how to help clients navigate this uncertainty.
(03:32):
My take on things is if the law changes, the law changes and that is fine. We just adapt, but it's this messy middle that we're in right now with the uncertainty of not having the full detail. All we really have is a couple of paragraphs and a few keywords from the budget papers that we're trying to hang our hats on. So once legislation is released and there's more clarity, things should be a little bit clearer, but it's really hard to know when that timeline will be. We just haven't really heard anything. I don't know if they've got legislation waiting in the wings. I suspect they don't because it's such an ambitious overhaul of the tax regime. It touches so many different parts. There is an interaction with so many other aspects like the main one is accepted trust income treatment, but what about family trust distribution tax and family trust elections, the Division 7A regimes, the principal place of residence capital gains tax regimes, the small business concessions, octopus tentacles reach through all of these different provisions.
(04:51):
And I have a feeling that as they start making amendments to one section or aspect of the tax legislation is just going to cascade into further flow and consequences into others. I mean, I personally feel like this is an extremely ambitious project to alter these aspects of the tax legislation. And if you don't know, at the moment, our tax regime is documented under two different acts that are all cobbled together. We've got the 1936 Act and we've got the new 1997 Act, not that new anymore, I suppose. And lots of random added on divisions with crazy division numbers. I, for one, do welcome tax reform because we've been needing it for such a long time. I do hope that this is tackled seriously and not just cobbling together and adding on new provisions to further make things a mess and hard to navigate for practitioners, but we will see.
(06:13):
I also just want to say without trying to get anybody's hopes up that everything we're talking about is just an announcement. Nothing is legislated. We do have some time aligns, but we've seen in the past with various provisions, for instance, division 296, I think about the super tax over $3 million super balance, that was delayed because of all the industry feedback and consultation. It took a long time to implement that. And what ultimately was implemented was a much watered down version of what was initially proposed about 20 years ago. I was still in high school, wasn't really worried about tax back then, but they had the Ralph review and they did try to bring in a sort of corporatized tax rate for discretionary trusts and they even got to the point, as I understand it, of releasing legislation and it sort of just got put in the too hard basket and more holes in the legislation than a piece of Swiss cheese and it was ultimately abandoned and we since then have just had tax trust as being a flow through vehicle.
(07:27):
So I don't want to be naive and say, "Oh, they won't go through and we don't have to worry about it." But at the same time, a lot can change from what we've got now. Okay, hopefully that sets the scene. Let's talk about what do we know from the budget announcement and I'm really going to focus, I should say, just on the taxation of trusts and the 30% tax rate rather than diving into the CGT concessions and negative gearing. We're just going to talk about this in the context of what impacts testamentary trusts. So testamentary trusts already in existence at the date of the budget announcements have been given protected status. They are now a sacred cow and they are meant to be excluded from these changes. So that's really reassuring that the government has recognised that testamentary discretionary trusts really should have a different treatment and an elevated status than your average intervivos family discretionary trust.
(08:30):
I'll come back to exactly what my thoughts on that exemption, but what else do we know? Income earned from discretionary trusts after the one July 2028 will be taxed at a minimum 30% tax rate. So in the same way that a company has a minimum tax rate, so trusts will have that too now. So if you earn a dollar in the trust, 30 cents is payable to the ATO, 70 cents can be distributed out to a beneficiary and they're saying that there will be a non-refundable tax credit. So very similar. I mean, the best way to think about it is like a franking credit. So what will happen, I imagine, with this non-refundable tax credit is that when the income is distributed out to a beneficiary, because remember trusts are a flow through vehicle for tax purposes. So all the income each financial year does need to be allocated to a beneficiary.
(09:34):
They need present entitlement. So that's still going to remain. So when the income is allocated out to the beneficiary, say they're an adult, what will happen is they will get a credit to recognise the 30% tax already paid by the trustee. If that adult's tax rate is also 30%, so they earn I think over 145,000 in income, so 45,001, but less than 135,000 all up including this trust distribution. So their tax rate on that distribution will be 30%. So if the tax rate is 30%, they get the credit for the 30% already paid by the trustee so they actually don't have to pay any more tax. But if their tax rate is above 30%, so either their distribution sort of pushes them over that or they've got other income. Say their tax rate is 45% and that's the rate they have to pay on this distribution, then they will get a credit for the 30% paid by the trustee and then they will pay a top up tax of 15, 17% factoring in the Medicare levy and all of that.
