Tara (00:51):
Thank you so much for tuning back into the Art of Estate Planning Podcast. It's Tara here. And in this episode, I want to dive into what is a fixed testamentary trust.
(01:05):
Now, would you believe it? I've actually had this topic of fixed testamentary trusts on my list of podcast topics for months. I've been putting it off because it's a big topic. There's quite a lot of very technical legal issues that I wanted to make sure I was across and run to ground. And anyway, time would have it. My hand has been forced because fixed testamentary trusts are all the rage. Everyone's talking about them after the federal budget announcement and the 30% minimum tax on testamentary discretionary trust established after the budget date. So why is everyone talking about them? Because in the budget papers at the time of recording, that is still all we have. So we are really stabbing in the dark as to what the government is proposing with respect to testamentary trusts. But they are saying there is going to be an exclusion on the 30% minimum tax for fixed testamentary trusts.
(02:17):
So just to recap, firstly, have a listen to episode 85. I spend a whole hour talking about the impact of those announcements on testamentary discretionary trusts and what they mean and are testamentary trusts dead? No, they're not. They're still extremely powerful. But I want to dwell down into this concept of the fixed testamentary trust exemption to 30%. And so just to recap, because I've seen a lot of people still being confused about this and rightly so because not everyone has read the papers and also we don't have a lot to go on in the budget papers, but testamentary discretionary trusts already in existence with assets in them at the date of the announcement, which was 12 May 2026 are exempt from the 30% tax on taxable income of discretionary trusts. This minimum tax will not apply to other types of trusts such as fixed and widely held trusts, including fixed testamentary trusts, complying super funds, special disability trusts, deceased estates, and charitable trusts.
(03:27):
So I've had people in the TT Precedents Club asking me, "Well, should we restructure our testamentary discretionary trust to fixed testamentary trusts? Should we have a option in the precedent so that new trusts that we draught can choose if they want a discretionary trust or a fixed testamentary trust?" And I have put together a whole presentation for the TT Precedents Club on this. So we've done the deep dive together, but I wanted to talk about it on the podcast, especially just as a resource for everybody. I have been involved in a number of back and forth discussions in some of the industry groups where people are saying, "Just use a fixed testamentary trust, no worries, move on. " And I have a lot of reservations with that. I don't think they are at all a viable substitute for a testamentary discretionary trust. They are an entirely different thing designed for a different purpose.
(04:29):
So let's dive into that and I'll explain why. So what is a fixed trust? You would actually think that should be a simple question to answer, but it isn't and that is sort of one of the main problems I have with it. I want to talk about what it is in the context of what most people know it is and at a very high level, but then I'm going to dive down into the challenges with even defining a fixed trust under the tax legislation. So I also just actually should say a few of the questions have come through. People are getting really confused or misled by the way that trusts are marketed or described. And I do want to just remind you that it is the best way to wrap your head around the trust and to work out what you're dealing with is to just go back to our core legal principles 101.
(05:25):
So if we're trying to work out if we've got a fixed or a discretionary trust, whether it's a intervivos established during a person's lifetime or a testamentary trust, we need to look at the beneficiary entitlements in the deed and how those are set up. So ignore the marketing terminology and just focus on those pure legal structures. I will just actually do a little plug now. I'm on a sidebar, but bear with me, we'll come back. But if you're feeling overwhelmed and getting out of your depth with a trust that you're drafting or this strategy and how to even just pivot and adapt to this new regime that we have to now contemplate, which by the way, it's not in effect until one July 2028 if it's even legislated by then. So this is all just over two years away, but we have to turn our mind to it and think about, do we need to be doing anything now to pivot our standard practises so that we are future proofing the wills we're doing and giving our clients comfort and protection?
