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You can't take it with you...but you should do this · The Money Puzzle

• 0:11
  Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
• 0:14
  Speaker 1: James Kirby. Welcome aboard. I imagine you've been bewildered with
• 0:18
  Speaker 1: all these stories about what's going on around inheritance and
• 0:21
  Speaker 1: wills and trusts in recent days. And that's probably because
• 0:25
  Speaker 1: you've been trying to catch up with everything else that
• 0:27
  Speaker 1: came from the budget. But there's an important show I
• 0:30
  Speaker 1: want to do today. And it's about how to effectively
• 0:34
  Speaker 1: leave it all behind, okay? Because you can't take it
• 0:36
  Speaker 1: with you. And it's the perfect time to do this
• 0:40
  Speaker 1: show Because even if you think that you've done things right,
• 0:46
  Speaker 1: you may not have because there has been important changes
• 0:49
  Speaker 1: which have come down the line. My guest today is
• 0:53
  Speaker 1: Rachel Roff. She is a lawyer. She specializes in this area,
• 0:58
  Speaker 1: but I know her a long time because she was
• 1:00
  Speaker 1: for 10 years the head of Australian Philanthropic Services Foundation,
• 1:05
  Speaker 1: where we used to tic-tac quite a bit on all
• 1:08
  Speaker 1: sorts of things. How are you, Rachel?
• 1:10
  Speaker 2: I'm good. Thanks for having me, James.
• 1:13
  Speaker 1: It's great to have you. And I actually want to
• 1:15
  Speaker 1: tell listeners, bear with me listeners, I want to tell
• 1:16
  Speaker 1: you something about Rachel and what has happened in recent times,
• 1:20
  Speaker 1: because this is a story worth hearing. During the budget
• 1:23
  Speaker 1: this year in May, which was the busiest week I've
• 1:26
  Speaker 1: had for many years, and it was the biggest budget
• 1:29
  Speaker 1: we've had for many years, there's enormous changes, negative gearing,
• 1:32
  Speaker 1: capital gains, tax changes, family trust, basically 20 years of
• 1:36
  Speaker 1: potential policy changes came through in one budget. That was
• 1:40
  Speaker 1: on Tuesday. On the Thursday where everybody was starting to
• 1:45
  Speaker 1: get a little bit exhausted, Rachel was on and I
• 1:47
  Speaker 1: knew she was on. And I was saying to myself, gee,
• 1:50
  Speaker 1: what on earth could Rachel add to the mix? Because
• 1:53
  Speaker 1: her area is estates and all that. And she came
• 1:56
  Speaker 1: on and she said, have you read all the documents?
• 1:58
  Speaker 1: I said, I've read most of the papers. She said,
• 2:01
  Speaker 1: there's an extremely important change in there that people haven't seen.
• 2:05
  Speaker 1: I said, what is it? She said, there's a death
• 2:07
  Speaker 1: tax in there. And I said, I don't know about that.
• 2:09
  Speaker 1: I haven't seen anything. She said, there's a death tax
• 2:12
  Speaker 1: in there. I'm a lawyer. I know how to read
• 2:14
  Speaker 1: these documents. And if you look at it, it says
• 2:17
  Speaker 1: on the changes to family trusts where the 30% minimum
• 2:20
  Speaker 1: will be imposed, fixed trusts are allowed. And I said, yeah.
• 2:25
  Speaker 1: And she said, yeah, but testamentary discretionary trusts by definition
• 2:28
  Speaker 1: aren't allowed. And I said, I don't see that. And
• 2:30
  Speaker 1: she said, that's what it means. So I called a
• 2:34
  Speaker 1: couple of people. They said, oh, I don't know. I'm
• 2:36
  Speaker 1: not sure. So then I went to, what would we say?
• 2:39
  Speaker 1: Sources close to government. I said, give me a line
• 2:43
  Speaker 1: on this. Is it true or false? Testamentary discretionary trusts
• 2:46
  Speaker 1: are going to be excluded. And they said, yes. And
• 2:50
  Speaker 1: at this stage, it was about six o'clock in the
• 2:52
  Speaker 1: evening and I had to call our news desk and
• 2:56
  Speaker 1: I had to say, it's a very important story and
• 2:58
  Speaker 1: I know it's late, but we've got to do this.