(10:52):
So this will work really similar to Franking Credit's work now, but there are a couple of major differences. Firstly, it is not refundable. So what that means is if your tax rate is actually lower than 30%, so you don't earn any other income and say your tax rate should be the tax free threshold or the 16 cents, then you are not getting a credit. So they're not going to recognise that the trustee has paid more tax than you should. So franking credits, you actually get a refund if the franking credit is for a rate higher than your personal taxable income rate. That's not going to apply for discretionary trusts. Also, distributions to companies, so corporate beneficiaries, bucket companies, whatever you want to call it, will not get the benefit of the credit. So they'll have to pay the 30%. That income will be taxed at 30% in the hands of the trustee and the trust.
(11:55):
And then if it goes and is distributed to a company, the company then pays tax on that same income at the company's tax rates. So that's basically a penalty tax. I think I've seen some accountants do them sums and it's almost like 60% or 66% of tax on that same amount. So what they're really heavily disincentivizing using bucket companies to accumulate income out of discretionary trusts. And look, that's not new. There's been an assault on accumulating income and bucket companies for trusts for years now. I'd say since they started treating UPEs as loans, when was that? 2010, I'm just trying to remember what year that was where I was in my career and ever since then they've just kept making it harder and harder. So yeah, the bucket company could be dead. Good news is potentially that it doesn't matter if you are buying capital assets in a company now because of the changes to the CGT 50% discount.
(13:14):
So anyway, a lot of new planning opportunities and strategies out there for us, but that's the main change. You can still stream. So you can still allocate income amongst the different beneficiaries each financial year. So there's still planning opportunities there. So if we look at how this 30% tax rate works for adult beneficiaries, if you are already earning salary and wages or some other kind of non-trust distribution income, over $45,000, that means every new amount of income you earn over the $45,001 is going to be taxed at at least 30%. So for beneficiaries of trust who already do have a job and have some kind of other income where they are using up their tax-free threshold of 18,200 and then their 16% tax rate, then they're probably going to be about the same because they were always going to be taxed on that income over the $45,000 at at least 30%.
(14:27):
So no real downside or penalty there. It's always going to be the same. For adult beneficiary who is not earning other income of 45,000, so perhaps retirees, perhaps vulnerable or disabled adults who are not working but are also not having access to a special disability trust, this is where I think they're really going to be feeling the pain of paying way more tax than they ought to have. So if you take a retiree, for instance, they would normally fill up their full tax-free threshold of about 18,000. I think almost it works out to be 22,000 by the time you sort of factor in things like low income tax offsets and stuff. But if we just look at the straight tax rates, the first 18,200, it has no tax on it and then it's only 16 cents for every dollar earned between 18,201 and $45,000 that they pay tax on.
(15:33):
So you lose the benefit of that. I've did a graph for the TT Precedents Club members showing these rates stepping up and you basically sort of draw a line where the 30% interacts and the 16 cent tax rate and the 0% tax rate and basically cross that out. That's what they're losing access to. So that's really disappointing because they are our most vulnerable Australians and historically, especially even as adults, family trusts and testamentary trusts have been able to benefit and provide for them at a tax effective way. Yeah, that is a bit of a shame that they're losing that. And whether that's been understood and taken into account, we just don't know. Here's some other things that we don't know about. We do not know what they're proposing to do to income to minus from testamentary trusts. So just as a refresher, if you've got a intervis, like an existing discretionary trust and you want to allocate this income to minors from that trust, you can only allocate about $416 per minor and every dollar over that is taxed at high penalty tax rates.
(16:49):
And that's basically trying to say, well, these minors didn't earn this income, it's tax avoidance trying to get income from this family trust from a high in person on a high tax rate to a minor. But for testamentary trusts historically and the current position is they recognise that to get assets into a testamentary trust and for this testamentary trust to exist, somebody had to die. You can't just set up a testamentary trust without a person dying. It has to be in their will at the date of death and currently only the assets that the will maker owned at the date of death that go into the testamentary trust is eligible for this treatment, but they give you what we call accepted trust income treatment where you are allowed to tax minors as if they are adults. And what that means in practise is that the first like $22,000 of income distributed to each minor each year can be tax-free because they're getting the tax-free threshold on the first 18,000 and then you might tax a little bit more at the 16 cent rate, but then the offset for the low-income tax offset brings it down to zero.
