Tara (00:57):
Hi everybody. We're up to episode 13. Thank you so much for tuning in. As always. I am joined by the super smart and charismatic, Carrie.
Carrie (01:10):
I love these descriptive words, Tara. They're just, they're so not me, but I'm happy to have them.
Tara (01:17):
Those two are definitely you, but people, I'm sure people can tell from listening. So today's episode is all about what law school did not teach you about Saunders and Vautier. So firstly, we are not even sure if we're pronouncing the case right. How do you say it, Carrie?
Carrie (01:37):
I feel like it should have an L in it, like Vaultier, I just think imagine being French and saying Vaultier, but I just don't know. And I hope this video doesn't end up on social media of me going Vaultier, but it probably will.
Tara (01:52):
Well, my wrapping had to go on my Eminem impersonation had to, so yeah, I'll dig that up for sure, Carrie.
Carrie (02:02):
I think if you're saying Mortier, it's certainly got as I said this, so I think that's the way I adopt it. But you are open to your own interpretation of that. And please, email us if you don't like my pronunciation.
Tara (02:14):
Yes, well, yeah, you'll just have to put up with me butchering it the whole way through. So this is a case from 1841 and you're probably going, okay, what has that got to do with anything in 2024? Right? But it is still actually quite powerful in estate planning and a relevant consideration, and there's a particular aspect of applying and considering this rule where it interacts with testamentary trust that I just think is so interesting. And I also think people overlook it a lot, and I really doubt it was even discussed in your succession law module at uni about this case. So I wanted to just talk about it, get it out in the air and just give it as another factor or thing to think about. So you could be sitting there going, thank you, captain. Obvious everyone knows this, but maybe there's a few people listening who haven't really thought it through to this conclusion and hopefully gives you some food for thought.
Carrie (03:24):
I think certainly, Tara, I mean, we could probably write a book on the things we don't learn about being a lawyer from law school, but I think even if we learn about it on a academic level at uni, we certainly, it doesn't prepare us for how that plays out practically when we're advising clients or distributing estates.
Tara (03:40):
Yeah, definitely. Okay, so we had to draw straws and I drew the short straw about explaining what the case is.
Carrie (03:51):
I don't think I was going to do it Justice, Tara. As I said, Tara's the brains. I wouldn't say Braun because I'm very energy efficient, but here for comedic relief.
Tara (04:01):
Yeah, well, no pressure on me either. So look, I think go and read the case. I don't even think it's very long, but here's the cliff notes of it. So it's actually like a British case that has been applied in Australia and the principles have followed through. So it's from, as I said, the 1840s. So some of the concepts are very old England. Basically Vautier was the nephew of the deceased test data, and he received a gift of shares in the East India company. See what I mean about it being very British.
Carrie (04:43):
Oh yes, the colonialists, say again, they strike again with the East India company.
Tara (04:47):
Yeah, exactly. Okay. So very simple will, kind of what a lot of people do today with a basic will. This nephew was entitled to receive the income from the shares in the East India company until the age of 25, and then became entitled to the capital in the shares at age 25. So when Vautier reached the age of majority, which at the time was 21, not 18, he demanded that he receive the full gift of the shares and that he was absolutely entitled to them. So rather than just receiving the income and the capital being held over till 25, he said, I'm an adult. I'm absolutely entitled. I'm just take ownership of those shares. And he was successful. A few sort of notes, I won't obviously read out the whole thing, but it was adopted in Australia by the high court in CPD custodian and the commissioner of state revenue in 2005.
(05:47):
And they basically said, under the rule in Saunders and Vautier, an adult beneficiary or a number of adult beneficiaries acting together who has or between them have an absolute vested and indefeasible interest in the capital and income of property may at any time require the transfer of the property to them and terminate the accumulation. So in a nutshell, what that means is even if you've got a basic will where you say, I give X amount to this person upon them attaining the age of 25 years, once they turn 18, if they're absolutely entitled, which they usually will be subject to some drafting notes, then they can just call on that against the executor or the trustee of the estate trust and demand that the gift be paid to them. That was my mic drop, Carrie.
Carrie (06:48):
I think, I don't know if we're going to get into the really technical points of what absolute entitlement means because it is an incredibly technical argument. A lot of it I know we'll probably talk about.
Tara (06:58):
No, let's not do that.
Carrie (07:00):
Let's not put people to sleep.
Tara (07:01):
But also you did this fantastic Facebook Live I did with our guest whose name I was hoping you would say because I forgot it. Oh my gosh.
Carrie (07:14):
It's Tim.
Tara (07:15):
Yeah. Okay. I thought it was Tim and I was like, I just don't want to say the wrong name.
