Part 2

 

Jordan Vaka
And I think it’s good to have those defined timeframes, I imagine, because you don’t want it dribbling on forever, but you also don’t want to act prematurely either.

So it just sits on hold and you kind of let it play out the processes, maybe distasteful as it can be sometimes along the way.

Which leads me into kind of the third area I wanted to talk about testamentary trusts.

And obviously the audience for this podcast are people that are financially inexperienced in the first three years of sort of the loss of their partner, and now they’re managing things, and they might be in that bracket of people who have kind of been surprised that they’re now trustees and what’s involved.

So I’m curious to walk through those, I guess, day-by-day or annual obligations.

What are some of the annual obligations you have as a trustee of a testamentary trust?

 

Claire Stollery
Yeah. So the first one is sort of the tax standpoint.

The trust needs to file a tax return every year for its income. And what we also would say is that every year you should sit down with your accountant and talk about how you’re going to allocate the income of the trust.

So every year the trust will earn a certain amount from return on shares or rental income, on investment properties, or interest on interest bearing accounts.

If the trust holds onto any of that income, it is taxed very highly, and it’s not sort of recommended at all.

The idea is that every year we want to be dividing that income between the beneficiaries.

So it’s good to sit down with the accountant, because they will be able to say, look at all the beneficiaries and say, where’s the most effective way we can allocate the income from a tax perspective?

We talked about before, minor children, you know, they can receive their $18,200 each year, provided they’re not, you know, 15-year-olds who also have a part time job, because that’ll be a little bit different.

But we look at beneficiaries who can receive income tax free, and then we might look at whoever else is included in the class of beneficiaries.

And you also want to be thinking, too, about who might need a little bit more that year. For example, you might say, okay, I’ve got some grandchildren in my twenties. They’re beneficiaries of the trust.

Last year, Matt got an extra distribution of income so he could buy a car. This year, Kate’s going to get a little bit extra so she can buy a car, those sorts of things.

So the tax return and the splitting of income on annual basis is something that’s really important. And I think having an accountant that you trust is really important from that perspective, too.

 

Jordan Vaka
And you want one that’s pro-active, too, so you can have that conversation in April, May, June, rather than last minute trying to rush it through.

Yeah, yeah. And this is pretty elementary as well.

But the costs for that are borne by the trust, aren’t they? The trustee is not expected to pay that out of pocket.

 

Claire Stollery
No, no. Any trusts relating. Sorry. Any expenses relating to the administration of the trust. So, including accountants fees.

And also if you’re engaging a financial adviser for the trust, which is, again, something we really recommend, again, those fees can be paid from the estate.

So as a trustee, you actually have a duty under the trustees act to review your trust’s investments every year and make sure that they’re still performing well.

I mean, you don’t have to be an expert, and we don’t expect trustees to be naturally amazing at investment and be looking at things that are making crazy returns, but we just want to make sure there’s some ongoing review and ongoing advice.

So again, on annual basis, we’d recommend sitting down with a financial adviser for the trust, just having a look and saying, here’s where we are at the moment.Do we want to make any changes? And listening to their advice.

 

Jordan Vaka
And is there an audit obligation for the trust itself?

 

Claire Stollery
I think that the trusts can be audited, to my knowledge. It’s random, but I’m not 100% sure.

 

Jordan Vaka
Yeah. So it’s not like a Self-Managed Super Fund where you have to have that annual audit done.

It’s just “keep your books in order, stay up to date”.

And I think you mentioned earlier the expectation isn’t you’re an investment expert or a cash or money expert, but you need to be organized, you need to have your stuff maintained because there’s a lot that’s required on the documentation level, if nothing else.

 

Claire Stollery
Yeah, absolutely.

 

Jordan Vaka
Is there anything else that kind of is really, should be part of that calendar across the year?

 

Claire Stollery
I think they’re the main ones.

 

Jordan Vaka
Yeah, it makes sense. I mean, yeah, it’s not nothing, but it’s not super onerous. I think if you’ve got good support and good advice around you.

 

Claire Stollery
No, absolutely.

I think that’s really something that’s really key is having that good support and advice in the early stages of the sort of administration you might want to be, you would want to be chatting to the will maker’s accountant and financial adviser to get that idea of where they were at.

There might also be, you know, final tax returns that need to be filed for the deceased, those sorts of things, but you don’t have to stick with those people either.