(06:35):
So if you're feeling overwhelmed, I really would encourage you to go do my online course, Testamentary Trust, the Essential Guide for Australian Lawyers. Yes, of course right now it only covers the taxation treatment that we currently have, not the new proposed tax regime, but that knowledge is going to be really helpful. You still need to know that knowledge for any testamentary discretionary trusts which are grandfathered and protected that were in place before the budget announcement. Potentially you'll still need to know it because we may not even have these changes come in, but also you need to know where we are now and how it works at a very specific detail so you can understand the proposed changes. So you will have to go deep in these structures so that you can understand conceptually how it all changes. Now, obviously my job is to guide you through that, particularly our TT Precedents Club members.
(07:39):
I'm really trying to be your sherpa to make it really clear and break it down into checklists and pros and cons and decision trees. But if you truly want the knowledge yourself, which you really ought to have, that course, the essential guide to testamentary trusts for Australian lawyers is the place to get it. And of course, you get lifetime access to it as well. So when we do have clarity, I'll be releasing new modules that will go in there comparing the different tax strategies and teaching you what you need to know about the changes and any pivots we have to make for our strategies. All right. I promised I would tell you what is the sort of entry level definition or meaning of a fixed trust. So a fixed trust is where the beneficiary entitlements to income and capital are certain and fixed. Now, they might be subject to conditions or contingencies, but they are fixed and certain under the trustee.
(08:42):
So compare that to a discretionary trust, whether it's intervivors or testamentary, discretionary trust. The entitlements of the beneficiary are merely to be considered by the trustee and to have due administration of the trust. So the trustee chooses under a discretionary trust which of the beneficiaries receive a benefit, how much and when in each financial year. In a fixed trust, the trustee does not have that discretion. The trustee's job is to follow the deed and to honour its duties under the trust deed. It does not get to choose what entitlement the beneficiaries will have. That is fixed and known. So usually it's in proportion. So if you've got one beneficiary of a fixed trust and the trust earns $100, it's clear that the beneficiary is getting that $100 of income and also is entitled to the capital. The only thing that might disrupt that is the trustee's right of indemnity against the assets.
(09:48):
So under a fixed trust, it's not like a unit trust and there's a whole debate about whether unit trusts can be fixed trusts under the tax regime, which we're not going into, but under a fixed trust, they don't have units. So they're not like transferable interests or entitlements. You can't change it. Once it's set up, it is set for life. So usually you have a very small range of beneficiaries like one or a couple, like two or three beneficiaries, but in a discretionary trust we've got our primary classes, secondary classes, tertiary classes. It can include a person's whole extended family, charities, related entities. You don't have any of that with the fixed trust. You've just got one or two beneficiaries that are set out from the very beginning. Of course, you need a trustee. You can have the bare fixed trust, which are covered in a lot of episodes under a will where the terms of the trust would be the will, the powers of the executor and bear trustee and whatever's in the trust legislation.
(10:56):
With a properly formed fixed testamentary trust, you want to have a proper trust terms like with express powers, succession of the trustee, that type of thing. You might have an appoint or principal guardian role as well and the main reason people use them is certainty, but let's compare them to a testamentary trust like a report card. So currently and with ignoring the proposed budget changes under a bare or fixed trust, you don't have lots of minor beneficiaries. You may only have one or none at all. So if there is a beneficiary who is a minor, they should get the tax-free accepted trust income treatment. Compare that with the testamentary discretionary trust where all minors are currently eligible for that, so multiple generations and they don't even have to have any relation to the test data. So under a testamentary discretionary trust, we have absolute flexibility and discretion and we have asset protection for family law and bankruptcy and also for beneficiaries who might be financially immature wasting their inheritance.
(12:11):
And the reason the testamentary discretionary trust offers that asset protection is because there is no certainty about the entitlements of the beneficiaries. They might receive anywhere between zero and a hundred percent of the income and capital of the testamentary trust at the discretion of a trustee. So because no one can point to any set entitlement or interest with any kind of certainty, that is why the testamentary discretionary trust and discretionary intervivos trusts offer that asset protection because there is no certainty and you just can't put your finger on anything to say, "Well, that belongs to the beneficiary." So the assets of the trust cannot be deemed to be the assets of a beneficiary against whom there is a claim. With a fixed trust, you do not get the asset protection. You don't get it for family law, you don't get it for bankruptcy and you can't really even get it to protect 18 year olds from blowing through their inheritance or spend thrift adults or adults with substance abuse problems.