• 3:00
  Speaker 1: And they said, how long do you need? I said,
• 3:02
  Speaker 1: I need about two hours. And that night we did
• 3:05
  Speaker 1: the story and it was quite a story, let me
• 3:07
  Speaker 1: tell you. A debt tax buried in the budget turned
• 3:10
  Speaker 1: out to be the first major reversal in the budget
• 3:14
  Speaker 1: that the PM had to come out and clarify and
• 3:17
  Speaker 1: Jim Chalmers had to reverse. And since then, of course,
• 3:20
  Speaker 1: he has had to reverse several things, capital gains and startups,
• 3:24
  Speaker 1: some issues now with family trust, but that was the
• 3:26
  Speaker 1: first one. So When Rachel says something matters, it matters. Okay.
• 3:32
  Speaker 1: How was that, Rachel? Was that a fair?
• 3:33
  Speaker 2: I think that's a fair assessment.
• 3:35
  Speaker 1: Do you recall things in that fashion? Yeah.
• 3:37
  Speaker 2: Budget night is always my favorite night. I have no
• 3:39
  Speaker 2: friends on budget night because I sit down and unpick
• 3:42
  Speaker 2: the papers in detail with a nice glass of something.
• 3:46
  Speaker 2: And I remember speaking to you the next morning going,
• 3:47
  Speaker 2: James needs to know about this. But Now understanding the
• 3:51
  Speaker 2: detail of your silence, I understand what you were doing,
• 3:53
  Speaker 2: going and checking and speaking to people about it. But
• 3:56
  Speaker 2: you weren't the only one. I spoke to a number
• 3:58
  Speaker 2: of sceptics who thought, no, sure. And it really was
• 4:01
  Speaker 2: in the detail and not many people would be looking
• 4:04
  Speaker 2: for it. I think about death and taxes all the time.
• 4:06
  Speaker 2: So that's obviously why I picked it up. But yep,
• 4:09
  Speaker 2: you ran that story and I'm grateful for you doing
• 4:11
  Speaker 2: that because it brought this really big issue to the
• 4:14
  Speaker 2: attention of the public, which probably otherwise would have gone
• 4:17
  Speaker 2: under the radar.
• 4:18
  Speaker 1: I was hauled before, just for what it's worth, I
• 4:19
  Speaker 1: was hauled before Treasury as well, I can tell you,
• 4:23
  Speaker 1: and told that I shouldn't be calling it a death tax.
• 4:26
  Speaker 1: But I'd been briefed by you, and I said, you
• 4:28
  Speaker 1: have to die, don't you, to activate this trial. So
• 4:31
  Speaker 1: what else can we call it? So there you are.
• 4:34
  Speaker 1: This is what goes on behind the scenes, folks, just
• 4:35
  Speaker 1: so you know. Okay, now, here we go. Wills Estates
• 4:39
  Speaker 1: trusts the whole thing. They've been left alone for years,
• 4:42
  Speaker 1: like everything else. For someone who is not familiar at
• 4:46
  Speaker 1: all with the whole thing, Let's cut to the very basics.
• 4:50
  Speaker 1: You should have a will. Hey, okay, folks, you should
• 4:52
  Speaker 1: have a will. I'm sure you have. If you don't,
• 4:54
  Speaker 1: go and get one right now. It's so unfair on
• 4:57
  Speaker 1: other people if you don't. Put it that way. But Rachel,
• 5:00
  Speaker 1: a lot of the issue this year was about trusts
• 5:02
  Speaker 1: and testamentary discretionary trusts and fixed testamentary trusts. Tell me,
• 5:11
  Speaker 1: should the listener have a trust as well as a
• 5:14
  Speaker 1: will How many people do you think have them? And
• 5:18
  Speaker 1: should our listeners have them?
• 5:19
  Speaker 2: I would take a step, one step back from that
• 5:22
  Speaker 2: to say that, well, first of all, yes, you definitely
• 5:25
  Speaker 2: need a will. But more often than not, you need
• 5:27
  Speaker 2: more than a will. Your will is only going to
• 5:30
  Speaker 2: deal with those assets that you own solely in your
• 5:33
  Speaker 2: own name or as tenants in common with another person.