(18:09):
So that has been life-changing for families, especially young families who have lost a breadwinner because the surviving spouse can use tax-free amounts to pay for their education, sporting, extracurricular activities, living expenses without having to pay tax on it and use their after-tax salary income or trust income. So this is really at risk under the new tax treatment, but it's actually really unclear because all we have is three paragraphs from the budget paper and a flyer that just regurgitates the budget paper. And in fact, what we really just have is in relation to the exemption or exceptions to the new treatment is one paragraph. So it says, the minimum tax will not aply to other types of trusts such as fixed and widely held trusts, including fixed testamentary trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts, some types of income such as primary production income, certain income relating to vulnerable minors, and amounts to which non-resident withholding tax applies and income from assets of discretionary testamentary trust existing at announcement will also be excluded.
(19:32):
Oh, so there's a lot to unpack there. So let's just go through the list that they've said. So fixed and widely held trusts being exempt. I think that's like managed investment fund type big public unit trusts, property funds, those kinds of things, fixed testamentary trusts. So they are going to be excluded. Remember, a fixed testamentary trust doesn't offer any asset protection because there's complete certainty that the beneficiary will get their share and potentially Saunders and Vaughtier will even apply so minors can end the trust once they turn 18 potentially. So for some people, a fixed testamentary trust might work if all you're looking for is protecting that beneficiary, but it's not like, let's just move all of our testamentary discretionary trust to fixed testamentary trust. Complying super funds, great. Super's looking really good out of this budget, the most tax effective vehicle still, special disability trusts, thank goodness, deceased estates.
(20:37):
Now some people have said, well, does that mean if the deceased estate is exempt, does that mean that the testamentary trust is exempt? And I am not hopeful on that front. We saw at the start of 2026 at the end of January, they released tax determination 2026 / D1 and in that determination it was all about accessing the principal place of residence CGT exemption on a main residence and comparing the treatment when it's owned by a deceased estate and then when it ultimately passes to a testamentary discretionary trust and what type of right to occupy you need. And they really drew a big line in the sand with different tax outcomes for deceased estates versus testamentary discretionary trusts and less favourable outcomes for testamentary discretionary trusts. So I just think there's a tone from the top that they really are making everybody understand this big distinction between the deceased estate and the testamentary trust.
(21:45):
And can I say if you are feeling a bit confused about where that distinction lies, I go over that in quite some detail in the online course, testamentary trust, the essential guide for Australian lawyers. So moving back to our budget announcements, charitable trusts are also exempt. Some types of income such as primary production income, so that could be good if you've got a family farm in the trust. This is the one that I've really been hanging my hat on, certain income relating to vulnerable minors, income relating to vulnerable minors from a trust. What does that mean? Accepted trust income treatment in section 102AG of the 1936 Tax Act is all about income for vulnerable minors. They're basically saying it's only income where someone has died for it to go into the trust where we've got orphans and double orphans where we've got people with disabilities like permanent visual impairment, things like that.
(22:46):
So 102AG is all about vulnerable minors. I would love to see, and I'm really hoping that when we see the draught legislation that they are preserving some kind of tax-free treatment of income distributed to minor beneficiaries. We've had that in the legislation for a really long time, particularly when we're talking about children of a testator, their parent has died. They are a vulnerable minor, but we don't know. We just don't know what they're planning on doing here This is complicated stuff and I really have a feeling that they didn't even factor this in and off think about it when they drew up these measures. So I'm hoping with some industry lobbying that we can actually make it really clear what the current position is and also get some clarity and make a case for the current position to continue streaming income to kids who've lost a parent is not really the big problem that they're trying to tackle here, right?