(13:32):
You really can't protect it at all. And that is because we know how much they are going to receive. They are going to have their set percentage of the income and capital. So there's complete certainty. So where there's certainty, there is no asset protection. From a tax perspective, there's also no income streaming with a fixed trust, whereas with a testamentary discretionary trust, you can choose which of the beneficiaries you want to allocate the income to and use their various marginal tax rates. I don't want to confuse and dive straight into the tax right now, but as an example, even after one July 2028, if these proposed tax changes come in as currently indicated with a discretionary trust and a testamentary discretionary trust, if you've got a high income adult, let's say his name is Jeff, he is a accountant running a business and earning a really decent salary over 135,000.
(14:38):
So his marginal tax rate is the top tax rate and he's got three adult children who all happen to be like in their early 20s and at uni and not working. Jeff can stream the income earned from the assets in a discretionary trust or a testamentary discretionary trust to those three adult children and use their marginal tax rates. Now currently you can use them up so you get the tax-free threshold and then the lower percentage, I think about 16% although it'll check, I think it's going to be 14% by 2028 after the changes, Jeff might have those adult children paying tax on that income at 30% each, which is higher than what they would at today's date, but they're still only paying 30% compared to had it been allocated directly to Jeff without any streaming benefits, he would be paying tax on that income at 40, the top marginal rate, 47%.
(15:45):
So income streaming is actually still very advantageous for our high earners with discretionary trusts, which as I mentioned in episode 85, is really counterintuitive and seems to go against the purpose of the tax changes. With a fixed trust, you don't get income streaming. If Jeff is the beneficiary of the trust, then it all goes to him and he can't allocate it amongst his family members. So I said before that a fixed trust should be simple to define, but it is not. There is a definition for tax purposes in the Income Tax Assessment 1997 Act, and it says a fixed trust in section 995-1, a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust. So we can't do these capital protected trusts or hybrid trusts. It has to be income and capital and they have to have fixed entitlements.
(16:49):
Fixed entitlements is actually defined. It says, an entity has a fixed entitlement to a share of the income and capital of a company partnership or trust if the entity has a fixed entitlement to that share within the meaning of division 272 in Schedule 2F to the Income Tax Assessment Act 1936. Did you get that? So what that definition ... So we've got fixed trust, which is referring to the fixed entitlement definition in the 1997 Act. The fixed entitlement definition is referring to the trust loss rules in section 272-5, which is in schedule 2F of the 1936 Act. So even though these trust loss rules are adopting the numbering protocol 272-5 from the 1997 Act, remember 1936 Act would just be 272. They don't do the dash sub number. Somehow this is buried at the back of the 1936 Act in a schedule. So you go there and then it says, for the purposes of the trust loss rules, and we'll conflate this with some other regimes as well, if under a trust instrument, a beneficiary has a vested and indeasible interest, remember that vested and indefeasible interest in a share of income of the trust that the trust derives from time to time or of the capital of the trust the beneficiary has a fixed entitlement to that share of the income or capital.
(18:31):
So back under fixed trust in section 995, it has to be fixed entitlements to all of the income and the capital of the trust, but 272-5 is just saying either, but I think you have to satisfy it for both. So you need a vested and indefeasible interest. There's also a discretion for the commissioner under sub three and it is a little bit confusing because vested and indefeasible interest is a really challenging test to meet. So I actually recommend having a read of PCG 2016 / 16. So I was over 10 years old and it basically goes through and says it's really hard to have a vested and indefeasible interest and a lot of trusts will not have a vested and indefeasible interest. It does focus a lot on unit trusts, but it also applies to others. But they say if you don't have a vested and indefeasible interest, there is some safe harbours that you can go along with.