I mean, I think it’s really important having a financial advisor that you trust and that you’re comfortable with and that they can be someone, because, as I said earlier, the trust can continue for 80 years.

So you want to have someone that you’re happy to have that chat with every year because it might be for a long time.

 

Jordan Vaka
It’s a big consideration, particularly with that mismatch sometimes between experience and knowledge.

Different advisors speak to different points and different methods.

So, yeah, absolutely.

Find the person that’s a good fit for you with the trustee work. Can trustees be paid for the work they’re doing in administering the trust by the trust itself?

 

Claire Stollery
Yes, they can be. So there’s a couple of different avenues that can take.

The will might say that the trustee is entitled to be paid for their pains and troubles on a regular basis.

There might also be a percentage or a fixed fee gift that’s made to them to cover that expenses.

Certainly if you’re someone who’s engaging a professional trustee, which is something we haven’t talked about much so far, but sometimes a will maker may decide to, rather than giving the role of trustee to a family member or a friend, they might engage a trustee company.

There’s a few around Melbourne, Australia, more generally that they might engage, or they might ask, for example, their accountant or financial adviser in some situations.

And this also depends on their license. As well. They ask them to be the trustee of the trust.

Certainly most wills would have a clause that allow those professionals to be paid their usual hourly rate.

But in terms of just appointing a friend or a family member, not every trust will have, or every will have a clause allowing them to be paid.

Sometimes, if the trustee is also a beneficiary, it’s sort of like, well, you’re getting a benefit of the will, we just expect you to do it.

But there are also avenues that you can apply to the court for payment as well, or you can ask the beneficiaries to agree. That’s another option.

 

Jordan Vaka
Oh, that makes sense. Is there an obligation for trustees? I guess not because they’re often minors, but to meet with the beneficiaries on annual basis or anything like that.

 

Claire Stollery
I wouldn’t say an obligation to meet with them on annual basis.

But you do have an obligation to keep good records. And if a beneficiary wants to see the records and they want to chat to you about it, that is something that you need to do. Yeah.

 

Jordan Vaka
Yeah. Right. Yeah.

 

Claire Stollery
We would say that, yeah. If a beneficiary requests the records, you do need to provide them.

We would also say that transparency is really great. I mean, as you’re saying, you might have minor children, but as they get older, we would definitely encourage people to be really open about the mechanics of the trust.

It just makes it easier for everyone.

As a trustee, another sort of important thing to remember is that most of the trusts that were talking about are discretionary trusts.

So we have a number of beneficiaries and you make a decision each year as to how income or capital is allocated. And that will depend a lot on taxation advice.

But you can’t have just a fixed policy in place.

You can’t, what they call ‘fetter’ your discretion, and either leave it all to the accountant and say you decide and you can’t say, right, every year we’re giving a third, a third, that’s it.

You actually do have a duty to exercise your discretion, and it may be that it ends up being a third or third, but you do have to consider the different beneficiaries and think about who might need more money.

Again, it’s not that you have to make a certain decision a certain way, but the main thing that the court doesn’t want is that people really go hands off with it and just say, here’s my flat policy.

I’m not taking any other considerations into account. I’m just sort of walking away, which.

 

Jordan Vaka
Makes sense at, I think, conceptual level, but that level of detail is really interesting.

So you, I mean, the trustees there to act in the best interest of all of the beneficiaries, not them as a homogenous group, but individually and consider it and record that?

I assume. So you’ve got some information there. I can’t remember the case now, but I heard of a matter recently where it was a Self-Managed Super Fund and the member died and it passed through to. But the court…one of the reasons the court found against the trustee in this action is they weren’t familiar with their duties under the Trustees Act.

So I assume then that is something that people should familiarise themselves with, is just what their duties are, because they are pretty fulsome.

 

Claire Stollery
Yes. Yeah. And it can be difficult too, because for a trustee, there’s duties that are in the Trustee Act and there’s also duties that are sort of common law duties that aren’t necessarily recorded in legislation.

And, you know, this is something that people spend a whole semester studying at university. It’s not like it’s necessarily, you know, easy.

And that being said, there is a lot of information online and your solicitor can provide you with a bit of an overview.

But, yeah, some of those duties are the ones we’ve already talked about.

