Tara (00:57):
Welcome everyone, and thank you for joining us again for another episode of the Art of Estate Planning podcast. And as usual, I am joined by my amazing co-host, Carrie. Hi Carrie.
Carrie (01:09):
Hey Tara. I'm excited about today's episode. I think that there's going to be some competing comments here, so I'm looking forward to chatting about it.
Tara (01:17):
Oh, I can't wait to hear what you have to say about this. So everyone should probably know by now that I am a huge fan of testamentary trust. I've actually made a whole career around testamentary trust, but this particular topic is one where I'm not always advocating for using the testamentary trust. And so our question for today is should you put a family home into a testamentary trust? So I'm sure there's going to be a lot of, it depends in our answer, but I think it comes up a lot in strategy discussions, especially for people who are new to working with testamentary trust, and I really thought it was worthwhile diving into Carrie, I'm sure you've got some opinions. What do you think?
Carrie (02:05):
I do. I do. I'm going to, it's not common for me to shut my mouth, but I'm going to do it a little bit and let you go through some of the key things that you consider and not putting it into a testamentary trust. And then maybe, I thought I might say why you might actually leave it in the testamentary trust. I sort of know where your head's going with that and I know some of those comments, but I wanted to be that, I hate using that phrase devil's advocate, but I wanted to be that person that says, well, why might you put it in there? So maybe if you talk through the sort of things that people that might make it difficult to leave it in the trust and then maybe I can say, Hey, these are the things I think why you might actually put it in the trust.
Tara (02:44):
Yes, I love it. And I also love how we're doing our podcast session planning session in the actual session.
Carrie (02:51):
People know when to fast forward then, right? If they don't like the first bit they can like the second bit or vice versa.
Tara (02:57):
No, I love it. Yeah. Look, I have to say that a lot of the time I will not put a family home into a testamentary trust when I am designing a client strategy until both spouses have died. So we're going to talk a lot here about our situation of dealing with a couple where a spouse has survived or then if they have both died. I think the decision is a lot different if you're working with an individual, but where you've got sort of a vanilla situation for a couple, I'm usually more inclined to have the interest in the family home passing to the surviving spouse directly outside of the testamentary trust so that the other investible assets can go into the trust. But we've just got a clear title to the family home in the surviving spouse's name, and the main reason is simplicity. I think with the family home, we have to be really careful around unintended tax consequences and not being too smart for our own good.
(04:06):
Our family home is kind of like this magical unicorn of an asset where it's our last place where we can get total CGT free exemption on the family home, and I really don't think we should underestimate that. And it also gets amazing treatment for land tax as well. So I think if you are going to be looking at putting a family home into a testamentary trust, you really have to do your homework or throw up the red flags to say, are we going to have any unintended consequences? From a land tax perspective, you're really doing your surviving spouse quite a disservice if suddenly they have land tax payable on their family home because half of it is in a testamentary trust. Again, I've just sort of said, oh, half of it's in the trust, half of it's out the trust. I think a big disclaimer here is you really have to look at, well, how has the asset held and then sort of work through and play it out, and I've said this in previous episodes, flow chart it out, work through where are these assets going.
(05:11):
So obviously if your property is held as joint tenants, you can't have it go into the testamentary trust in the first instance unless you sever the tenancy and convert it to tenants in common. If you've got it held jointly as tenants in common, then in your will gifts the property or even just the whole residue to the estate into a testamentary trust, then you're going to end up with a situation where half the property from the first deceased owner is in the testamentary trust and the half the other part of the property that was originally owned and continued to be owned by the surviving spouse is outside of the testamentary trust. It just gets really messy.
Carrie (05:52):
I think that's a really important point, Tara, even from a planning perspective, but also just generally I think what we see a lot is that most homes are held as joint tenants anyway. It's very uncommon for a standard family couple to own a property as tenants in common now for multiple different reasons. I mean, number one, it's kind of the default position. Number two, a lot of your mortgage, so your financiers love the property, be held as joint tenants, then they're coming after the whole thing, so to speak. So I think this worry about it falling into the trust is something we definitely need to investigate and you need to make sure that as an estate planning practitioner, you confirm that underlying ownership, I hope LEXION and QLS are listening when I say this, so doing those tick boxes. But certainly I think this concept of it being like a huge thing, it's not really that common for a PPR to be held as tenants in common when it's a vanilla family, husband and wife sort of stuff.