(19:41):
So there's a safe harbour number five for a specific single interest holder trust. So the trust must have a trust interest, all beneficial interests in the income and capital of the trust are vested. All beneficial interests have the same right to receive the income and capital of the trust. All beneficial interests in the income and capital can be expressed as a percentage of the total income and capital. There is not a discretionary trust and there are no default income or capital beneficiaries and you must have a single interest who's an individual. There's also number six of the Safe Harbour, which basically goes through the same, but it doesn't say you need a single individual. Instead they say, because you can have these vested and indefeasible interests with multiple fixed beneficiaries. If there's three, then they each have a third, for instance, but they say in Safe Harbour number six and other trusts, all of those conditions except you can have more than one and the trustee or manager has never exercised a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust.
(20:54):
And this is where it gets even more confusing because there can be powers in most modern trustees which cause a beneficiary's interest to be defeasible. So not indefeasible. You have to have vested and indefeasible. So you may not satisfy that requirement if there is a broad power to vary the trust deed. So nearly all discretionary trusts have very broad powers. And in fact, there's been a huge trend and I urge will draught us to lean into having a very broad variation power because there can be quite a lengthy time between drafting the will and the testator dying and we don't know what the change of circumstances might be. Also, we've seen a lot of regime changes, the foreign person exclusion requirements, this new tax regime now, like things change, circumstances change. So a lot of the time you do need a variation power, but in PCG 2016 / 16, they're citing the Colonial First State Investments decision where the federal court held that the power of the trustee or manager to amend the constitution of the trust results in the beneficiary's interest being defeasible and consequently the trust being a non-fixed trust.
(22:17):
I also have a big question mark over intergenerational succession planning for fixed trusts. A lot of the time we use a testamentary discretionary trust so we can avoid relying on the will of a particular person. So like for instance, if I pass away and I want my husband and two kids to benefit from my life insurance and super, and if I use a basic will and my husband does repartner or have more children, I've got no idea whether my inheritance is going to end up with my kids. It could very well end up with my husband's new wife or to their baby together and I'm really relying on him to try to make a will. I've said this in episode 85, that's even challenging. His will could be challenged. He may have intermingled the money from me into things like joint tenant assets or her super while she was on maternity leave.
(23:19):
I've got no comfort that my money will go to my own kids with a basic will, but with a testamentary discretionary trust will, my husband's actions and his will are irrelevant and when he dies, that trust keeps on keeping on, he stops being a controller, whoever I nominated as a backup controller steps in and I've got a lot more comfort. So can you do that with a fixed trust? I can draught that. I know how to draught that. You'll be basically put in our second tier secondary beneficiaries or remainder beneficiaries, but I think that will mean the trust is no longer satisfying the definition of the fixed trust. So we have to work out what happens when the trust vests with this person, our main beneficiaries dying. Further, can I just say the definitions I've just been talking about then are in the tax legislation.
(24:17):
There's a whole requirement of fixed trusts in things like stamp duty and land tax. So I'm just looking at the Land Tax Act for New South Wales and in section 3A, they define a trust is a fixed trust. If the equitable estate in all of the land that is the subject of the trust is owned by a person or persons who are owners of the lands for land tax purposes, what? So that's an entirely different definition, right? And I don't want to dive into the comparison of the definition. I just want to highlight the complexity of even working out, have you got a fixed trust or not and are you getting in the fixed trust exemptions or not? I mean, the thing with the fixed trust stamp duty land tax and CGT and income tax treatment is generally if you can satisfy you've got a fixed trust, then they will conflate the assets of the trust as being belonging to that fixed beneficiary, which as I said, sometimes that's easier because it sort of looks like an individual owns it and sometimes that's really bad because you get exactly no asset protection.
