Tara (00:57):
Welcome back to the Art of Estate Planning Podcast. It is episode 15. As always, I am joined by my marvellous co-host, Carrie Payne. Hi, Carrie.
Carrie (01:09):
Hey, Tara. Happy day!
Tara (01:10):
Yeah, I'm excited to tackle this topic. So this is one of the most overlooked estate planning issues when it comes to testamentary trusts, in my opinion. And I really wanted to dedicate a session just to this topic of dealing with foreign persons and the foreign investment review board when it comes to testamentary trust, which seems kind of random, right?
Carrie (01:38):
Yeah. I think for me it's a bit of a sleeper issue that because we've not really had a lot of action in this space, given how new some of the changes around this regime are when it comes to states, I think there might be more of this coming in terms of difficulties for practitioners in the future. So I think this is going to be a really good podcast for anybody that number one didn't know about the issue. But number two, even if they know about it, if they don't know how to navigate it.
Tara (02:04):
Yeah, I mean, that's what we're trying to do. Just get this on people's radar because I, for one, am really surprised by how little airtime this issue gets at conferences, in publications, in social media, in journals, all of that. I'm just like, why is no one talking about this? And I don't know if it's because it's boring, because it just doesn't come up that much in practise, which I think it really is going to come up in practise a lot more, or if they just don't know about it. So anyway, we're going to have a chat about it and hopefully this gets it on your radar. Or even better if we know everything we're talking about today. Great. A plus, right?
Carrie (02:43):
I don't think everybody knows everything all the time, so I'm sure there'll be something you could learn even if you think you're across it.
Tara (02:48):
Sorry. Well, let's dive into the issue. So FIRB, if you're an estate planning practitioner, you are probably like, I've only ever heard of FIRB in passing. I have no idea what any of this is about. So I guess we'll do a little bit of background. So the FIRB is the acronym for the Foreign Investment Review Board, and it's administered by the Foreign Acquisitions and Takeovers Act and the foreign acquisitions and takeovers regulations. So yeah, usually it's about, I think what most people think of is large overseas corporations trying to buy up our farms in Australia, or maybe people even just overseas taking up all our real estate. But it actually has a bit of application to estate planning as well. Historically, as estate planners, we could have just ignored it, right? Because there was a big exemption in their regulations, which basically said you don't have to worry about it.
(03:51):
If there was an asset acquired by a will, there's a big exemption. FIRB approval is not required if you are acquiring or transferring the asset under a will, but in one, well, from one January, 2021, so a few years ago now, actually, there was a sneaky little amendment where the section of the regulation that had the exemption that a transfer under a will doesn't need further approval. The words by will were removed. So the section actually kind of looks the same, even if you're just casting your eye over it, you might not even notice that they've removed the words by will. But what that means now is that transfers that are happening pursuant to a state administration under a will will need FIRB approval if they satisfy the criteria for getting full requiring FIRB approval. So that's been around for about, well, we're coming up to about four years now. And yeah, I'm just so surprised there was a bit of noise about it when it happened, but no one's really talking practical strategies for dealing with it in the estate planning space.
Carrie (05:02):
I think the thought process, from what I can gather from talking to some other practitioners, is it something they can just deal with in the post death space? They can just do a variation to the terms of a testamentary trust as an example, if we're using those trusts and just do a variation to exclude at that point. But I think that there's two issues in my view with that approach. Number one, we have no leadership from the authorities that a later variation is actually totally a hundred percent effective to avoid that issue. And because of these substantial interest deeming rules where they kind of look at the above entity, I just get a level of nervousness as to whether it falls into the estate, if that's an issue, if the underlying owners can be foreign persons.
Tara (05:43):
Carrie, can we take a step back because I think our people are like, well, how's this more relevant?