Tara (06:51):
Yeah, absolutely. And so I think a lot of the time lawyers are going, oh, do I have to take proactive steps to get some or both of the interest in this property into the testamentary trust? The other thing I wanted to just round out, I was talking about tax and I mentioned the land tax and just to say the land tax in some states can be really easily managed. It's not like game over when you're using a testamentary trust. Some of the states, I believe just look at who's occupying the property, who's the default beneficiaries. We actually have a private ruling application request in with revenue New South Wales at the moment on behalf of the TT precedents Club to try to get them to approve our standard right to occupy clause over the principal place of residence to confirm that if there's a right to occupy where the property is held by the testamentary trust that the principal place of residence land tax exemption will apply.
(07:49):
Victoria, I think has another position. So just be aware of the position in your practising state and sort of understand how much confidence you'll have on the land tax position. It really does change, and I'm not an expert on the position in all of the states, I do want to say capital gains tax. It's a lot easier to still maintain access to the main resident's capital gains tax exemption, even where the property is either wholly or partly held in the testamentary trust if you have a right to occupy in the will. And so in the art of estate planning precedent, we have in the testamentary trust terms, the ability for the trustee to grant a right to occupy the property to any of the beneficiaries. And we also have wording that we encourage our members to use when they're actually crafting that specific gift of the interest in the property to the testamentary trust to create a right to occupy at that point as well. So generally speaking, the capital gains tax exemption pretty straightforward to access the exemption, but I do think for an unsophisticated layperson, it is still another layer of complexity that they probably don't need. It's not just like an open shut case when they dispose the property, dispose of the property that the exemption applies. Some analysis needs to be done. So I guess I keep coming back to this position of, unless the circumstances justify it, I'd probably on the side of just keeping it really simple.
Carrie (09:30):
I'm going to throw out there the kind of other arguments that people might put just because I want to be that jerk today. So I think this is something that is all very much as you said at the start, it depends sort of discussion, but I think that when we talk about the issues with it falling into the name of the surviving spouse is we have no asset protection for that surviving spouse. Now, I'm going to put a big star on this, which we'll talk about at the end about perceived asset protection versus whether you actually need it. Okay? And number two, you've already got half the property in your name anyway potentially. So I think that this concept of asset protection is very, as I said, it's a perception and not necessarily a reality for everybody, but certainly I think that given the value of property now often the home can be one of the biggest assets that people have.
(10:23):
So I think that we have to put that in context of how much the home is worth and the sentimental value of that property as well. If your partner goes and repartner and that property belong to your family kind of thing, if there's a sentimental attachment to that property and there's this real desire to protect that property, I think that that overshadows the kind of complexity. So I always say that when we deal with any aspect of estate planning, it's about balancing that flexibility versus certainty. Do you want the surviving spouse to have the flexibility to do whatever they want to do based on the changing circumstances or do you want certainty that you will know what the outcome will be? So I think when we talk about property now, it's a very different conversation than it was even sort of 20, 30 years ago where the house was worth like a hundred thousand dollars.
(11:17):
Now a house in Brisbane, just a normal family home in like I'm on the most western suburb of Brisbane and a dodgy house around the corner here for just a normal three bedroom home, it was $900,000. So that's a lot of money. I think we've kind of lost it in our minds that we think, oh, because again, it's not a realisable asset in the sense that it's not really cash in your hands, but certainly if something happens to you, it has a significant amount of value. So I think whenever we talk about that, I totally agree with what you're saying when we talk about keeping it simple for most family circumstances. But I think our job when we are talking with clients is getting to the root of is it really simplicity that they're looking for or is there some underlying protection here that they want for that property?
Tara (12:07):
And Carrie, here I am advocating for the keep it simple and out of, but I just checked my own estate plan before I logged on. What does it say? What does it say? We're giving half to the trust if one of us dies?
Carrie (12:25):
There you go see. See, Jared's a good looking fellow Tara. I mean, we want your kids to get their share of the inheritance. I think it's kind of, as you said, it's very much an it depends thing, right? I think when we talk about asset protection as an example, I mean one of the reasons you might be doing that, I'm going to use you as the example here is that you're a lawyer. You could be sued like no tomorrow. And so when we talk about asset protection, we have those several layers of number one, doing your job as best as you can. So in the context of a lawyer using best practise, following all your risk processes and checklists, okay? Number two is having insurance. So to come to the party if they get past that sort of first level, everybody has a bad day, and the bottom of the barrel is to have nothing in your name. So when we talk about a trust owning property, that's the very, very bottom of the barrel. So we want to make sure we've got good insurance and we've got good risk procedures above that when we are in professional practise. But I think when we talk about how often it gets to that bottom of the barrel, I don't know how often that is, but I certainly, I'm hearing you a lawyer and looking for those protection pieces.