(23:56):
And just to sort of recap on that, if they do continue the special tax concessions for distributions to minors from testamentary discretionary trusts, testamentary trusts are going to be even more powerful and attractive than they are now. They're already life-changing compared to an interviews family trust. So if the 30% minimum tax rate doesn't apply to minors or disabled beneficiaries or a beneficiary with special needs, then hallelujah because they will just become even more powerful compared to your average trust. If it doesn't and they are just taking a hard line, 30% tax applies, then as I mentioned earlier for beneficiaries who are already taxed at 45% or 30%, then this is no difference. The testamentary trust doesn't really change the tax position and in fact, it doesn't really change the tax position for them compared to a basic will either, but we've got a lot of other benefits of a testamentary trust, which I'll come to.
(25:01):
So we have to see, and it would be amazing to have clarity on this because I think this issue about how income to minors will be treated is the thing causing the most uncertainty for the members of the general public in terms of can they keep using a will with a testamentary trust in it? And one of our TT Precedents Club members summarised this really well. She basically said, if the position is basically the same, if we lose our special tax treatment, but the position is kind of the same as for people who own the assets in their own name and for anyone earning over $45,000 of other income, it will be, then great, we'll just keep on recommending testamentary trust because the asset protection and succession planning benefits are so powerful. But if we are actually at a detriment and are paying a penalty to have income earned in the testamentary trust, then we do really have to think about how important is the trade-off between the asset protection benefits and the tax downside.
(26:07):
As I see it at the moment, we probably do have to pay a bit more attention to the expected tax rates of our beneficiaries and work out, is it going to just be the same or is there going to be a bit of a detriment? And of course, if it turns out that income to minors is preserved as having access to those stepped tax rates so the concessions remain no-brainer, testamentary trusts will just be even more powerful than they already are. So there's a lot of noise going around as well about the exemption for existing testamentary trusts. Again, some clarity would really help here because they basically said income from assets of discretionary trustamentary trust existing at announcement will also be excluded. So that sentence in its own is confusing. Is it just the discretionary testamentary trust existing at announcement or do the assets have to exist at announcement?
(27:11):
Do the assets have to be in the testamentary trust at announcement? What does that mean? And we have been talking about it in the TT Precedents Club and I think there's sort of two positions. One is actually someone had a client scenario where the testator died two years ago and some of the beneficiaries have been dragging their feet. So they haven't actually gone through the steps of applying for a tax file number and opening a bank account for their testamentary trust. So obviously the assets haven't been distributed into the testamentary trust and now this has been announced. So what do they do? Where do they stand? Are these testamentary trusts exempt or not? So on one hand, there's an argument to say, well, the rights of the trustee of the testamentary trust to have the estate administered and their rights in the estate to those assets, even though they haven't been distributed is enough to be property and that testamentary trust is basically enlivened on either the date of death or the grant of probate for the will such that you've got all of the elements of a trust satisfied.
(28:24):
And so as long as the testator basically died before the announcement date, then it's exempt. The other argument is that that's not really property, it's something else chosen action, I won't go into that, but it's not enough to be property and like the trustee of the testamentary trust actually has to own, be the registered holder of the assets. And the really frustrating thing is the legislation will say one thing, often we see a statement like a determination or something from the ATO with their opinion. And even if you go off now and get a barrister's opinion and take action based on what that opinion says, the only opinion that really matters is what's in the legislation and what the ATO says. And we're not going to see that for some time. So I really feel like there is so much uncertainty for people who are in this sort of medium situation where they haven't transferred the assets to the testamentary trust, but they have a will where the will maker has died before the announcement.
(29:40):
It's really rough and I don't know. I think no action could be taken unless they're of course happy to have the testamentary trust no matter what because the asset protection is great. But if they're sort of saying, "Well, yeah, I don't earn 45,000 of other income where I can use up my tax-free threshold and 16% rate." Right. And I don't want to pay a premium for asset protection, so do I bypass the testamentary trust or not? That's a really hard position to be in to make a decision. So yeah, we just don't know. So hopefully we can get some clarity on this soon, but I wouldn't be holding my breath. Okay. What else don't we know? We do know streaming's still available, so that's really helpful. Say you're a adult beneficiary of a testamentary trust, say you're in your 50s or 60s and you've got children at uni and they're not earning the 45,000.