Carrie (07:21):
Sorry. We love you, Tim. Sorry, Tim. I think that there's a technical discussion around absolute entitlement, and if you are an estate planning lawyer or a lawyer that is interested in estate planning, jump onto our Facebook group. It's for free, and you can get on and watch that Facebook live on the Facebook group under the guides tab.
Tara (07:38):
And I'll put the link in the show notes directly to the YouTube link as well if you're not a Facebook person.
Carrie (07:47):
But I think as a really dumbed down way, meaning that they're the only person that can receive that asset, and there's nothing standing in the way from getting that asset. And what I mean by standing in the way, meaning they've met all the conditions required and they have the legal ability to, they're over the age of majority and they're not under a legal disability. So that's the really kind of dumbed down version or the carry proof version for estate planning light.
Tara (08:14):
And in Tim's training in the Facebook Live that you did with him, Carrie, he did an amazing job of talking through when they may not be absolutely entitled and when the interest may be contingent, and how you could look at drafting that if you are drafting a basic will. So that is definitely worth going through. And I don't think, firstly, it's quite helpful to have a visual medium for that. So we won't go in that today, but it is a really good resource. But the reason what I want to talk about is the fact that the rule in Saunders and Vautier does not apply to assets in a testamentary discretionary trust. So when you are drafting a will for test status, who want to benefit minors, whether it's grandchildren, children, nieces and nephews, whoever, it's actually a really valid consideration to go, okay, if you do want to defer their entitlement after 18, can we actually do that with a basic will? And you've got all these issues to navigate around Saunders and Vautier in terms of maybe you can get cheeky and smart with your drafting. Maybe it won't work anyway. Or you could use a testamentary trust and you don't have to worry about Saunders and Vautier at all.
Carrie (09:36):
I think this is a good point, Tara. People sort of say to me, oh, we don't want to use a trust. It's too complicated. The reality is if your child is under 18, it's a trust, okay? It's a trust. So all we're doing by using what we call a testamentary trust, which technically is a testamentary discretionary trust, is just extending that life a little bit, getting a bit more flexibility out of it. So it's not overly complicated. It doesn't make things more complicated. It actually gives you more of those options. And I've got this point because it's something I always make in my points with clients in meetings, what person wants an 18-year-old to get a couple of million dollars worth of property assets? I always say, I should not have been given $1 at 18, let alone 1 million because it damn would've been spent on a bourbon and coke at the regatta or some similar pub. I even question whether my 40-year-old self should have an inheritance today's date. But I certainly think that when you're planning for children, it's a trust anyway, at least with your testamentary trust. We're not handing a gift of millions of dollars worth of real property life insurance superannuation over to a very young person that doesn't have some of that financial acuity or that life experience around how to do those, make those sorts of decisions.
Tara (10:50):
Yes, absolutely. I also don't think you can overestimate the impact of a young person on losing someone really close to them, especially if we're talking about parents and children. I was a very studious and trustworthy 20-year-old. What different lives we led, Tara, I'm telling on myself here about what a nerd I was very serious. But yeah, so its face, you're like, yeah, very trustworthy, but what happened if I had the carpet ripped out from under me and lost both my parents at such a young age? Or you cannot quantify or predict how that will impact someone's behaviour.
Carrie (11:38):
I think that's the point though, right, is that when we are comparing leaving a gift to a child outright, we get the certainty that they get that item. But who knows what a 2-year-old at today's date will be like with money at 18?
(11:52):
Compare that to say your brother or your friend who you know what they're like with money, putting them in charge of a testamentary trust. You've got that, well, not certainty, but you've got at least you're picking someone who and understand the way that they work with money, their values around money. What do you know about a 2-year-old? And as you said, if something happens and they lose their parents, how is that going to play out for them? How does that trauma represent later on in life? Does it mean that they're not good with money? Does it turn into something worse than that? So yeah, I think you're absolutely right. We're trying to crystal ball what happens by using a simpler or basic will, at least with your testamentary trust wills. We're trying to get a little bit more flexibility around what that looks like.
Tara (12:34):
So as per usual, I want to talk about what I've done in my will. I think, do we need to start a drinking game?
Carrie (12:44):
I think we just put your will up publicly available.
Tara (12:46):
I might as well at this point. Yeah. So if you listen to the last episode, you know that I have set up a single testamentary trust for my husband to be the sole controller of foot to benefit him and our two children as the immediate primary beneficiaries. And if we both pass away, which is really the scenario that we're talking about here, if we both die, I've got my dad and my father-in-Law as the co-trustees, and then if my dad can't do it, my brother fills the vacancy. And if my father-in-law can't do it, my brother-in-Law, so my husband's brother and husband's father will control it jointly. We've basically got a representative from each side of our family coming together to make decisions about the trust that we believe would be in the best interest of our two boys who at the moment are like one and four and a half. So as you said, Carrie, who knows actually, if anything, if their childhood attitudes and behaviour translates into adulthood, then yeah, they're pretty wild at the moment. So who knows?