Tara (13:40):
Yeah, absolutely. I mean, Jared and I both run businesses, and for us it's a bit of a no brainer because we made a choice to put our home in our personal names because of that capital gains tax treatment and it being really one of the last areas that you can get capital gains tax-free asset treatment, and I don't think we were really as worried about asset protection back then, but now it's like, oh, why wouldn't you use a death event? Sorry to be so impersonal, but an event where there are stamp duty and capital gains tax exemptions to restructure the ownership to level up your asset protection where there are asset protection concerns. For us, it's like, yeah, why not use this as a chance to at least get half the property protected, half the equity and not pay any tax or stamp duty to get it in there. So it's a bit morbid, but death as a restructuring event for asset protection, it can be really smart.
Carrie (14:46):
Well, I always say Tara, the tax man doesn't think that dying is a particularly good tax planning strategy. So if you've got it, use it, that's about the only time you're going to get it. So I think what's interesting, what you said before as well is, I mean you think about, I keep picking on you and Jared, I'm sorry, but you are a young couple still. You probably, when you purchased a property, you were still relatively early in the relationship, we'd probably having an incredibly different conversation in maybe 20, 30 years time. So obviously your asset protection generally for things like business if you're retired would obviously wind down, but certainly your security and your own relationship, the chances of you, those sorts of things would reduce as well. So I think that's certainly something to consider is the age of the people that you're working with.
Tara (15:35):
Yes, absolutely. I do think probably the best way to go when you're meeting with a client is to talk to them about the options and just say, is this important to you? Is protecting the asset on relationship breakdown important to you? What's your risk profile from bankruptcy? And then so we can put it into half into the trust right away. If one of you died, here's the pros and the cons. We can put everything else in the trust and keep the home out weighing up. Well, are we happy if we've got this amount of protection over a certain level of assets and we're running the gaunt land on the other and let the client decide, make an informed choice. That's usually how I approach it in a meeting because as we've sort of seen, you can argue it, you really easily argue it both ways.
Carrie (16:25):
And I'm just putting this in here because I know that it potentially is a shorter topic than some of our other topics. But again, I think this is an incredibly different conversation in your blended families, and I think it's a different conversation when you're approached by one person of the couple and not the other. Okay. Again, uncommon in a sense that if it's not a blended family for one person to approach you. I have had that before though, where a wife came to me, they had two children together, but she wanted to contact me independently. So that estate plan was very much crafted around protecting the children. I might've suggested marriage counselling at that point, but certainly I think that again, those clients, when they come to you looking at those drivers behind what's making them reach out to you in the first place, I think tends to then direct the rest of your conversations. Again, obviously it's our job to navigate saying, okay, well we know you want to protect things for the children, but do you also want your surviving spouse to have to deal with this trust? So that might modify their thinking.
Tara (17:32):
Yeah, I mean, things certainly get complex when it is a blended family, and I think I've written down here talk about my rules of thumb, but they really go out the window when it comes to a blended family dynamic. I just think you have to highly customise it. Same with this, right to occupy, I was just flippantly referring to the right to occupy before, which really in my mind is a mechanism for tax savings rather than something that you are going to have to rely on and enforce in court or lawyers at 10 paces. So I just do want to mention if you're doing blended family and putting the home into or an interest in the home into a trust and you need a right to occupy, I think a lot of work needs to go into stress testing, how that right to occupy is going to work, and then future planning of is it portable or what happens for disputes and all of that. Whereas where it's a vanilla family and no anticipated conflicts, then the right to occupy it's there, but I don't, you give it lip service, but I don't really think anyone's enforcing it against anyone. So you just need the clause really to demonstrate it for tax purposes. So yeah, another thing to sort of think about when you're drafting these arrangements.
Carrie (18:57):
Yeah, yeah, I think you're absolutely right about sometimes the devil is in the detail for those right to reside clauses because if you've got different trustees of the testamentary trust, then the person that has actually got the right to reside, you need to be very careful the way you're drafting the obligations of each parties and the rights of the parties to either end the relationship or to, as I said, if it's a portable interest, the payment of outgoings and how there might be portion or not apportion. So again, very simple in mom and dad, where mom is the sole surviving trustee, so to speak, very different when you've got co controllers involved, those sorts of things.
