Tara (00:57):
Thank you for joining us for another episode of the Art of Estate Planning podcast and today's topic is again on one of my favourite estate planning strategies, testamentary trust. And Carrie and I are going to dive into how much money do you need to really justify a testamentary trust So there's no actual, I'm going to be a spoiler and say there's no actual limit mentioned anywhere in the legislation or the cases. It's a big fat depends, but yeah, Carrie and I are dive into all of the factors to think about and all of those things that it does depend on. Hi Carrie, thanks for joining me again.
Carrie (01:42):
Hi, I have to join you. No, I just joking. I love coming to talk about my favourite thing, which is cats and estate planning.
Tara (01:51):
We love having you, look, I don't think we've actually really dived into this particular concept before, so I thought it was worthwhile mentioning before we really got into the details. So I wanted to just remind everybody about the benefits of a testamentary trust. I dunno if we have, it has been a few episodes since we've done it. So the reasons that I just love testamentary trust is firstly they give us so many opportunities to maximise the inheritance and protect the inheritance and particularly I'm thinking one, the asset protection. So whether it is from a beneficiary of an estate having bankruptcy exposure or family law risks on repartnering, I think testamentary trusts offer opportunities to level up your asset protection, whether it is a surviving spouse or a son-in-law or a daughter-in-law, getting their hands on an inheritance after a relationship breakdown. I really just think if you've got the testamentary trust there, it gives your beneficiaries a lot more options to try to protect and keep that inheritance.
(03:15):
The second reason I love them is that they really protect miners as well. So we have an episode where we are going to dive into this in a lot more detail, but minor kids who reach maturity turn 18 if they have received their inheritance through a testamentary trust, we are really just trying to protect that inheritance from them eroding the money through immature financial decision making. So really not setting them up to fail. In fact, we're setting them up for success with the testamentary trust. And lastly, probably my favourite, but also maybe one of the more boring benefits is the tax free income treatment. So the government recognises that to get assets into a testamentary trust, someone died. So they give the testamentary trust this amazing tax treatment compared to any other structure that you can set up. If you go and set up a family trust today, you cannot get access to these tax rates.
(04:22):
There's no way to replicate it unless you have a testamentary trust in your will. And basically what it allows you to do is allocate tax free amounts to minors. So any minor, it can be children, grandchildren, nieces, nephews, whatever. If they're a beneficiary of the trust, they can receive tax free income and at the time that we're recording this in September, 2024, miners can each receive $22,550 of tax free income from the trust and then any income in excess of that is just taxed at the standard marginal rates. So if you've got two kids, that's like the first $45,000 of income that the trust earns from investing. The inheritance is tax free. If you've got three kids, it's 67,000. So to me, those numbers are life-changing for Australian families and the people who have testamentary trusts, they are just paying so much less tax than anyone else.
(05:31):
They are the kind of structure that makes wealthy families stay wealthy because they're just paying way less tax than anyone else and they had the money to set these up in the first place. And for your vanilla clients where you've got a young family who's lost a breadwinner, if they can have their life insurance and super in this type of structure, it's protected and they don't have to pay as much tax, then that can just make the inheritance go so much further than it otherwise would. I'm a huge fan of testamentary trust. I love them. I am spreading the good word to the legal profession about how important they are and trying to overcome this stigma of them being only for the very wealthy, only for them super complex and not something that everyday Australians have. And those are the reasons why.
Carrie (06:29):
Tara, I just want to jump in here, clarify. We've probably got a lot of lawyers listening in and I can just hear them in the background. A lot of lawyers or attention to detail people, when we use the phrase testamentary trust, we mean generally testamentary discretionary trusts. So a testamentary trust generally that term is a term for any type of trust that you get when someone passes away. When we're talking about the asset protection features, we are meaning a testamentary discretionary trust. It's just no one wants to say that really long phrase. So we're going to say testamentary trust. Right.
Tara (07:05):
Thank you for clarifying that, Carrie. Yeah, that's a really important point.