(25:29):
I also want to talk about Saunders and Vaughtier and that rule. So if you're going, "What is that? " Have a look at episode 13 because we did a full episode on that and how it applies, but basically Saunders and Vaughtier is the rule where if you've got someone who is over 18, who has invested an indefeasible interest in the capital and income of property on a trust, then they can demand that the trust ends and they receive their entitlement. So I've been wondering, do we have a saunders and voir dire issue with a fixed trust because it does not apply to testamentary discretionary trusts. It usually applies to a basic will where you leave an asset for a minor, like it obviously has to go on trust because minors can't hold property. But where the auntie is holding the inheritance for the minor until they turn 25, well, actually that minor can call on the saunders and voir dire rule and say, "Well, I'm 18 now.
(26:35):
I am absolutely entitled. I have a vested and indefeasible interest. Ends the trust. Give me the assets." So if they choose to do that, there's nothing that their auntie can do legally to prevent that from happening and then you've got an 18-year-old with a lot of money exposed to their financial immaturity. So testamentary discretionary trusts, one of the reasons we use them is to avoid saunas and vautier happening so we can have a smoother transition of control to the child. We also don't want the trust to end necessarily. We want those asset protection and income streaming benefits to continue and because you don't have a vested and indefeasible interest when you're just a beneficiary of a discretionary trust, testamentary discretionary trusts aren't susceptible to the rule. So for saunders and vautier to apply, you need a vested and indefeasible interest. And remember, a fixed trust is a trust that a beneficiary has invested an indefeasible interest.
(27:33):
So as soon as you are an adult, as soon as you turn 18, if you're a beneficiary of a fixed trust, Saunders and Vaughtier applies so you're not really doing anything to protect beneficiaries from blowing through their inheritance. And that includes disabled or adults with a disability who might still be entering into relationships, might have some level of legal capacity but are not really financially savvy or astute and the idea of the trust is really set up to try and preserve the capital so that it's always available for them and to have someone who is responsible to manage it on their behalf. They could shut that down with a fixed trust but not with a testamentary discretionary trust. So back to our question of should we be changing our approach to use more testamentary fixed trusts, I want to examine the utility of when they are helpful because they're actually only useful compared to a basic will in a very narrow set of circumstances.
(28:40):
Like you might as well just use a basic will. Don't bother with the fixed trust in your will is pretty much what I'm saying in a lot of circumstances. So just to recap, if this 30% minimum tax rate comes in, there's a few issues where we don't know. We do not know how double orphans, so where a minor child has lost both their parents and they're a minor. We have been given preliminary indications that income to them will continue to be exempt from this 30% when you're a double minor. So both parents have died and they did say income to vulnerable minors will also be exempt, but we don't know what that means. We do not know what happens where you're a single orphan, so only one parent has died and you're a minor, but I do want to say if you're earning over $45,000 of income from other sources, so employment income where you are using your marginal tax rate and tax-free threshold on that first $45,000 and you're earning over that, then you are already going to be paying 30% tax on a distribution from a discrete trust, you're already doing that right now.
(30:03):
So it's people who are not earning $45,000 of salary and wages or other income that they can apply their marginal tax rate and tax-free threshold for who will be paying 30% on the first dollar they earn. So as I said in episode 85, people who might be in that category are probably retirees, disabled adults who are not eligible for a special disability trust, people who are in the sandwich generation, maybe they've really stepped down their employment work because they've got to care for ageing parents, maybe grandchildren, adult students. All of those people will be paying 30% on the first dollar they earn, whereas they should have at least 18,000 tax-free, probably closer to 22,000 tax-free by the time you look at the low-income tax offsets and that type of thing. So again, when you look at this, it's really penalising our most vulnerable and having no real practical impact on high income earners.