Tara (19:36):
I think even where you do have the simple scenario where if my husband died and the house is held 50% by me and 50% in a trust that I control, even then it's still not super smooth sailing, like stress testing how bills and everything being paid for. Another thing is the testamentary trust can't borrow, right? So what is the debt funding issue going to look like? And I think in my case, we've got so much life insurance that is going into the testamentary trust, it won't need to borrow and it will be fine. But that is another thing to think about. If you have got a lot of debt on the home and the testamentary trust can't borrow without jeopardising its accepted trust income treatment, then yeah, what's that going to look like? You don't want the spouse being forced to sell the home. So yeah, I think just sort of playing it through when you are guiding clients to make this decision that they really do understand it adds another layer of complexity, which could be totally fine for someone who is sophisticated, used to dealing with trust, used to dealing with property and trust and has a really good advice team there.
(20:54):
But for a lay person who has not really had any exposure to trust and the testamentary trust is their first exposure to trust at all, you really throwing them in the deep end with the testamentary trust owning half their house.
Carrie (21:08):
Yeah, I think in terms of the thought process around the trustee compliance stuff, I think is very real, and it's something that we're going to be talking about in a future episode, but it's very different from being able to go down and just do something yourself. I think we lose sight of that as lawyers because we are dealing with sophisticated things on a day-to-day basis. The nightmare that it is dealing with third parties when something is not just held simply is very real for individuals. So you're right, we do have to think about it in context.
Tara (21:40):
So I wanted to share my rules of thumb and thumb. Lemme know if you agree. Yeah, go for it. I'm excited. I've got my pen, I'm ready. Well, you might have different rules of thumb. So okay, if we're dealing with a young couple who have minor children and they're on the simpler end, they don't have any trust or companies they just want, they came to you for an I love you simple will, but you have recommended the testamentary trust will. In that case, I would probably leave the home out of the testamentary trust until they've both passed away. If it was that same scenario like myself where both people in the couple are running a business and we already have a bunch of trusts and companies, in my case, obviously we decided to level up our asset protection and put it into the half of it, into the testamentary trust. I mean, the other part of that though is we are going to have two testamentary trusts when we both pass away, one under my will and one under my husband's will. And in each of those trusts are going to own half of the property.
(22:49):
I have gone into that arrangement understanding it's going to be a bit more complex where you've got a boomer couple who have adult children. Again, I nearly always would defer the gifting of the home into a trust until they've passed away. Both couples have passed away. And then if you've got an individual, then yeah, I think put it into the testamentary trust right away if you've got that two year disposal period to either sell the home and do that tax free or they can decide to keep it in the trust and invest it. So I just sort of think it really comes down to the appetite of the test data as to what they want for the surviving spouse.
Carrie (23:34):
So yeah, I think that when we talk about the sort of vanilla family, again, I'm having to stress test that each time because I had a couple came into me recently where husband and wife, very much a vanilla family, but adult children, and they were adamant that they wanted the property to fall into a testamentary trust that the husband didn't have sole control over. So it was quite an aggressive thing when we think about it in the context of a vanilla family. But the purpose was that she had had a bad experience where her father had repartnered when he was sort of losing capacity and things were done, which meant that they never kind of got their share of the inheritance from their mother's or father's assets. So I think again, each time we have to, the rules of thumb are there for a reason because they are that simple approach that gives you sort of the baseline, but we have to test them each time.
Tara (24:28):
Yes, I love that. And actually that question of how much control should a surviving spouse have over assets and the testamentary trust. I've got that down for one of our podcast topics coming up, so I think we're going to have a lot to dive into there. The very last thing I wanted to talk about, and it's sort of related to this topic and not quite loosely, I guess, is sometimes people get confused about how it works where say you have got three testamentary trusts, three adult children, and they've all inherited a third of a family home, how does it work having the family home interest spread across multiple trusts? They want to sell it if they just want to rent it out.
Carrie (25:16):
Oh, so you're asking me, oh, okay.
(25:18):
Yeah, well, I could have a buy. I thought you is always so beautiful.
(25:24):
I was chilling back just thinking about sipping from my tea, Tara. So throw it back, give a girl some warning. I mean, sometimes I explain this to people that have you ever owned property jointly with anybody before? It's kind of very similar in many respects that you just have to agree with those people. But I suppose it depends on who the underlying controllers are, who you're in bed with, almost literally if it's a home. So I think when you're dealing with any sort of property and you've got more than one owner, there's already complexity involved. But certainly it comes down to that underlying control aspect.