(30:37):
Someone made a really good case in one of the accounting groups. Well, you know what? Especially say you're a doctor or high income earner and if you allocate all of the income from the trust to yourself, you'll get the credit for the 30%, but you're probably going to be at a tax rate over 30%. So even if historically or currently your unemployed children would've been able to receive that income at a lower tax rate, it's still advantageous for you to stream the income to them and pay tax at 30% on their income for them rather than all of it going to yourself and being taxed on the highest rate. And if you didn't have the testamentary trust, that's what's happened. All the income just has to go to you and get taxed at your marginal rate and push you up the tax brackets. So we still have streaming, which is really still very valuable when it comes to testamentary trusts.
(31:34):
It's just that gap of people like retirees, vulnerable beneficiaries who are really missing out. So perhaps if you've got a 30-year-old fellow who can't really work due to a disability but is still not eligible for a special disability trust in the estate plan, a testamentary trust for their inheritance would've been marvellous because they would've just got the tax-free threshold and the 16% rate and stepping it up. Now with a testamentary discretionary trust, they're going to be paying tax at 30% on the first dollar. And when you look at working through all the rates, normally you have to earn on average I think like $225,000 of income so that your average tax rate equates over to 30%. So that's just sort of averaging it out because of the stepping up. So they really are disadvantaged. So for a person like that, you might consider changing your strategy to a fixed trust where they are the only beneficiary because the main reason of the trust is just to protect them from making poor financial choices in relation to the inheritance and susceptibility to predators and bad actors.
(32:58):
Usually with a trust, one of the advantages is also locking in place the succession plan so that we're not relying on our sort of disabled adult to have to make a will or the intestacy provisions applying to them if they don't even have capacity to make a will or them changing their will and all of that. So you would sort of want to have a look at can ... And then this is the other thing, what does a fixed trust mean? Can you have fixed entitlements to this one beneficiary, the first tier beneficiary, but the remainder beneficiaries where you want, if they die, you want to set the plan for where those assets go, going out to others. If you use the yard of estate planning precedents, we do have a mechanism to try to do that where it basically just goes back out to the calamity beneficiaries on vesting.
(33:54):
So it's possible to do, but you just need to give it a lot of consideration. There's also been a lot of discussion around, well, what does a fixed trust even mean? Because from tax perspectives and I think in New South Wales land tax, there's actually very, very strict requirements about what you need to do for it to be a fixed trust. So what test do we need to get this fixed trust exemption? Again, really unclear. Okay. I put together a decision tree to help TT Precedents Club members communicate through their social media to their clients about whether they need to revisit their estate plan, especially where they've got testamentary trusts. So do they want to go down to a basic will? So in the decision tree they are on, let's look at the reasons why you use the trust in the first place. If the only driver was tax concessions, which it rarely is, then you may need to go back and review your will.
(35:00):
If you have got beneficiaries who are earning less than $45,000, then you might need to revisit the will. And then lastly, if the testamentary trust will has flexibility built in so that there's discretion or choice about which assets can go into the testamentary trust, or you can bypass the testamentary trust altogether. If you don't have that flexibility, then you may need to revisit your will. But at the art of estate planning, our testamentary trust will precedents have the ability to bypass the testamentary trust for all or some of the assets. So what we're saying to clients who have wills based on the precedence is you don't really need to do anything right now because firstly, we just don't know the detail. There's so much uncertainty, it's really hard to make an informed choice, but we have the flexibility built in so that if when you die there is clarity on these announcements and changes have been enacted or maybe everything gets abandoned or it's a lighter version of what they've proposed, your executor and beneficiaries can sit down and get advice at that time and make a decision based on the law then.
(36:20):
And they have flexibility to keep the testamentary trust for some or all of the assets or actually go back to a basic will because the only other alternative we have right now to our testamentary trust is a basic will, which if you've listened to this podcast before, you know it has problems. It doesn't protect minors from blowing through their inheritance. It doesn't provide family law protection or bankruptcy protection. It doesn't let you plan for the next beneficiaries and what happens when your first line beneficiaries die. So there's lots of problems. So we don't have a great second best option. We've either got testamentary trusts or a basic will and testamentary trusts are superior on every level. And even now with these potential tax changes, depending on the beneficiaries existing tax income, it still may not be any worse off.