(31:11):
The only downside for the high income earners like that Jeff case study I mentioned is where they might've streamed to other family members, then they're streaming at 30% instead of the lower rates. But hey, that's still better than the top marginal tax rate and they can't utilise a corporate beneficiary bucket company, but they're already going to pay tax at that exact rate or higher, so they're not affected. So let's work through a couple of demographics, estate planning beneficiary scenarios to work out should they still use a testamentary discretionary trust after say these budget announcements are in place, we're looking at it after the budget, should they use a testamentary discretionary trust, a testamentary fixed trust or a basic will? And I've got a table here sort of comparing and ticking and crossing and question marking each of these metrics, but I'm going to do my best to try to talk it out to you.
(32:09):
So this is what the TT Precedents Club members are getting, a visual. So if we've got, oh gosh, I'll just pick on myself. So if my husband and I are killed in a car crash after we drop the kids at school, my kids, I've got two boys, they're suddenly double orphans with some wood, better tap some wood after the budget with a testamentary discretionary trust. It offers asset protection. We've been given a good indication that double orphans will still get tax-free income. Any adults in that trust will be taxed at 30%. So say my mom does a lot of caring for them, my brother and my brother-in-law are going to run that trust. So say my mum looks after the kids a lot and they decide to remunerate her for that and that as a trust distribution, she'll be paying 30% tax on that and she is a retiree, so that is probably higher than she would've received.
(33:03):
But the kids are still getting tax-free income, the first 44,000 tax-free between the two of them and then marginal rates from there. The next tax bracket of 16,000 up to 45,000 and then are finally hitting 30%. So still really good. And we've got the tax streaming, but as I said, if they want to allocate income to my mom because she's helping out, they can do that. It also means that we've got multi-generational succession planning and we're protecting the kids from demanding their inheritance as soon as they have their 18th birthday and blowing through the lot. With the fixed testamentary trust, there's no asset protection from relationship breakdown, bankruptcy exposure, or from their own financial immaturity once they turn 18. They still do get the tax-free amounts for minors. In this case, if there was an adult who was a beneficiary of the trust, it would be at their marginal tax rate, but our only beneficiaries are my two kids who are minors.
(34:07):
There's also no tax streaming and as I said, I don't think we can do the multi-generational succession planning. I need to investigate that further, but at the moment it could jeopardise the nature of the trust as being a fixed trust. I need to learn more about that. And that's also demonstrating my point about this is not simple. This is complex. People think, "Oh, just a fixed trust. No worries." Well, yes, worries.What is a fixed trust? So compared to a basic will, the report card for a fixed testamentary trust and a basic will is identical, no asset protection. Yes, those two double orphans get tax-free income, no adults to stream to, no streaming anyway, can't plan and the kids get their inheritance when they turn 18. So I would pick a testamentary discretionary trust for double orphans, very valuable, lots of benefits there. What about if we've got a single orphan?
(35:06):
So that scenario that I die leaving my husband and our two kids after the budget is implemented. Asset protection in a testamentary discretionary trust, he gets asset protection. And more importantly, I don't have to worry about my husband repartnering and making a new will. I don't have to worry about him repartnering and going through a relationship breakdown. The kids get asset protection on that money in a testamentary discretionary trust because it's for my husband and the kids. So when the kids grow up and go through relationship breakdowns, it's protected. We do not know how minors will be taxed on income. I don't know if they will get the tax-free amount like they currently would. I don't know if they're getting the top marginal penalty rate like they would if it was a family trust or if they're just going to have to pay the minimum 30% and not get the tax-free threshold.
(36:02):
There's a big question mark over that, which we are urgently trying to get clarity on. The adult, so my husband would receive income from that trust at a minimum of 30%. He's already paying tax at at least 30% so he'll just pay it at his marginal rate. So same, same really. Same if he wanted to allocate it to my mom, 30%. So he's got the tax streaming ability. We've got the multi-generational succession planning. So I'm not relying on my husband's will. I've set the intergenerational plan for this money in motion when I made my will. I'm not worried about what he does. And when the boys turn 18, they can't demand anything with a fixed trust. So just in the scenario where you've got a surviving spouse with minor kids, no asset protection. So you would have one beneficiary being my husband, right? It would be very strange to have to split everything that I leave him to himself and the two kids in thirds.