Carrie (05:50):
Just want to cover off one other thing though. I'll close this out quickly, I promise, and then we'll explain the madness. But the other reason I think it's a of an issue to not be thinking about this is that there are things you can do to plan for foreign ownership in your estate plan, including foreign ownership through a testamentary trust if you don't have those discussions with the client having a lost opportunity cost. So that's why I think this discussion is important, even if you're thinking, oh, we can just deal with that in the estate phase. We don't have leadership about that, number one. And number two, what's the lost opportunity cost of not talking about the options with your clients?
Tara (06:27):
Yeah, I definitely think it's something best dealt with in a proactive way. So let's keep laying the foundation around when is this still relevant? We know now that it does come up in the estate planning space because the exemption about transfers under a will was removed in January, 2021 essentially. And look, it's a very vast piece of legislation. I'm just going to talk today about the most common transactions, which is residential property passing under a will. So on its face, you have to go off and get firm approval for a transfer. If there's a foreign person, they take a significant action to acquire property that is over the threshold and there's no exemption. So we now know that there's no exemption in terms of that threshold amount. Another sort of crazy thing that happened is they removed the exemption for wills, and they also dropped the threshold for residential property to zero.
(07:30):
Now, what that means practically is that any transfer to a foreign person of residential property that is for consideration is $1 even needs for approval. And you're like, okay, well that's cool because I hardly deal with the states with foreign beneficiaries. But where this gets complicated and particularly tying it in to testamentary trusts is that every testamentary trust or family trust for that matter, is deemed to be a foreign person unless it expressly excludes foreign persons as beneficiaries. So I think there's a misconception that, okay, the testamentary trust is obviously not a foreign person. It's an Australian resident testamentary trust for tax purposes, and we don't have any actual foreign beneficiaries in the family who are part of the trust. So we're cool. The trust is just an Australian trust, but that is not how it's treated under the Foreign Acquisition and Takeovers Act. They actually say, because it's a discretionary trust and the range of potential beneficiaries is so large, unless you have an express exclusion of foreign persons as beneficiaries of the trust, the trust is deemed to be a foreign person under the foreign acquisition and takeovers Act. So they don't actually who the actual beneficiaries are. They don't look through and say, is anyone foreign here or not? If you don't have that exclusion, the trust is a foreign trust, and therefore we've got a foreign person purchasing Australian residential property with no exemption. The approval is needed.
Carrie (09:14):
And Tara, to give people a bit of an idea about why this can be big news is what that application process actually costs as well. So forgive me if I'm wrong, it's in the tens of thousands of dollars depending on the value of the actual asset. And I think that starts at, that's the base level and then it goes up depending on the value of the asset that application costs. So I think that's an interesting thing to think about is that we might say, oh, it doesn't matter, but for that many dollars, it probably should matter.
Tara (09:43):
I've got the fees here, Carrie. So if your residential property is worth over $75,000, which let's chase it, everything is over that and under 1 million, the fee just to whether you get it or not, whether you get approval or not, is $44,000
Carrie (10:03):
44? I didn't think it was that high. Goodness me.
Tara (10:06):
They doubled them. They will lower. And then this year, well, sorry, I think the start of 2024, they doubled them. So if your property is between 1 million and 2 million, the fee is $88,000. Wow. And if it's between two and 3 million, which I don't know if we're talking about Sydney or Melbourne, that's not crazy or a big farm or something, it's $177,000.
Carrie (10:37):
Goodness me!
Tara (10:38):
Just gone. The fee is just gone.
Carrie (10:42):
And that goes to a government body and not to your children or your chosen beneficiaries.
Tara (10:48):
Talk about admin costs, and this is what gets me laughing about the online wills and people DIYing their estates, they're trying to save $2,000, but setting their family up for potentially $80,000 approval fee from FIRB. Like what?
Carrie (11:08):
Yeah, it's not nice, not nice.