Carrie (07:08):
I can hear the screaming into the ether as people are driving, commuting into the law jobs in the city. So I wanted to make that very, very clear. The second thing is for all those that are listening and prescribed to the gospel, according to Kerry Packer, what I wanted to talk about is when we say like that $22,000 as at today's date, effectively a minor child gets treated as an adult. It's kind of the simplest way of putting it right, because it's very different with a family trust. And just to show you the discrepancy between that, the maximum amount of income that you can distribute to a minor child from a normal family or normal discretionary trust that you set up while you're alive is around. I mean Tara, I think the amount might have changed, but it's around $416, right? It's still 416. Yeah, it's still four 16.
(07:55):
Yeah, there you go. That's been that way for a while and if you give them a dollar over that, they tax it at the penalty rate. Okay, so when we talk about the difference, it's huge. $416 versus $22,000. I mean that's the difference between going to the nice school between being able to afford a nanny after school, which we talked a lot about in our first episode. So these are really game changing numbers. It's not small sense here. So those are the two things I just wanted to add in there that when we talk about using the terminology, that's what the terminology we're using and also the numbers are very significant here.
Tara (08:35):
Thank you for doing that, Carrie. Yeah, I think it is important to get into, it's so hard in the podcast to know how deep dive we go because who's listening? I have no idea. Well, we do go really deep into all of this in our weekly TT precedents club hot seat and also our courses in the Art of Estate planning portal where we dive into it in the TT precedents club, we actually show you how to work out the 22,550 so that with complete confidence how that works, how to explain it to a client. So if we do go super deep there.
Carrie (09:14):
And stop being that woman with the maths meme, you know how she's got all the numbers in her head that you don't have to do that, we can help you with that.
Tara (09:20):
Yeah, exactly. But this is just a high level podcast. You're probably all gardening or cooking or something as well. So yeah, how much are we bending your minds? So today's topic is about how much money do you need in your estate to justify a testamentary trust? And as much as I am a huge fan of testamentary trust, and I think a lot more Australians should have them than currently do, I also don't think that for everyone you do need to have enough assets in the estate to justify it or else it's just going to add a heap of complexity and probably not very much value. So it is a fine line I think as to when do you bring this up in a meeting with a client, suggest it as a possible approach that they can take and start talking about it, and then when do you just say, actually we're just going to do the basic will not even bring testamentary trust. So Carrie, what's your magic number?
Carrie (10:25):
Well, as the size of wealth that is being transferred over increases, obviously I think we have to adjust that number, and I'm going to preface this with my comment that I think no amount is too small if it's in it all depends on who's actually receiving the funds. Who are you trying to protect here? When I talk about this number, you might think one fifth of the number I'm going to talk about is worth it if the beneficiary is really not in the position to be able to receive those funds appropriately. So I usually use the 400, $500,000 mark to warrant it, and that's on the sort of basis that the administrative costs and burden of running it kind of start to outweigh itself if it gets much less than that. So when we talk about administrative costs, we mean accounting and financial planning costs or legal costs depending on what adds up inside the trust and what that's actually doing.
(11:20):
The burden is obviously talking about things like everything from the compliance issues from having to run a trust, the tax planning all the way, sorry, and I should say to funding issues all the way to opening a bank account. So this is something I mentioned very briefly on one of the earlier podcasts is it's so much harder to open a trust account than it is to just open up a bank account as an individual. So I think that when we talk about those administrative costs and burden, what we're saying here is what amount do we start to see as being kind of worth all those costs? And people say how much of those costs? The answer is we don't know because it really depends on what's going on with that trust in the actual post death space. But I mean again, I want to preface it that it all depends on who you're leaving it to and what you want to protect them from.
Tara (12:12):
Yes, Carrie, on the note of the compliance costs, we actually have a free list of the steps involved when you need to set up a testamentary trust, which you can see in the show notes and download that. So for anyone listening going, yeah, it sounds good in theory, but what do you actually do when someone dies and what is involved in setting it up? We've got a checklist there of the step-by-step tax return tax file number, bank account, all of that. So check that out if you're more curious. And we do also have, we spend an hour talking about this a few years ago, so I can also link that training too.
Carrie (12:52):
I'm flicking my hair, of course I was speaking about it and I don't have hair, but it's definitely a training I was involved in.