(37:15):
So for a lot of people we're saying, "Just hold your file. We just don't know. Don't panic. You're really protected. You've got the best of both worlds and you've done the right thing and be thankful you're alive because your testamentary trust could definitely be secured and exempt, but it means you've died. So let's just be grateful for the small things." Okay. I do also just want to mention one other thing, not really related to the tax 30% minimum tax, but they also said that they are going to start bringing pre CGT assets into the tax net for capital gains tax purposes, which is huge, right?That has been a longstanding sacred cow for like 41 years. I can do that maths because I was actually born a month before CGT came in. Yeah, it came in in September 1985. So I can always just work out, how old am I? But yeah, that has been sacred for over 40 years and they are just not holding back.
(38:22):
So curious to see if that gets through. But basically from I think one July 2027, they are going to start taxing you on any gains after one July 2027. So it's not like you lose the whole pre- CGT status, but basically they'll give you a new cost base of what the market value was at on July 2027 and you pay capital gains tax with the new index, the old, new, new old regime from there. So you might be going, "Whoa, okay, because a lot of people are like, we can't touch the pre- CGT asset." It's just suicide, professional negligence suicide to do anything with a pre-CGT asset because losing that status is and resetting the cost base historically has just been the worst outcome, but that might be the position. So what that means is people who have been holding off on farm succession or asset succession because it's been pre- CGT really don't have that excuse anymore.
(39:33):
So it could open up a lot, especially for like the collaborative practitioners, a lot of work and a lot of opportunity to start planning those intergenerational succession strategies because we don't have to worry about not messing up the pre- CGT status. So can we have a refresher on other reasons why people might use a testamentary trust? Because I actually surveyed our TT Precedents Club members and I said, "When clients come to you and either they ask for a testamentary trust or you raise a testamentary trust, what are the key advantages that you're focusing on? " And albeit a small number said, "Yeah, we go in with the tax first because the current tax concessions are life changing." But a lot said, actually we focus on the protection of the family, protecting the kids, protecting it from divorce and relationship breakdown, and the taxes are cherry on top.
(40:33):
So it can be really tax is getting all of the attention right now. If you look at the newspapers and articles, it's tax, tax, tax, but we've got to remember for a lot of families, the tax is not the main reason, it's the other asset protection. So it is really good now to just verse yourself on this and make sure that you are really grounded in your knowledge of testamentary trusts and the reasons for using them.
(41:03):
So again, I will give a shout out to the online course, Testamentary Trust, the Essential Guide for Australian Lawyers. It is the best place to get this fundamental knowledge so that you know and can talk the difference between the deceased estate, the fixed and bare trust, the testamentary discretionary trust. So you can understand how things work when various people die, how we're locking in succession plan for future generations and the asset protection advantages to protect minus from saunders and voir dire to protect on relationship breakdowns and also to protect on bankruptcy.
(41:41):
So if you don't have that course, now's a great time to get it brush up. And also the thing about a course compared to like a textbook is I'll be updating this as soon as we have more information, there'll be a new module in there. So actually the module there is about how the tax treatment works now and I know a lot of you are like, "Oh, tax, don't please." And that has been generally fine. But for you to understand these changes, you actually need to understand how the tax currently works. And there's a really detailed module in there in the course on the tax and as soon as it breaks that we know I'll be really updating that module and putting a new one in so people know what the new taxation treatment is. So obviously you're not getting that from your tax textbooks about testamentary trusts.
(42:36):
Also on the family law asset protection, if you're a listener of the podcast, you probably know this, but we've just wrapped up a series, a six episode series on the asset protection treatment under family law of discretionary trusts, including testamentary trusts. So I did an audit of the last 18 years of cases where discretionary trusts have been attacked in family law proceedings and I've gone through all of the cases. So you start at 75, episode 75, and then there's a bit of a break and then I think 79 onwards goes through the cases and then there's a wrap up episode as well. So that's really good to listen to so that you are really clear on what happens at family law with testamentary trusts. And no, I didn't just pick the cases that won. I went through all of them and it's still, even though you can never have complete certainty with family law, it's still extremely positive for testamentary trusts and especially testamentary trusts and family trusts.