Tara (11:11):
So I think, look, in terms of what this means for us as practitioners, if you're doing a basic will with no testamentary trust, and then it's just like have you got a foreign person as one of the potential beneficiaries of residential property in the estate? And so that would ring a lot of alarm bells, right? You're already on notice that this is a more complicated estate. And so if it's just like a mom and dad, basic will FIRB doesn't really come into the equation there. It's where you are doing vanilla mom and dad plans with a testamentary trust included. So where the issue is the testamentary trust considered to be a foreign beneficiary and a foreign person, unless we're putting particular provisions in the will to exclude foreign persons as beneficiaries of that trust. And I think that's the real, when we drill down, that's the real issue. Practitioners out there are delivering testamentary trust wills on what should be very vanilla, straightforward matters, but they're not closing the loop on dealing with verb upfront.
Carrie (12:19):
Tara, I've got a couple of other points here. I suppose what I was thinking about next is how do we communicate the different options that are available to clients? I've always sort of premised my discussions around there being three options, but I'm happy to be told that there's other options. So I thought I might run through what I think of the three options, and you can correct me if I'm wrong.
Tara (12:38):
Sure. And this is just in the testamentary trust context.
Carrie (12:42):
Yes. Yeah, absolutely. Yeah, yeah. So I sort of say the first one, which is the simplest, if you've got no foreign persons and don't intend there to be foreign persons sort of intergenerational wealth, it's just to do the straight up exclusion of foreign persons. So that gets you the easiest kind of tick. And so for a lot of families, that will be totally appropriate. Okay? The second thing would be to do no exclusion at all and just to have the full breadth of beneficiaries in the discretionary testamentary trust. And then you would have to make sure that there were some sort of instructions in your letter of wishes telling or reminding your trustees that, Hey, we have an excluded foreign persons. So you either are going to have to sell the assets, do a variation, if that's even a possibility at the time to exclude foreign persons or sell the relevant assets in the estate level, which as we know will potentially cause CGT and related issues.
(13:35):
And the third option is I think what you've been sort of calling this foreign person excluded testamentary trust, which is sort of a hybrid almost of the two approaches where you get a broader testamentary trust that has all of the inclusions so all of the foreign persons can be included in. And then we have a foreign person's excluded testamentary trust, which is something that is set up sort of side by side with the testamentary trust. You can have the same control mechanisms and most of the same terms, but the difference is that foreign persons aren't beneficiaries of that separate trust. And then the executors can distribute between the trust, the appropriate assets, depending on which of the, I'm going to say offending assets. And that way you kind of get a little bit of best of the both worlds. So I usually kind of explain those three options to clients as being the main three, but I'm happy to be told if you think that there's another one, Tara.
Tara (14:26):
No, I think you've really covered the base there. I guess for people trying to get their head around this foreign person excluded additional testamentary trust. Basically we have the testamentary trust just drafted with the normal full blanket range of beneficiaries as you would a bog standard testamentary trust will. But there's an additional section in the will which says, yeah, actually we prefer the executor's discretion. So at the executor's discretion, they can actually set up a separate testamentary trust, and it's exactly the same as the main testamentary trust, but we're excluding foreign persons as beneficiaries. And then the executor has the ability to send the property that needs verb approval to that special purpose, excluded testamentary trust, and then the other assets to the main bog standard testamentary trust. Now, there's so much flexibility built into that, which I think is key. For instance, they might go, yeah, we're just never concerned about foreign persons being in our family.
(15:32):
We don't think that we really need to provide for potential grandchildren who might be born overseas and foreign, so we're actually just going to send everything to the foreign person, excluded testamentary trust, or as you said, Carrie, they might have the residential property and real property in the excluded trust and the cash and investments and super and life insurance in other trusts, or they might sell the property. So it just gives them a huge range of flexibility to decide where we are going to put things. How are we going to navigate these rules around FIRB? So I, for instance, am based in Queensland and in my will, I've gone with the version of the foreign person excluded testamentary trust as an option. It's almost like having the super proceeds trust there. If you're familiar with how a super proceeds trust work in that it's optional, it just sits in the will and it gives the executor a lot of planning opportunities when someone dies. This is like an additional optional trust there to handle this foreign person's issue. And that's what I do in my will. I've got the super proceeds trust, the main bog standard trust, and that foreign person excluded optional trust. And then I know hopefully we've covered all our bases when it comes to distributing assets into any of those trusts to, obviously there's a compromise between complexity and simplicity, but the fact is the executor can get advice at the time and decide what they want to do and try they've got options.