(37:07):
Most people do not want to do that. That's like bringing forward the inheritance. If you think of a basic will, it's always like I leave it to my surviving spouse and only after we've both died, do the kids get it. So we'd have one beneficiary being my husband. So the trust and actually if he can't be the trustee then either because do you even have a trust then you need a separation of the right to control the trust, being the trustee and the right to benefit. So you'd have to have someone else in control of it for him. So the minors aren't getting any distribution because he's the only one allowed to receive it. Looks and feels like his asset. He's got total certainty. He's got no asset protection. He'll just be taxed at his marginal tax rate. Great, but he's already over 30%. He's so really no benefit there.
(37:59):
No tax streaming. I don't think there's any multi-generational succession planning. The kids aren't even getting the inheritance, so we're not worried about Saunders and Vautier, but not very good. And the basic will is the same. The fixed trust offers nothing over the basic will other than choosing someone else to control the money as the trustee, which can be good if you've got a disabled adult who needs protection. But in the case of a surviving spouse, that's almost offensive. So you would not use a fixed trust where you've got a surviving spouse with kids. If you have got an adult child and after both parents have died with the testamentary discretionary trust, they get asset protection. So if they're receiving their inheritance, they have a chance of protecting it on a relationship breakdown. So say if my parents both die and leave me a testamentary discretionary trust, like I'm married, I'm running a business, I want asset protection.
(39:01):
They want to set me up so that if I do go through a relationship breakdown with my husband, I've got a chance of protecting this money for my kids.
(39:11):
I don't think I'll be able to get tax-free income streamed from this trust to the kids, which is currently a huge benefit. Currently I could stream 22,000 of tax-free income to each of my children to help with school fees and everything like that. Like I mentioned, I don't know if minors will be taxed at top penalty rates, the minimum 30% or what they'll be taxed at, how this 30% will apply to them. I will be taxed at 30% minimum with the refundable credit and maybe top up if I'm higher and I will be higher because I earn over 135,000. So it'll be exactly the same. There's no tax penalty of using the testamentary trust compared to me getting a basic will. It's a tax neutral outcome, but I've got the asset protection. I've also got tax streaming so I could stream to other family members who are adults if I wanted to.
(40:11):
My parents have locked in the succession plan so that they know that my kids will get the inheritance in the trust. They don't have to rely on whatever I do in my will. And again, if I've predeceased them and their trust is actually for my kids, well, they don't get a chance to call on the trust when they turn 18. With the fixed testamentary trust, no asset protection, no minors, I'm the only beneficiary, but you do get taxed at your marginal tax rate. There's no streaming, no ongoing succession planning. So it's pretty much the same as a basic will. No asset protection. I'm the beneficiary, there's no minors, tax at my marginal tax rate and no streaming. Where this could be useful is, so why would you do a fixed trust over a basic will? Because you don't want the beneficiary to be able to control their inheritance.
(41:06):
So they need protection. You need a different trustee. So probably for an adult who has disability or special needs who does not qualify for a special disability trust. So I am recommending to the TT Precedents Club we should be looking at these fixed testamentary trusts for adults in that category. And even then it's a trade-off between the tax and the protection because if you've got an adult beneficiary who is not financially mature and sound and very able to be influenced by bad actors and susceptible to that, if they have a fixed trust, they've vested an interfeasible interest and they could end the trust. So if there was somebody who knew about that and was able to persuade them, then that child could end the trust that's designed to protect them, whereas with the testamentary discretionary trust, you can't do that. The same as adults in that category with special needs but not a disability enough for a special disability trust could be coming in and going out of relationships as well and they don't get any protection with the fixed trust.