Carrie (14:02):
I was a really good child. I was really well behaved, and then I think it was, I was 19 and I went out one day for bacon and came home with a $250 pair of boots. So we just can't predict how people are going to be.
Tara (14:17):
And not to mention, as I said, my husband and I have both got a tonne of life insurance. We've got these in place when we were younger, and they're like, these policies don't cost us as much, so we just keep them. But I think between us, we've got 2.4 million in life insurance alone, not to mention Super and our house and all that stuff. So yeah, we're definitely worth way more dead rather than alive. But yeah, who's got a trusted 18-year-old, two 18 year olds to manage 2.4 million or better yet my eldest to manage it for himself and his minor brother. It's just wild.
Carrie (14:59):
Also, and this is just a little bit of a comic relief, Tara, but I also think there's a joke where we talk about how we would like to be trust fund babies, but not till after we're 30. So a little bit of struggle, not struggle, but a little bit of rather than just chucking money at someone, if they have to work a little bit for it from 18 to 25, is it going to hurt them? Probably not.
Tara (15:24):
Yeah, let's talk about that with the trust.
(15:28):
Yeah. In my scenario, we've used a letter of wishes to give guidance to my trustee team, and just because the money is in the trust doesn't mean that the boys won't benefit from it. The trustees do have power to release capital amounts either as no strings attached distribution, or preferably a loan, like a very favourable loan. They can release the income to them, they can pay for everything that they need. The kids will still benefit from having the trust that assets in the trust can be used to provide for their accommodation, their education, whatever they want, their travel, their gap year. We've given guidance to our family members about that, and so it's not like they're not going to benefit, but what they can't do if they want to go and buy a hundred and thousand dollars car of what type of car? I don't even know enough about cars, but what boys would like, but if they want to go get this souped up Jeep or whatever's cool, they can drive a Mazda like the rest of us, Tara at 18.
(16:37):
I was just thinking, do people even buy cars in 20 years time, 15 years, they'll have some self-driving car thing. I don't know what they'll want to blow it on drugs. Maybe the family members are there to say, no, it's not available for that. It's available for supporting you, supporting your education and these things so they can't blow and erode it. And in my goal, and what I ideally hope is that when it comes to entering the property market, I don't know how much a house is going to cost by them that maybe the 2.4 million won't go far enough. They'll each be able to buy a house and get a start in the property market or whatever it is. There'll be money for their wedding. The testamentary trust protects it and it puts people in charge who I do trust to make these financial decisions, or most likely work with our financial advisors to jointly make those financial decisions for the kids until the kids then become financially responsible.
Carrie (17:47):
And I know we're talking a lot here about financial responsibility. When I talk clients through the benefit of using a testamentary discretionary trust is that even if the child is good with money, so even if at 18 they're a savant when it comes to financial management, if you leave a simple, will they get it at 18? They are good with money. What about if they partner with someone who they think is the love of their life and then three years later they're not the love of their life? Unfortunately, that's in the pool of assets. If it's inside a testamentary trust structure that there aren't an uncle control or something like that, we have those asset protection levels that we don't have in a simple will. And that includes too for things like bankruptcy. So again, if your kid's really good with money and they build their own business and something like Covid happens again, and the number of businesses that crashed because of Covid is huge. There's no protection under those. I love you wills. So even if we're putting in there that we want our children to not receive money until they get to 25, unless you structure that will appropriately, they're going to be able to claim the money at 18.
Tara (18:55):
Yeah, those are great points, Carrie. We are not even pointing out character flaws of beneficiaries, just protection for life's eventualities. The other thing, we talked about this in episode four about trusting the trustees just in terms of what I love too about a testamentary trust, and especially if you use a letter of wishes or maybe you're hardwired into the will, but it allows you to implement these apprenticeship or training wheel type strategies where as the children do come to age, they can be added into the control positions like a co-trustee or maybe they become the trustees, but your independent third parties wise, owls are sitting in there in the appointor role just supervising them, guiding them. It just means like, okay, we've got this panel of trusted people who train the kids about how to manage this amount of money and how to talk to a financial advisor and what things have to happen in relation to the trust rather than just dumping them in it, which I really love as well.
Carrie (20:05):
Yeah, Tara, I'm not sure what you've got next, but I've actually got a really good example of even an example where the clause was drafted to meet Saunders and Vautier, meaning that there was a condition precedent saying that the two boys couldn't get their inheritance until they were 25, but because it wasn't a testamentary discretionary trust, it actually created issues. So this is a very live issue. A client of ours came to us and said, I am the trustee of a trust for state trust for my two nephews, my sister. My sister passed away many years ago, and the boys are now 23 and 24 respectively, or 22 and 24, I think it was respectively, and I want to do X, Y, Z with the money, and they want to do it as well. I'm just acting on something that is their wish because the terms are very narrow in an I love you style will.