Tara (13:00):
My magic number is 500,000, but I've changed it a little bit the way it in the last few years. So I used to just say $500,000 in the estate. Now I sort of refer to investible assets of 500,000 because I think if you've got an estate of 500,000 and you're leaving it to your spouse and your spouse is most likely going to pay off the debt on the house, buy a new car and everyone's going to Disneyland and then nothing's left, you probably aren't going to get any value out of a testamentary trust. You'll have a beautifully drafted testamentary trust with no money in it. It's not earning any income and there's nothing to protect. So probably no point.
Carrie (13:49):
I'm just laughing at the going to Disneyland. I have to say, Tara, everyone who's anybody who talks to me knows my father passed away recently, my brother and I are going to come into a small amount of money and we bought tickets to Oasis over in London, so now go on a Disneyland trip, right? You're so right. What amount is actually going to end up in there and we're allowing ourselves one stupid purchase. So when you take out all the liabilities, the stupid purchase, all these things, what is actually left? So I think that's so important to consider that.
Tara (14:17):
Yeah, exactly. So I think, okay, well yeah, are we going to have 500,000 in the trust earning us a return and that can go and be invested in shares or ETFs or whatever your financial advisor recommends. There's no financial advice on this podcast, so I hope you're listening regulators, but yeah, that's probably the number that I think it really depends though. As you said, we've certainly set them up for people with less assets that will remain in the trust after everything is done and dusted because they're really concerned about that asset protection and they're happy to take on a little bit more complexity in favour of protecting like 350,000 of investible assets sitting there. It's nothing to sneeze at. And if you are happy with managing a trust over that, great, set it up. Who are we to say, sorry, you're below the threshold. So it doesn't really work like that. I don't want it to be snob.
Carrie (15:22):
If you've got a child that's bankrupt, a child that's bankrupt, bankrupt, if you know that if you give them anything, it's going to go to the trustee in bankruptcy. It doesn't matter if it's a hundred thousand dollars or $500,000, you don't want to give the trustee in bankruptcy any of those dollars. So it depends on what the actual person is that you're trying to protect. I thought what's really interesting too, Tara, is this, we have this kind of notion that a testamentary discretionary trust, that's why I wanted to rephrase that at the start, that it's not worth it, but then we're quite happy to leave our funds to our minor children on bear trust, so just a plain testamentary trust with no discretion and we think that that's somehow less complex. You still have the same steps. So I want to make sure people when they're thinking about planning for clients and they're like, we have to keep it simple, and so we're going to do this simple will, it's not any simpler from a real practical perspective, if you've got minor kids involved, there's still have to set up a trust account. There's still all these kind of steps that you have to do and it's not any easier. You're just getting less for your bang, right? You're getting less protection, you're getting less opportunities than you would with a kind of bear trust.
Tara (16:35):
So true Carrie, and how about all the extra complication when the trustee of that bear trust is sitting there going, am I allowed to do this with the trust funds or not? Can I make a loan and release this or not? What are my trustee duties? Because we're trying to cobble together the very bare minimum clauses from the will plus whatever the trustee or trust legislation says in your state. Trustees of discretionary trusts and testamentary discretionary trusts don't really have that complication. They have got so much flexibility and very sophisticated drafting of their deed, so that's a really important point. I think sometimes those bare trusts, it's simple for the lawyer and the testator, but it actually is a real headache for the people who inherit them.
Carrie (17:26):
I had this exact scenario, Tara, a few years ago where a sibling passed away and so woman passed away, appointed her brother as executor of the estate, and it was a bear trust and he very much wanted to do something in particular that was actually objectively very good for the beneficiaries and he just couldn't do it because there were no powers. He came to us trying to find a loophole. I searched everything, known and demand to try and find a loophole for that person, and unfortunately it wasn't there and he still had all the other horrible compliance stuff anyway, he just didn't have any of the flexibility. So I think that's the point I wanted to get across. When we talk about people thinking that when we say testamentary discretionary trust, that it's all this extra palava because the will happens to be a little bit thicker, but it's in practise when there's a minor child involved. It's not really hugely different from a compliance perspective in terms of setting things up, but it does really limit you with lots of different things.