• 5:36
  Speaker 2: And if you think about your assets, how many do
• 5:38
  Speaker 2: you actually own in your own name? You've probably got
• 5:40
  Speaker 2: a jointly held asset that's going to pass automatically to
• 5:43
  Speaker 2: the surviving joint owner if you die before them. If
• 5:46
  Speaker 2: you've got super, that's perhaps one of the most significant
• 5:49
  Speaker 2: non-estate assets. It doesn't go in accordance with your will.
• 5:52
  Speaker 2: So I'd say your will is just your starting point,
• 5:55
  Speaker 2: but often isn't enough.
• 5:57
  Speaker 1: To make sure... Everyone has super now, right?
• 5:58
  Speaker 2: Exactly right. Yeah. So if you've got super, a will's
• 6:01
  Speaker 2: not enough.
• 6:02
  Speaker 1: I thought my beneficiary declaration in my super would cover that, no?
• 6:07
  Speaker 2: Yeah, it will, but it's not a will, is it?
• 6:09
  Speaker 2: It's a binding death benefit nomination or a death benefit nomination.
• 6:13
  Speaker 2: There's lots of different types. Some are an expression of wishes.
• 6:16
  Speaker 2: telling the trustee where you would like it to be paid,
• 6:18
  Speaker 2: but ultimately the trustee can decide versus, say, a binding
• 6:22
  Speaker 2: death benefit nomination, which says, actually, provided my nomination is valid,
• 6:27
  Speaker 2: I have nominated people who are eligible to receive it,
• 6:29
  Speaker 2: the trustee has to honour it. So if you don't
• 6:32
  Speaker 2: have one, you've probably left one of your most significant
• 6:35
  Speaker 2: assets and where it goes in making that a decision
• 6:38
  Speaker 2: for someone else.
• 6:39
  Speaker 1: If I go into a lawyer or if a listener
• 6:41
  Speaker 1: goes into a lawyer and says, I want to make
• 6:43
  Speaker 1: a will, Are they obliged to say you should have
• 6:46
  Speaker 1: a trust or should they? How often does it happen?
• 6:50
  Speaker 2: A good lawyer would look at all of your assets,
• 6:55
  Speaker 2: all of your family, think about not just how your
• 6:58
  Speaker 2: assets are going to pass, but think about the circumstances
• 7:01
  Speaker 2: of your beneficiaries to determine what you need and whether
• 7:04
  Speaker 2: you should also be thinking about a discretionary testamentary trust
• 7:08
  Speaker 2: in your will or maybe a protective testamentary trust or
• 7:11
  Speaker 2: maybe a special disability trust. There's lots of types and
• 7:15
  Speaker 2: it's the lawyer's job to think about that and work
• 7:17
  Speaker 2: out which is going to be right for your circumstances.
• 7:20
  Speaker 2: But that particular one, that discretionary testamentary trust, would be
• 7:25
  Speaker 2: the cornerstone of most good estate plans in Australia.
• 7:30
  Speaker 1: Okay, and this was the one that was temporarily threatened.
• 7:35
  Speaker 1: In fact, in the budget it was hit with the
• 7:39
  Speaker 1: new trust tax. tax, which was going to be a
• 7:42
  Speaker 1: minimum of 30%. And then the government said, okay, no,
• 7:46
  Speaker 1: that's okay. We won't do that. That's the story, right?
• 7:49
  Speaker 1: Have I got that right so far? Okay. Now tell
• 7:52
  Speaker 1: me for the lay person, the testamentary trust then is
• 7:57
  Speaker 1: a wider, tighter legal framework that you get after you
• 8:06
  Speaker 1: go for those left behind. You get to do with
• 8:09
  Speaker 1: the money what you had hoped. Explain how important the
• 8:14
  Speaker 1: discretionary aspect is and what that's all about.
• 8:17
  Speaker 2: Yeah, so the trust comes into existence on your death
• 8:22
  Speaker 2: under the terms of your will to receive assets from
• 8:25
  Speaker 2: your estate. And so your will says, I want to
• 8:29
  Speaker 2: give everything to James and James, I'm going to pass
• 8:32
  Speaker 2: it into this testamentary trust for you. And the assets
• 8:34
  Speaker 2: pass into that trust and James is, the main beneficiary
• 8:38
  Speaker 2: of that trust. But there's also a bunch of people
• 8:41
  Speaker 2: that I also might want to support from that trust
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  Speaker 2: in addition to James, like his spouse or his children
• 8:46
  Speaker 2: or his grandchildren, because I don't know in the future
• 8:50
  Speaker 2: what James's circumstances are going to look like. And I
• 8:53
  Speaker 2: want to make sure that James can provide for his family.