So exercising discretion, acting in the best interest of beneficiaries, reviewing investments on annual basis, taking advice, which I think is a really important reminder, as we’ve said, as well, but again, plays into that idea that you don’t have to be the expert, but you need to listen to the experts.

Other sort of ones that are in the Trustees Act are not to invest in things that are speculative.

You can’t really go wild with your investment ideas. You need to have a sort of a solid plan in place, making sure you comply with the deed.

So in this case, the deed is the will. So making sure you’re sort of familiar with that.

If you’ve got any questions, take the will in to your lawyer and get them to go through it with you. That’s always a good idea. And another one is just maintaining the trust property.

So generally, we’ll say in our wills that if the assets of the trust diminish through no fault of your own, you know, the market crashes and suddenly a house isn’t worth what it’s worth. That’s fine.

That’s no obligation on you because you can’t control those sort of market forces.

But for properties in the trust, you’ve got to sort of keep them in good order. So residential properties, you can’t let them just fall into absolute disrepair.

And in terms of the sort of other assets like the shares and securities, that’s something where that ongoing review is important, just to make sure that you aren’t letting assets be wasted just due to your neglect. It’s got to be sort of an.

 

Jordan Vaka
Ongoing role, I think, to that point around that, and also the advice piece, I think it’s fair to say that if you feel like you’re doing it alone, then you need a different advisory team, because I think you should be able to work with all the people that are involved, from solicitors, accountants and advisors, like you say, take the will into the solicitor and confirm.

Things like that should be part of the team dynamic that you’re working with.

Which brings me around to, I guess my last question is, from what you’ve seen and in your experience, how could things go wrong with a testamentary trust? What are some things people should avoid?

 

Claire Stollery
Yeah, I think the main sort of things that can go wrong is where a trustee isn’t sort of meeting those obligations.

Failing to file the tax returns every year, obviously, is a big no because those will pile up and it will become really complicated to sort out afterwards. Something that can sort of go wrong is just the interpersonal side.

So it can be difficult dealing with the relationships between the trustee and the beneficiary, particularly if you’ve got a situation where someone’s.

There’s been a trust created to sort of protect someone from themselves, that might get a bit difficult between them and the trustee. What I would say in that sort of scenario is, again, relying on the professionals around you.

If relationships are starting to break down between the trustee and the beneficiaries, engage a solicitor, get someone to do that sort of correspondence piece for you so you’re not handling it by yourself down the track.

You know, if things escalate, there are options for sort of mediation and those sort of issues, but we want to avoid that happening.

We want to keep everything really calm and professional.

If you’re a beneficiary of the trust and the trustee is really failing to meet their duties, so not filing tax returns, not being transparent bookkeeping, making poor investments, those sorts of things, there are legal options that you do have to seek to have that person removed, and in those cases, you might want to appoint a professional person in their stead to sort of sort things out.

So that is something that can happen.

 

Jordan Vaka
I mean. Thank you, Claire. It’s just so interesting and so such a fascinating area of law, which I imagine is why you’re specializing in it.

I think we’ve barely scratched the surface of everything.

As you mentioned, this is what people study semesters or even years at university about. So we’ve kind of barely scratched the surface.

But hopefully it’s been useful for people that are going through this process and inheriting that mantle now of managing the assets to understand that it’s a serious duty, but it doesn’t necessarily need to be an onerous one.

Just you need to be very mature and serious about it.

What I would say is people will probably have questions about this. Claire, where’s the best place for them to reach you if they do have questions or they wanted to have a chat?

 

Claire Stollery
Yeah. So I would say sending me an email is usually the best way. So if you search Tony Kelly lawyer, you will find our details there. Or my email address is just [email protected].

And we’re also available on the phone for people to come and have a chat. Always happy to have a sort of no obligation meeting with people who’ve got questions.

And if we can help. And if we can’t, we can refer you to someone who can. So that’s sort of our approach, which.

 

Jordan Vaka
I think is a great approach. It’s one that I think good professionals all share.

I would, as a final word, just say this is a very detailed, as you can tell, a very expert area.

So engage an expert that has that experience and that depth of knowledge around this because things can go wrong or things can go very well and you don’t want to be at the wrong end.

 

Thank you again for listening to this episode of Life, Loss & Legacy.

If you do have any questions for Claire, be sure to send her an email, or you can email me at [email protected] thanks for listening and we’ll see you next time.