Single v multiple testamentary trusts: The debate continues

Last week’s post set out a number of reasons as to why a single testamentary discretionary trust (TDT) might be the preferred structure, even if there are multiple family members to benefit under an estate plan.

As noted there are a number of factors that need to be taken into account in any particular estate planning exercise and there are a wide range of the factors that might be relevant in deciding to implement multiple TDTs.

Many of these factors have a practical focus and can include:

1              the different geographical locations of the children - particularly if one or more children live overseas;

2              poor relationships between siblings (or their respective spouses) meaning that jointly controlling wealth is likely to further fragment family dynamics;

3              the risk profiles of each child’s investment outlook;

4              the underlying nature of the wealth – for example, if particular assets are earmarked for the sole control of a particular beneficiary;

5              differences in the ‘life cycle’ of each beneficiary – for example if one child themselves has young (or no) children whereas another child has adult children, their investment objectives can look quite different;

6              the desire to have different control mechanisms in relation to different children – for example one child might be the sole controller of their TDT whereas another child may have one or more co-trustees, or indeed, not be a trustee at all; and

7              there can be a myriad of difficulties that arise if a single TDT is utilised and it is still running in, say, two generations time both in terms of overall management of the structure and how income and capital is ultimately allocated.

In the next post we will look at one further variation on this debate, the so called ‘hybrid’ approach.

Until next week.

Single v multiple testamentary trusts: The debate

One issue that comes up regularly in estate planning exercises where there is more than one family unit ultimately to benefit, is whether a single or multiple testamentary discretionary trusts (TDTs) should be implemented.

For example, if there are three adult children, each to share an estate, should those three children jointly control a single TDT or should each child (perhaps with a co-trustee) control a separate TDT, with each TDT receiving one-third of the estate.

As with many aspects of estate planning, there is no ‘correct’ approach.  This said, some of the factors that would tend to support using a single TDT include:

1              if some (or all) of the children are under the age of 18 – an estate planning exercise should always be undertaken on the assumption that the willmaker dies shortly after signing the document.  Therefore the primary focus should be on the needs of the surviving spouse.  In these circumstances, it is generally not appropriate for the wealth to be held across multiple TDTs where the surviving spouse will likely be in control for many years;

2              if asset protection (for example guarding against a relationship breakdown of any of the children) is critical, then generally a single TDT will be the more robust approach;

3              if the vision of the will maker is to have the next generation (i.e. their children) effectively act as ‘custodian’ for future generations, then this is normally more easily achieved via a single trust; and

4              if the underlying nature of the assets would make a ‘split’ ownership structure unduly complicated – for example if there is, say, one significant asset (such a property or business).

The next post will focus on some of the reasons that a multiple TDT strategy might be more appropriate.

Until next week.

Deferral of property settlements

This week’s post looks at a recent Family Court case - Pratt [2012] FamCAFC 81 (13 June 2012).  A link to the full copy of the decision is as follows: http://www.austlii.edu.au/au/cases/cth/FamCAFC/2012/81.html

The husband and wife were graziers.  The main issue in dispute was that a valuer had confirmed there had been a $10 million decrease in value of their two cattle stations over recent years as a result of exceptional circumstances (such as the restrictions on live cattle export).  The parties agreed that as a result, the bank debt over the properties substantially exceeded the value of the land.

The wife sought a three year adjournment under the Family Law Act to enable a ‘just and equitable property settlement’, on the basis of the valuer’s statement that the land should increase in value substantially over the next two years, as market conditions return to normal. 

The husband opposed the delay on the basis that the parties’ debts exceeded their assets and he could not meet the interest owed to the bank.  The adjournment was originally granted but appealed by the husband.

Normally an adjournment is only available where a ‘significant change’ in financial circumstances is likely and the delay will probably do justice, more so than an immediate division of property.

Ultimately, the Court accepted the husband’s argument and ordered that the property settlement be finalised immediately.  A key aspect of the decision to deny an adjournment was the failure in the original decision to factor in the cost of maintaining an increasing debt through interest on the loan facility and the ongoing costs of running the properties.

In other words, it was held that in order to delay a property settlement, all relevant financial issues must be considered.  It is not sufficient for there simply to be a ‘significant change’ in the gross value of the assets.

Until next week.