Tara (18:26):
Yeah. Look, Carrie, I totally agree and I think that's a real shame that for your client who had that outcome, I think in the past a lot of practitioners have been a bit fearful of testamentary trust and it's really easy to just say, if I don't fully understand it or I don't have a precedent that I completely trust, let's just avoid them unless we have to. Whereas we have amazing precedents, we do understand them, or we have the support network for issues that do come up if they are a little bit quirky. And so when you look at it from that angle, you can see there's so many more opportunities like embrace the testamentary trust, and for me, I know my practise was 80% of my clients elected for the testamentary trust, whereas I think if you don't have that support and infrastructure around them, it's probably the opposite and only 10 or 20% you are suggesting testamentary trust for. So some of this can be a bit of a mindset shift and I think it's really heavily driven by your support and resources.
Carrie (19:35):
Tara, I have the juiciest story to tell you, and I appreciate that this is going public. Obviously I'm going to anonymize it, but I think this is exactly on point with what you're saying. I had an advisor who I'd worked with for some time approach me. They were involved with their client reaching out to another lawyer who was doing their estate plan, and the advisor was asking some very relevant questions around why the estate plan didn't include testamentary discretionary trusts and didn't encompass the discussion around the use of potential special disability trusts because the child had a disability and the clients left the room or something to go to the bathroom and the lawyer came up to the advisor and kind of said to them, please just keep this simple. I'm not joking. And I just think that comes from such a place of insecurity where that person just clearly didn't have the tools to be able to understand how beneficial that would've been for that client and ultimately for their child or children in that case. And I just think that it is a mindset because that person could have very well and gone and get upskilled or said, Hey, this is a bit more complex than I'm comfortable with. I'm going to get a consultant in to help us out, or I might not be the right person to help you, so I'm going to refer it out. I just think that it is definitely a mindset. I do see that and have seen it as I've just said.
Tara (21:00):
Yeah, look, we haven't all had the benefit of being trained on the job in testamentary trust. You and I were for that. I think we'll be forever grateful. So I don't judge lawyers poorly per se if I don't want anyone to act outside of their scope when they're not comfortable. But I do just think in the estate planning space, reputationally, testamentary trusts have been reserved for the super complex and I'm on a personal mission to change that and also to support as many lawyers as possible who want to learn more and get more confident with testamentary trusts to be able to do that and to serve their clients. So I don't think you should push, I mean, I very purposely limit what I work in to the areas that I'm confident in, and so I would never encourage anyone to work outside of that. But also I just think don't tell people that a solution is not suitable for them when it actually is, when the reason for that is actually your lack of confidence, not based on fact.
Carrie (22:07):
I think that's so true. Our job is not to pick for the client. The client has to have a will that reflects their objectives, their wishes, what they want to happen. Our job is to advise, so show them what options are available to them and to show them what we can do, what the risks of what their plan, how that might play out. Our job is not to pick for them to show them those options. If they pick an option that we're not totally comfortable with, we then need to either assist them in finding someone to help them with that solution or just totally bow out altogether. I think that's what was with that story is that if that person had actually gone, Hey, I'm not across this. I'm going to go and upskill or I'm going to do X, y, z, I'm going to find someone who is skilled to come in to help us advise on this particular piece. I think that that's okay. I just think the issue that was like, oh, you can only pick this simple approach. This is in my mind. All I can do, I think that we can't pick for people. We have to say, these are the options and you pick and whatever you pick, if I can help in those options, great. I'm going to help out. If I can't, let's work together on finding another solution for you.
Tara (23:14):
And it goes both ways, doesn't it? I'm not here saying we are picking for clients and telling them they need a testamentary trust. I'm all about presenting the option if they come roughly within that 500,000 or so investible assets threshold, talking to them about testamentary trust as being a possible option, explaining how it would work, basically supporting them to have enough information to make a choice about whether it is something that they want for their family. So I'm not pushing testamentary trusts on them, I'm just educating and informing them and then also not pushing them and not even giving them the option of a testamentary trust that is choosing for them as well.