Carrie (17:09):
Yeah. Tara, I wanted to talk about this too in what I think is one of the biggest misconceptions with this excluded sort of concept. I want to be very clear that the foreign person regime from a federal perspective, so FIRB is very different than say the New South Wales foreign person regime. So it's not the topic of this podcast. I think that's a whole separate thing on its own. But with the New South Wales stuff, not only does it have to be, sorry, I should say number one, it's different assets for New South Wales. It's only residential real property. And number two, not only does there have to be an exclusion, but the exclusion has to be what I call entrenched meaning that you have to ensure that that exclusion can never be removed. And so it's a lot more serious because you can never change that. And so I think when we're talking about firm, there's no requirement that has to be double entrenched. And so I think that it's a very different conversation than when we're dealing with those New South Wales real property assets. And it can be a little bit more flexible, like you've said, Tara, we have that option. It's a very different conversation when we're dealing with New South Wales real property.
Tara (18:20):
And I do think it's important to get comfortable with whatever the stamp duty and land tax foreign person surcharge rules are in your jurisdiction, and then overlay what works for your state-based land tax and stamp duty and FIRB to try and find the right option. So Carrie, as you said in New South Wales, if you're a New South Wales practitioner, you probably will just exclude foreign persons across the board and not have the optional trust because you just have to exclude them anyway in any trust. Or if you are having the optional trust because you want a bit more flexibility, you're probably just going to have a double entrenching of the exclusion of foreign persons from the beneficiaries of the trust. Whereas if you're in a state that actually looks through to see, okay, well have we actually got any foreign persons who are beneficiaries of this trust, which is the test for falling foul or incurring those stamp duty and land tax surcharges, and they're obviously a lot more lenient, then you might change or customise your strategy a little bit in terms of how hard do you go at excluding foreign persons as beneficiaries?
Carrie (19:33):
Yeah, I think it's important that we do distinguish that because I think as we've said, if it is double entrenched, there's not a lot of wiggle room there when we're talking about firm, they should be excluded, but that double entrenchment requirement is not there.
Tara (19:47):
So Carrie, I think regardless of whether you're doing a basic will or a testamentary trust, will these FIRB issues also bring up a couple of other aspects that I think you need to deal with in your will precedence regardless of whether it's a testamentary trust or not. So the challenge is also even I said before with a basic will, FIRBs probably a lot less relevant unless you know that there are foreign beneficiaries in the family. But the other aspect of that is we don't always really know the characteristic or someone's residence so they can change or they might have children who are gift over beneficiaries who happen to be foreign beneficiaries and court within the definition. So I think if you haven't revisited your will precedence for this issue, it is really worthwhile just addressing it and having it in your boilerplate executive powers to deal with things like, okay, so we do have to go off and get verb approval.
(20:52):
Who's responsible for paying the application fee? Because as we talked about before, it is not insignificant. Who's going to cop that 40,000, 80,000 170,000? Is that coming out of the estate or is that attached to following the specific gift beneficiary? And they're responsible because this is not like that fee is payable regardless of whether you have a successful outcome or not. That's just if you don't pay $200, you don't pass go kind of thing. So I would think deal with that in your will and just have it clear who's paying. So there's no issue. Also what happens if to that gift, if approval is denied, does it fail and go into the residue? Do we have a top-up gift or a replacement gift for that beneficiary? Particularly if you're being quite specific with your drafting and it doesn't sort of all just equalise in the wash.