Wholesale deed updates post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 4th and final one in this series of posts via the following video link under the heading ‘Wholesale deed updates post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

The third idea is the ‘wholesale update’ approach.

The providers around are saying for $x you can go and get all of your deeds across the board 2012 compliant, really adopting the same approach that you do with an SMSF trust deed. People accept that with an SMSF, you're going to have to update it every 5 years probably. That’s just the life that you lead running an SMSF.

We would argue that people have never really had that attitude with family trusts. Whether that’s right or wrong is another question. But by and large, people have not really had that wholesale approach. We'll speak about Clark and why that may be the case from a resettlement perspective.

What we're saying with the third option is that you just go and do the update for all clients. Are you running the risk that you'll have to go and do that again in 3 or 4 years’ time? Absolutely you are. But in the meantime, are you investing in your clients by saying you will read the deed once, make sure that every deed across the entire client base has the exact same provisions, can start getting some efficiencies in terms of resolutions, in terms of the review process.

It may be a little bit of pain upfront, however hopefully, any subsequent changes won't be too prohibitive anyway and many are saying may be this is the way to go.

Until next week.

Deed updates by exception post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 3rd instalment of 4 in this series of posts via the following video link under the heading ‘Deed updates by exception post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

The second approach is ‘by exception’, that is you do something. So on the basis that even if you do nothing, you've got to do something; which is you've got to have someone read the deed.

The by exception approach is if it's a particularly nasty deed, or there is as particularly big capital gain this year we’re going to invest in this and we're going to look at it and we're possibly going to amend it, because of the particular circumstances.

We're going to do that, because even doing nothing, we've actually sat down and looked at the document and we understand it.

The trigger for a lot of people on that, if you're looking for a date, but don’t quote me because again not all deed providers were diligent in doing this, but by and large, any deed after 1993, from any even remotely reputable provider, will have streaming.

So if you're looking for a date to say I would hope to be basically right, you can use 1993 as the date, because that’s when streaming ruling came out or whatever it was and most deed providers across the board went through and did it. Indeed, a lot of them went and did actual updates in 1993. So even your pre-’85 trusts had gone and had that amendment in 1993.

The next post will look at the third main approach we are seeing in this area.

Until next week.

The “do nothing” approach to deed updates

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 2nd in a series of 4 posts via the following video link under the heading ‘The “do nothing” approach to deed updates’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

There are obvious advantages to ‘doing nothing’.

From a cost perspective for a client, you would intuitively think that’s probably the best outcome for them. Our only asterisk that we would put next to that is it does put enormous amount of pressure back on your practice and your team if someone needs to be sitting down and reading the deed.

Even if you've had the same provider for many years, you can almost guarantee that they will have changed their document, and they won't necessarily be able to tell you at what point at time they changed it.

Even if they could tell you, it probably doesn't absolve you under your insurance policy to say that everyone before a point in time will have this style of deed. Someone has to sit down and look at that. Which then means, according to the Tax Office, you can't just be churning out standard resolutions. You've actually got to have a tailored resolution that fits the particular deed and the particular income profile for the particular year.

So yes, the do nothing is attractive on a number of levels, but you need to be aware that it does add compliance costs.

You will see there's a common theme to all of these 3 choices.

Ultimately, our positioning is ‘don’t shoot the messenger’. This is something that has been imposed on us from Canberra. It means the cost of running a trust is more. So first one is to do nothing.

The next post will look at the second main approach we are seeing in this area.

Until next week.

What are the options in relation to deed updates post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the first in a series of 4 posts via the following video link under the heading ‘What are the options in relation to deed updates post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below - 

What it actually means in terms of the trust variations, we think it's one of the following three things. 

The first one, we're probably guess that most of the people we work with adopt this path, is to ‘do nothing at all’. 

Is that still the right thing to do?  The honest answer is we don’t know. 

What we do know is even within the last 6 weeks, this complete review of trusts, that has been threatened forever, has already been pushed out for another year.  So the earliest that we're going to have a new taxation regime for trusts is 2014. 

You wouldn't want to take too heavy a bet for whether that's going to be pushed back again.  I suspect there's every chance you're going to have an election before the next time around and you may well have a change of government. 

So there's a whole range of things that are going to potentially happen between now and 2014 that will push that out. 

The first one is to just do nothing.

The next post will look at this approach in more detail.

Until next week.