(43:42):
But testamentary trusts are almost given greater protection because when you look at the source of the assets, the purpose of setting it up, the origin of the trust and then if we factor in the way that we strategize with setting it up, we're protecting our trusteeship and appointship and who the range of beneficiaries are. We can really do a lot to protect the inheritance in the trust. Okay. Let's have a look at some of the benefits of using a testamentary trust in your will that are not tax related. So if your client is in a couple and has young children, let's say that situation, only one of them dies though. So the testamentary trust lets that surviving spouse repartn, move on, have new kids live their best life, which is what we want after a suitable mourning period, but that's what you want. But what happens is the inheritance is protected in the testamentary trust for the minor kids of our deceased client, right?
(44:48):
It's completely segregated from what that surviving spouse does. So I'll use a couple. So we've got Dan and Elsa. If you've listened to any of my webinars, you know Dan and Elsa. So if Dan and Elsa have three young kids, they're in their like mid 30s. If Elsa dies in a basic will, if she leaves everything to Dan and then Dan Repartners, he marries a lady called Louise, they have a new baby and he comes to get his will updated, he has got a conundrum because he's got a lot of dependence. He's got to keep Louise accustomed to the lifestyle she's used to and supported. He's got to provide for his new baby, who's got all of their education and living expenses ahead of them. He might've even used some of else's inheritance to be intermingled in the equity of their home that maybe he owns his joint tenants with Louise.
(45:44):
It's really hard for him to sit down and make sure that he still passes the inheritance from Elsa, which was only intended for Elsa's kids, right That doesn't end up going to Louise and the new baby. And maybe Louise re-partners and all of a sudden it's so far out of this bloodline, you can't even trace it. It's a really hard exercise, especially if it's intermingled into maybe he did the right thing and used some of it to pay super contributions for Louise while she was on maternity leave, maybe it's intermingled in their family home. What a mess. With the testamentary trust, if Elsa instead had left everything to Dan in a testamentary trust, then Dan's will is completely irrelevant. Dan might be the trustee and a pointer of that trust, but when he dies, he's no longer involved. She's nominated her sister Ana to run the trust for the kids.
(46:36):
It's completely ringfenced separate financial statements, separate taxile number, separate bank account. It's not likely to be intermingled. And if it has been used to help with the mortgage payments or the offset, it would be done as a secured loan so the equity still goes back to the trust. And outside of New South Wales, if there's a challenge against Dan's estate when he dies, the assets in the testamentary trust aren't available to satisfy that challenge. So what that means is if Elsa uses a testamentary trust to provide for Dan and the kids, she is setting up the plan now. She's not relying on whatever Dan does or doesn't do with his new will. She knows her kids are protected and she has that peace of mind that that money will be there for them and Dan can go off and live his best life, which of course we want him to.
(47:30):
Let's talk about Dan and Elsa again. Elsa dies, leaves everything to Dan in the trust or a basic will. Dan does meet Louise, but he doesn't die. Instead, they're together for 10 years and then they break up and go through a family law property settlement. With a basic will, that money from Elsa is just part of the property pool. Game over, Dan can't do anything really to protect it. He's on the back foot if he wants to try to carve it out. With a testamentary trust, the owners of proof ships. So rather than the inheritance from Elsa being part of the property pool, it's excluded and Louise is the one who has to argue that it's brought in. So you never say never with family law, but the owners of proof shifts, Dan goes from the back foot to the front foot and he has a fighting chance to protect that for Elsa's kids and they'll look at where did this money come from?
(48:27):
Who was it intended to be? So it was coming from someone who was not a party to the relationship. Dan is more of a custodian than it being his asset that he brought into the relationship. The purpose is to provide for children who are not in that relationship and not party of both spouses. Maybe when things were getting rocky, Dan stepped down and put Ana in so he's not even in control. There's lots of things that can be done to try to keep that out. All right, forget anyone repartnering. Louise is out of the picture. Let's just say Dan is in a high risk occupation. Let's say he's a lawyer as well or a doctor or something. So if Elsa dies and left everything to him and there is a claim against him, then the inheritance is on the table to satisfy the creditor. If it's in the testamentary trust, it's not available.