(42:19):
You do get protection from both of those things with the discretionary trust, but you have to tax them at 30% from what we know. Special disability trusts are exempt from that 30% rule, but we're not enough to be eligible. So we are paying more tax. Basically, if your first dollar of income is taxed at 30%, it almost ends up as like an average tax rate of you having earned over $200,000 because you don't get the opportunity to fill up your tax-free threshold and lower marginal rate. So the fixed trust does give you the marginal tax rate, but you lose all protection so it doesn't really achieve much. I do think for that category of adult with special needs, it's worth trying a testamentary fixed trust over a basic will, but in all other categories, the testamentary fixed trust adds nothing compared to a basic will.
(43:19):
You might as well have just done a basic will. Now you've done really well bearing with me on this very technical topic. I do just want to say if you are interested in understanding more about the family law protection with fixed trusts, don't forget our family law series. Episode 75 and then 79 through to 84, go back and listen to the episodes with the case of Pittman and Pittman and also Rigby and Kingston because we look at what happened like in Pittman and Pittman, they converted a discretionary trust to have fixed entitlements and as a result, the trust assets were property of the parties and in rigby and Kingston, they looked at quasi-type fixed entitlement and whether that was enough to be property of the parties or whether there was still discretion. So back to our original question, should we be changing our strategy and just offering fixed testamentary trusts?
(44:12):
For most of your clients, the answer will be no. For the disabled adult beneficiary where either they've got an estate that's too large for the special disability trust thresholds, like I've got one at the moment in the TT Presidents Club we're looking at. I think the estate is like three or four million. There's an only child who's severely disabled, so they will qualify for a special disability trust, but we can only send like around 820,000 and plus a home to the special disability trust. What are we going to do with the excess? So if they want that child to have the full amount available to them, they need to do a testamentary fixed trust. Everyone else, young couples with children, whether both of you them die or only one of them dies, the testamentary discretionary trust is still far superior because of the asset protection, protecting the kids from being financially immature, still the ability to stream and the intergenerational wealth planning, even adult children who don't have special needs and they want some kind of asset protection, including family law, the fixed testamentary trust achieves nothing over a basic will.
(45:29):
So there's a reason we don't have them in the equation now even before this 30% tax. I'm sure there's other things. I think there's a case out there. I probably should have researched this. I'm just going to put it out there and maybe someone who knows can let me know. I'm certain there's a case out there which actually said while the trustee has a right of indemnity against the assets of the trust, the beneficiaries can never be absolutely entitled now absolutely entitled as part of the requirement for Saunders and Fortier. Is it part of the definition of fixed trust? It is confusing. I'll run that to ground for our TT Precedents Club members, but as you can see, at the moment, unless we get clarity on this and really specific guidance, this is not a simple answer. And I'm really hoping, as I said in episode 85, that as part of releasing this new regime, they tidy up this whole mess.
(46:30):
We get consistent definitions. We don't have to rely on definitions and then PCGs and pulling it all together and really old guidance that we really, they look at this holistically and clean it up. I hope this episode has been helpful with cutting through the noise and particularly where people just say, "Oh, just used a fixed testamentary trust so that you're informed to know if that really is the right choice and you're armed with things that you can go and look up yourself. Stay strong, keep following me on social media. I'm constantly coming up with new infographics and checklists and videos as my thoughts on this are evolving. And if you are really wanting some support, join us in the TT Precedents Club because we are talking about this all day, every day we're spending a lot of time in our weekly hot seats, chatting it over.
(47:26):
People are sharing resources. One of our members, her father is a tax structuring accountant and he did some calculations to show us exactly the difference before and after the proposed 30% tax for testamentary discretionary trusts and which category of beneficiaries will be affected and which ones won't. So it was really good to see the actual numbers stacking up from ... We can sort of use broad brush calculations from a lawyer's perspective, but seeing it from the accounting perspective was really helpful. So if you're feeling alone or stressed or unsupported, come join us in the TT Precedents Club. It's so much support. We are collectively creating resources that you can all use so you don't have to individually reinvent the wheel and you've just got people to bounce things off. Thanks so much for listening and I'll see you next week.