(21:55):
What happens to that beneficiary's entitlement in the gift if approval is not granted? You've also got to factor in obviously, all of the delays by needing to get approval. So yeah, I just think it's important to review your precedents to just say, have we dealt with this? And I don't think you need pages and pages of clauses in there, but even for basic wills, I think you need a couple of extra powers in your executor powers explaining and clarifying the process. And in your testamentary trust wills, if you're using a precedent that's a bit old, it's definitely not going to deal with this. If it's a pre 2021 precedent, it's not going to deal with it. And so you do need to sort of factor that in head on and decide as a firm, how are we going to, what's our policy? How are we going to tackle most of this verb stuff?
(22:49):
And then what changes do we need to our precedent? Oh, you can come with The Art Estate Planning because obviously we have all of that set up in our precedents as well, as much more detailed training around all of this. I mean, this is just a short podcast episode. We haven't given you any sections or legislation references to go and get your head around it. So we have got a lot of resources in our precedent portal and for the TT Precedents Club members about getting you up to speed diving much deeper into those options that Carrie suggested before. So you can really just decide where are we landing on this as a firm?
Carrie (23:29):
I think that's important. You beat me to the crunch, Tara, because I do know that we have a few people that we have sort of talked through or coached with in the TT Precedents Club, and it is a little bit of an overwhelming issue because it is such a big thing to come across if you're not a property lawyer and you've not been doing this stuff day, day out, and there's this big change that affects something, I think it is a bit daunting. But rest assured that, as I said with Tara's precedent packages, there's this incredible training that I sort of say is Carrie proof, which means if I can read it, you can definitely read it and you can definitely learn. And then also, there's not only numerous hot seats, but there's a clause library. We're here to support you with the transition into dealing with foreign person ownership and getting the best outcome for your clients. And as I said, not missing out on that lost opportunity cost of having some additional ideas up your sleeves.
Tara (24:17):
Yeah, I mean, philosophically I get kind of frustrated that we are seeing all of these restrictions coming through. We are getting it at the federal level with FIRB. We're getting it at all of the state levels with the land tax surcharges. So what land tax surcharges, what I mean by that is if you're having an asset in a family trust or a testamentary discretionary trust, and it's an ongoing annual tax for owning that asset, that is actually significantly higher if they consider the trust to be a foreign trust. And that, again, can really erode away at the inheritance and make the owning that asset unsustainable. And then there's also stamp duty surcharges for foreign persons as well, including trusts who are deemed to be foreign persons because they don't exclude foreign persons as beneficiaries, and that is incurred when you acquire the asset. So across the board, we are just seeing an attack on potential foreign owners and they're being, because trust is such an amazing flexible vehicle, and you can have so many different ways to structure them and be quite clever in the sense of one or two particular secondary or tertiary beneficiaries could be a foreign person.
(25:37):
And they're using that as a way to get access into Australia, the Australian market, they are just taking a very ruthless approach to say you have to blanket exclude foreign persons as beneficiaries of the trust. And I can see why they're doing that if it aligns with that policy of not wanting foreign ownership in Australia, but the unintended or flawing consequences for just everyday Australians trying to get their head around this, it really limits some of their future planning because I don't know if my grandchildren will be foreign persons. I've got no idea. My kids are under five. And so I could possibly think, yeah, that's not going to be an issue that touches our family, but that is very shortsighted on my part and I just don't know. So it's really hard to sort of if just me to sit here and go, yep, do I just keep it super simple now, as Carrie said, do a blanket exclusion of foreign persons across the board and then when I'm 60 or 70 and I'm sitting down doing my estate plan, and they're like, well, all of your trusts that you guys have set up don't provide for your grandchildren who live overseas.
(26:52):
I don't know if I'm going to face that issue if I just try and keep things simple now. And on the converse, we try and be a bit smart and have this optional foreign person excluded testamentary trust to try and keep all our bases open. But it is complex.