Tara (26:00):
Yeah, that's it. So it's not that complex. I think clients get scared off the idea, but it's almost like, especially if the children are just the sole trustees of their trust, it's almost like they're just co-owners acting with the trust behind them and they have to decide if you are sitting here going, okay, that's a lot of information and maybe I'm more confused than I was when I was at the beginning. Firstly, sorry about that. And then secondly, we do workshop these types of scenarios a lot in the TT Precedents Club weekly hot seat. So every Thursday we all get together over Zoom. It's a live meeting where everyone can turn their mic on and chat and you can submit your anonymous client scenario to us and we can sort of work through the different strategy points and things for you to talk about with the client and get specific.
(26:57):
I was sort of a bit vague on the different land tax consequences in each state, but we can deep dive that into that for you and help you work through it if you are sort of going, oh gosh, yeah, I'm still getting my head around testamentary trust, and this does make me a little bit nervous or unsure. We can always prepare with you and help you be armed to talk about this with the client based on their scenario. So I just wanted to mention to everyone that we do have that support available in our amazing TT precedents Club. We've got over 200 lawyers around Australia who join. So yes, you get access to me and Carrie, but you also get access to our Collective Brains Trust, and we have such a wealth of experience and knowledge in that group. It's so valuable to tap into.
Carrie (27:48):
I should say too, Tara, just to, I want to flog the chain a little bit more. I think what's good about the TT Precedents Club is, I mean, two things. Number one, you can turn the membership on for a month and come in and do some things, and then you can turn it off anytime you like. It's not one of those subscriptions that you bought into for eternity. So as things change with you and your business, that's something you can do. I think that's really important for small business owners because I think things happen and cashflow does change, particularly if you're just starting out. The second thing is that I consider myself an extrovert. I dunno about you, Tara, but that's certainly I'm in that basket. But for the introverts out there that don't feel really comfortable asking in a group forum, there's an array of prerecorded hot seats from since 2020 or 2021, I think, Tara. So your question might not have been the first time it's been asked. So you can always go back and do that. We have a lot of questions around things like right to occupies or rights to reside. So you can go and search that and listen to the recording and see whether your question is answered, if you're feeling a little bit uncomfortable about bringing it to a group scenario.
Tara (28:59):
Yes, I love that, Carrie. I mean, obviously this is our membership, so I'm a huge fan of it and can't stop braving about it. But a great example of, we had a client scenario brought to us just a few weeks ago where we were just drafting the first, it was I think a right of first refusal or an option for one of the adult children to buy the home of the others, and we helped craft the strategy. We looked at, well, what are the tax consequences? Do you get the deceased estate stamp duty and CGT exemption if it's a option versus a conditional gift where the gift is charged with paying out the other siblings looking at that. And then also we had the clause drafted, but then also that week a new case had been handed down from, I think the New South Wales Supreme Court called Boyd and Peters, where that exact scenario had gone pear shaped, and there were some really important lessons out of that case that we could feed into our drafting to be on the front foot and not avoid falling into that same trap.
(30:15):
So it's just the kind of thing when you're running a very busy practise, it's really hard for you to stay on top of all of that on your own. And you might even print the case out, but did you get to read it or is the case even on your radar? And we do all of that for you and we draught the amendments and you've just got access to a lot more support. So you are free to be there with the clients devising the amazing strategy, just running things by people to just check that there's not another approach you could take and you've thought of everything. So that's what I love about it. We've just got, it's like being in a firm with 200 estate planning partners there all supporting you when really you're mostly, they're mostly sole practitioners.
Carrie (31:01):
Sounds like hell, Tara, 200 lawyers. Goodness me, that's Hades, right? Yeah. Our partnership meetings are a real party though. Listen, I think that's probably a nice way to kind of round things out, Tara, that these questions around whether a trust should fall into whether a primary residence should fall into a trust is something that isn't always sort of cut and dry. And if you're on the fence about something, you're always welcome to bring it to us and talk it through. A lot of what we see is confidence issues with people rather than competence issues. And so having that group of people being able to support you is huge when you're running out there against it all on your own.
Tara (31:45):
Well, I think that's the perfect note to finish on. Thank you so much for joining me today, Carrie, and thank you everyone for tuning in. We'll see you next time.