(21:00):
Even though, yes, they didn't get the money until 25 because of that correctly crafted condition precedent, they couldn't actually apply those funds to that thing that they wanted to do. And it was actually something that I've gone back and looked at and the thing that they wanted to purchase is now almost triple the value. So it's actually really interesting. I think that when we talk about, we always get worried about the too much discretion in a testamentary trust, what sometimes we see practically, which we don't talk about as much, is what happens when there's not enough discretion. So even with those, I love you wills, and even if you're drafting your clause to defeat that rule in Saunders and Vautier to get it to say 25, it was in this case, it doesn't really give you much in terms of flexibility. So that, I just wanted to share that story because I thought, I know there's a lot of people probably listening in that don't think that testamentary trusts are as great as we do, and let's keep it simple and get the certainty that child will get the money. You're absolutely right. You'll get the certainty that get the money, but what's the lost opportunity cost?
(22:06):
So I thought that was an interesting point to raise that yes, Saunders and Vautier, you can do some things in a basic will to try and get a bit of an older age, but it sticks you in a corner that's very difficult to paint that out.
Tara (22:20):
Yeah, that's a really powerful example, Carrie. And you said it before, people think they're doing the right thing by keeping it simple with a basic will. But yeah, when it comes to actually utilising the funds, a basic will trust you might have some terms in the basic will, you'd hope so if it's a post office will, you'll have no terms if it's like a lawyer drafted even the art of estate planning, basic will precedent, we have got still two pages of powers that apply to the executor and the trustee of any trust estate, trust bear trust type scenario. So you've got a few powers there. And then you have to incorporate the powers from your trust or trustee act from your legislation and cobble them together. And often, unless there's an express authorization, what are issues where there's problems with loans, conflict of interest, transactions, even investment types, offering up assets for security.
(23:26):
It's really hard. Whereas a testamentary discretionary trust, if you use The Art of Estate Planning precedent, at least we've got pages of authorizations and express powers for the trustee where they can basically do nearly anything. And as long as you get the trusteeship, which we talked about in a few other episodes, they can do whatever they want with the funds. And so you think you're being simple by not using the testamentary trust, you still need separate bank accounts, you still need a tax file number. You should still do tax returns for the bare trust or fixed trust. Where's the simplicity? I actually don't see it.
Carrie (24:07):
As I said, until the child gets to 18. It's still a trust, it's a fixed trust. It's not a discretionary one, and all you're doing is meaning that that trust can end at 18, let alone extend, and then have all of those different benefits later on.
Tara (24:22):
And to your point, Carrie, about they want the certainty, you can nominate an age like 25, roll the dice and say that you're betting on this particular age that they'll be financially mature and capable. You can hardwire that in so that your independent people get booted out when at whatever age, maybe when the eldest child or the only child turns 25 and they come in as a controller. We talked about the pros and cons of the letter of wishes versus hard wiring in that transition of control into the will in episode four. So that's a good one to go back and listen to just sort of hear the pros and cons, but you can totally do it if that is going to give you that peace of mind as well.
Carrie (25:08):
Yeah, and I've had clients that, even though we've talked through all the pros and cons about it, they still wanted their children in control of the trust at 18, but the point was they wanted the discretionary trust to continue so that the child had options later on.
Tara (25:21):
And I think, look, it's different when we're talking about a gift of $20,000 versus the residue of the estate and a significant sum. So I don't want to be like, no basic wills ever, but I just think sometimes when we're doing the strategy and the clients especially are like, our fairs are simple. We want to keep it simple. Don't overlook how Saunders and Vautier here will apply to your strategy and possibly undermine its effectiveness. So yeah, I guess we sort of got the pitchforks out against simple wills. I guess the moral of this episode was this isn't something that's pointed out along, and it may be a new idea or concept of some people listening, in which case we wanted to sort of build the story. And it is certainly something that when I'm trying to convey the benefits of testamentary trust, particularly for young couples with young kids, if you both die together, the testamentary trust just protects the kids from their own financial immaturity and makes the inheritance go a lot further. So that's really the main messages I wanted to get across today. Carrie, do you have any other juicy stories or any other points that I haven't thought of?
Carrie (26:41):
No, I think that I said that concept of certainty versus flexibility is really important in this discussion. And if you are a lawyer and you are drafting those simple or basic wills, just remembering that there is this rule that applies and get on and have a look at our training to have a look at. If you want to try and defeat that rule that you have to be very careful with the drafting.
Tara (27:04):
Awesome. Well, hopefully we made this episode about a case from the 18 hundreds, somewhat interesting for you and practically relevant to today's will drafting. Thank you so much for tuning in, and we hope to see you next week.