Carrie (27:08):
I've got this issue in my own family. I mean, my brother, if you'd told me 20 years ago he was going to marry a Brazilian girl, I would've laughed just at that. He was going to marry part, but sorry, I'm sure everybody thinks I dislike my brother. I love my brother, but he's married to this wonderful Brazilian girl who is not an Australian citizen, and they'd made a decision to come to Australia and have children, but they very easily could have had children in Brazil. And then my niece and nephew wouldn't be Australian citizens and therefore they would be foreign persons, and I very much want my funds to go towards them. So I think that you just don't have any idea what's going to happen, and you just have to make sure, as I said, that you've had those conversations with the clients because it's not up for us to judge whether the client thinks they're going to have future generations outside Australia. I think that Australia is an incredibly multicultural society, and we need to make sure that we've not made that sort of judgement on the client's behalf.
Tara (28:03):
And also it's even hard to ask the client to make that decision themselves.
(28:07):
So I think, I don't want to scare people off testamentary trust. I don't think this is a reason to avoid them, but I do just think if you are drafting and preparing testamentary trust wills, you do have to be across this, and as you said Carrie, you've got to explain it to the clients. And there's a real nuance there around how much detail you go into versus do you keep it super simple and just keep their options open. And I think some skill is involved in getting yourself confident that you understand how this works from the legislative perspective. Then having a firm policy about what you think is the best practise for your state considering verb issues and the land tax and stamp duty foreign person surcharges in your particular state, and then what you think is probably the main couple of options available for your key client demographic.
(29:10):
And I think if you do that groundwork, then you'll be in a position where you can sort of refine and think about how are we going to explain this to the client? How much information do we give them? We don't want to overload them and freak them out. We don't want to leave them uninformed. So how do we just build this into our process now that we explain what we need to, but we don't let this issue over complicate everything either. Yeah, I think it's kind of tricky, but I mean you can get there.
Carrie (29:40):
Sounds like a topic for a future podcast, Tara. How do we not overwhelm clients? Spoiler everyone. We have a topic for podcast, which is just on that thing.
Tara (29:48):
Yes. Well, that will be our next week's podcast, won't it? I guess that's a really good segue to wrap this up unless you have anything else you wanted to add, Karen?
Carrie (29:58):
No, I'm ready to let people on their FIRB journeys.
Tara (30:01):
Oh gosh, I feel like we might've just given everyone a headache. I can feel a migraine coming on. No.
Carrie (30:07):
You might have to start sending out painkillers with your fret chocolate freckles for the TT Precedents Club members, Tara.
Tara (30:13):
Yeah, I know I don't want to scare people with this, but I also do just want to keep giving it a little bit of airtime and making sure that people are across it because it's just 10 years ago if I had said I need to understand and read the Foreign Acquisitions and Takeovers act like I would've laughed. It's just bizarre. But here we are. They've changed the law quite sneakily. What's the date? The date was 2021. So we're still wrapped up in Covid crises and it was just a lot and they snuck it through and yeah, I feel like there's people out there who haven't even heard about it. So that's really all we want to do. Raise some awareness. We have the resources. If you're feeling overwhelmed, come to the TT Precedents Club membership because we have the resources here to really guide you and support you.
(31:06):
We've done a lot of work on this as a organisation and also just as a community in the TT Precedents Club. And you can hear from our other members in your state what they're doing and the policy that they've decided to follow. So there's a lot of support if you are thinking, oh, I really need to get my head around this and sort it out. Yeah, we've got you. So on that note, we might wrap this up. Thank you so much for listening. It always means so much to us and we will see you in our next episode. Hi, it's Tara here. You might've heard us mention our TT Precedents Club membership a few times throughout the episodes now. So I wanted to share a little bit more information about what it is and how it works. The TT Precedents Club is a membership for Australian lawyers, whether you are an estate planning specialist, an early career lawyer, or you're experienced in another legal area and you want to add estate planning as a compliment to your existing services, it doesn't matter as long as you're curious about estate planning and keen to learn and share in our estate planning mastermind group.