(49:16):
It's protected. And when I say, "Oh, never say never with family law," well, you get a lot of certainty on bankruptcy and trust protecting it. So we're really confident on that one. And lastly, let's get really depressing. If Dan and Elsa died together making their three young kids orphans with a basic will, Anna still going to be the trustee of that bare fixed trust running it for those kids. But saunas and Vautier will come in and say that when they turn 18, they can demand their inheritance. They can call on it and we've all heard those war stories of kids just blowing through their inheritance on frivolous things rather than it being there for when they need it to buy a house or provide for their family. With a testamentary trust, Saunders and Voirtier does not apply. So doesn't matter what age they are, Dan and Elsa are the ones who can decide how those kids ultimately get financial control over their inheritance.
(50:14):
The kids can still benefit on the way through capital can still be released to them income generally, but who knows how that's going to work at the moment, but the money will be protected for them for once they're financially mature. So they can choose who's in charge, like in this case, they'll choose Anna and then Ana can actually be there when the kids are 21, 25, 30 and decide you're ready, you can have control of your trust. So a lot of benefits there that have nothing to do with tax for families with young children. What about families who have adult children? The main thing I hear is that they're all worried about leaving their inheritance to their kids and then their kids going through a divorce and that money leaving the bloodline and going off with their daughter or son-in-law. So like we said with Dan and Elsa, having that inheritance in a testamentary trust gives those kids a fighting chance with the basic will game over.
(51:13):
There's no argument, no conversation about where that money came from. So the number one thing for adult children is to give them a testamentary trust so they can keep it for the lineal descendants, not having it exposed to in- laws. The same if any of those adult children are in high risk occupations, running a business, the inheritance is protected from any claims against them and they can segregate it and keep it in there for the bloodline. Testamentary trusts also let you rule from the grave. And I'm not always a huge fan of ruling from the grave, especially when it means someone hasn't received adequate provision. But one thing I do like about ruling from the grave is protecting grandchildren because if you are sitting here going, "I want to make sure my inheritance goes to my child, but then to my grandchild." If you do a basic will and leave everything to your child, you are then relying on that child to make their will.
(52:11):
Are they going to make their will? Is it going to be intestacy? Are they going to have different spouses? Are they going to leave everything to their spouse who is not in your bloodline? And then is that spouse going to re-partner and leave everything to them and suddenly who knows whether your grandchildren are getting it? But if you leave it to your child through a testamentary trust, their will is irrelevant. You are setting in line the plan because when your child dies, they stop controlling the trust, but the assets stay in the testamentary trust for the kids and all that needs to happen is someone else manages the trust for the kids. So you're really making sure that the grandchildren, you set in motion now what happens to the inheritance after your child dies so it goes to your grandchildren. Lastly, the same thing with the saunders and voir dire when we looked at Dan and Elsa both dying together.
(53:06):
If you've made a will now and God forbid one of your adult children dies before you, if you did a basic will, then it just goes their share goes down to their kids, your grandchildren, and they can just get it when they turn 18 and blow through it. Whereas if you'd actually use a testamentary trust for your child and they predecease you, then the grandchildren inherit the testamentary trust and saunders and void here doesn't apply. We're protecting the grandchildren from themselves as well. Okay. So this has been a big episode. Thank you for sticking with me. It's a lot to digest. The main thing I wanted to help you with is to get your head around what we do know from the tax side of things, what is uncertain, what we're waiting to hear more on, how to talk to your clients about this and all of the protection benefits of testamentary trusts over and above any tax considerations.
(54:02):
So watch this space, especially if you're in the TT Precedents Club or if you're feeling like you need support on this and you're unclear and uncertain, come join us in the TT Precedents Club. We are talking about this every day. I'm creating new resources as people ask for them and we think of them to help navigate this uncertainty. We're really in the messy middle and I think collaborating together, having the collective support, the brain's trust, all of us thinking of new strategies and ideas and considerations, it just makes us so much stronger and you know that saying a problem shared is a problem halved and that is really so true with the TT Precedents Club. So I would really encourage you to come join us and yep, hang in there. This is just part of ... We haven't had a lot of changes when it comes to estate planning, but things are moving.
(54:57):
There's new trusts act, there's new successions acts out there, there's new tax determinations. Now we've got these announcements, so it's more exciting than ever to be in this space. I really do hope we can find a position where we have some clarity so we can at least share with our clients exactly what's happening. But yeah, watch this space. I'll keep sharing what I know. Thanks for tuning in.