Carrie (23:59):
Yeah, I think another point I wanted to talk about here, Tara too, is I know we've talked about it in a previous podcast, the option to kind of not use the testamentary trust. So if we're on that kind of fence about whether to use one or not, what my general suggestion is to consider putting it in place, and then if your testamentary trust precedent, which for good precedence, we go to taralucke.com.au. If your precedent has this ability for the executor to, with the consent of relevant beneficiaries to bypass the trust and not use it, I think that that's something that if in doubt, you kind of put it in place because you can always not use it. Obviously, there's a series of things you have to do with the client to show them how that mechanism works and whether that mechanism is right for them, but you can't retrospectively wish you had one of these in place. We've talked a lot about this in the TT precedents club where people don't have these structures, and then we have to look at things like estate proceeds, trust, those sorts of things that don't have the same benefits as a properly planned out testamentary discretionary trust. So I think that when we are on that fence, if you are with a client and you're not really sure on what to do, pop one in if the client consents to it and then you can always not use it.
Tara (25:16):
I always think of that Eminem song, Lose Yourself. You only get one shot. Oh my Gosh.
Carrie (25:27):
You can't see what I've just seen people because this is a podcast, but I've just seen the whitest ever woman rap or try to rap. So great job, Tara. That's going to go down in the history books. I hope this video comes out as a short for the podcast.
Tara (25:44):
Yeah, we'll be a snort laugh. Spit your copy out. Sorry. Well, anyway, hopefully you all heard what I was trying to sing in your head, but that's the thing. You only get one chance, at least testamentary trust and all of our precedents make them optional, so why not put them in if they're on the fence? Well, I'm just recovering from my embarrassment. That was a real vulnerable moment, Carrie.
Carrie (26:08):
I mean, I've known you nearly 10 years, Tara. I don't think I've ever seen you do something like that. So thank you for sharing that with me. I'm going to take that one to the grave as one of my favourite Tara Lucke moments.
Tara (26:19):
Alright, well, I'm clearly losing the plot, so we might have to wrap it up, but I had one more thing I wanted to say, and same as our Family Home podcast episode. I think what comes into this decision process again is the level of sophistication for our clients as well, and tying that back into all those steps that you were mentioning, the administrative burden of the trust. In my personal situation, I'm always talking about myself just anyway, I guess I don't want to reveal anyone else's information, but in my situation, we already have three discretionary trust. So what's another trust? We already have an accountant doing trust returns. We're already familiar with the trust process. It's just like one more. It's not really a big deal. Whereas if you have no exposure or experience to trust whatsoever and you've suddenly got a testamentary trust and you don't have a lot of money in there after the estate is administered and you've done whatever you want with it, then those administrative burden steps can feel like a lot and that can feel very overwhelming getting your head around it.
(27:38):
So I think again, it's a bit like read the room, what level of sophistication will your beneficiaries have? And if you are got heaps of investible assets that will go in there in the estate, a huge amount of insurance and all of that, then I think those hurdles are really easy to overcome. But if you're on the fence, then yeah, make a decision. Then even if you're in doubt after that, you've got the optional testamentary trust clauses in the will. So you're setting your beneficiaries up with the maximum flexibility to assess what is the situation at the time the estate is being administered. If you're on the fence, I'd probably still include it anyway, unless your clients are like, no, no, no, I don't want this. It's too complex. We don't need it. So that's probably my thoughts on the topic. Again, in the Art of Estate Planning Facebook group, if you've got a different magic number or a strong opinion on any of what we've said today, we'd love to hear. Carrie, anything you want to wrap up with?
Carrie (28:38):
No, I'm just going to go and lose myself in. I can't get over it. Tara, this is my favourite podcast ever.
Tara (28:49):
Oh my God, we might have to edit that out.
Carrie (28:50):
No, no, no editing. No editing. We like the raw reality. We don't want to be that boring podcast only talks about law stuff. So I like the vulnerability, Tara, and I like that you talk about yourself because I think we need to see people that we need to show people that we're living the reality, that we're talking about our clients. We're not just out here saying, you have to have it or you should have it and know it. We're not following that same thing. And I think two people like to see examples. You and I have very different circumstances. You married with two children. I'm single. I still have a testamentary trust in my will for my brother and his children. So if he doesn't want to use it, that's totally up to him, but it's there because I want to give him the best foot forward. So I think it's good that we talk about ourselves and show a little vulnerability.
Tara (29:37):
Oh, I love that. Well, thanks everyone. I promise there won't be any singing in the next episode and we will see you then.