• 8:56
  Speaker 2: And there is a trustee of that trust. And the
• 8:59
  Speaker 2: trustee's job is to look after those assets inside the trust,
• 9:03
  Speaker 2: the assets that have been inherited from the estate, to
• 9:06
  Speaker 2: invest them, generate income, and then to make sure that
• 9:09
  Speaker 2: income from that trust is shared with James and his
• 9:12
  Speaker 2: family or the beneficiaries. The discretionary nature of the trust
• 9:17
  Speaker 2: is that ability for the trustee to decide who, if anyone,
• 9:21
  Speaker 2: should be receiving distributions from James's trust. So it might be, okay,
• 9:26
  Speaker 2: James's children, that's a really great need. They are going
• 9:30
  Speaker 2: to university. They need those expenses covered. Okay, we'll distribute
• 9:33
  Speaker 2: some income from that trust to James's child. or it
• 9:37
  Speaker 2: might be James is actually going through a very difficult time.
• 9:40
  Speaker 2: We've got concerns about his ability to be able to
• 9:42
  Speaker 2: manage this money, or there could be substance abuse issues,
• 9:44
  Speaker 2: or all sorts of manner of things that happen after
• 9:46
  Speaker 2: I die. I'm not going to distribute anything to James
• 9:49
  Speaker 2: right now until he gets his affairs in order. So
• 9:52
  Speaker 2: the discretionary nature is extremely important. It allows that trustee
• 9:57
  Speaker 2: of the trust to be able to exercise the decision-making
• 10:00
  Speaker 2: for the deceased, who can no longer do it because
• 10:03
  Speaker 2: they're no longer alive, and make distributions to beneficiaries to
• 10:07
  Speaker 2: meet their needs based on the circumstances at the time.
• 10:10
  Speaker 3: Right.
• 10:11
  Speaker 1: I've always been told by those who know that it
• 10:15
  Speaker 1: doesn't matter who you are or how rich you are
• 10:16
  Speaker 1: or how smart you are, It is very difficult for
• 10:21
  Speaker 1: things to work out as you had planned when you
• 10:24
  Speaker 1: were alive.
• 10:25
  Speaker 3: It's really hard to predict the future.
• 10:28
  Speaker 1: Yeah, yeah. Because you just don't know, as you say,
• 10:32
  Speaker 1: and that's a very good example. I suppose that's the
• 10:33
  Speaker 1: classic example that someone said, okay, you know, there's basically
• 10:37
  Speaker 1: there's 10 people involved and I want to divide it
• 10:39
  Speaker 1: in 10. And then 20 years later, one of them
• 10:42
  Speaker 1: is just basically gone completely off the rails and cannot
• 10:45
  Speaker 1: be trusted anymore. And so there's the discretion to hold back, yeah?
• 10:50
  Speaker 1: Simple as that.
• 10:51
  Speaker 2: Yeah, exactly. And when we were originally having this conversation,
• 10:54
  Speaker 2: you might recall with Treasury when we were opposing this
• 10:57
  Speaker 2: minimum 30% tax on testamentary trusts, I said, look, we've
• 11:00
  Speaker 2: got this neat solution for you. You can still have
• 11:03
  Speaker 2: a fixed trust, which completely defeats the point of these structures.
• 11:08
  Speaker 2: So a fixed trust makes you decide in advance that
• 11:13
  Speaker 2: Who is going to receive what for the trust and
• 11:15
  Speaker 2: how much? It doesn't allow you to be able to
• 11:18
  Speaker 2: respond to the circumstances at the time. So you'd need
• 11:20
  Speaker 2: that kind of future, be able to see the future
• 11:23
  Speaker 2: when you're drafting your will to decide how much people
• 11:26
  Speaker 2: are going to get, which is just not possible.
• 11:28
  Speaker 1: So ironically, it did highlight the specific benefits of testamentary
• 11:34
  Speaker 1: discretionary trusts, which maybe were not fully understood prior to that.
• 11:39
  Speaker 2: That was a fantastic outcome of the budget, of all
• 11:43
  Speaker 2: of the outcomes, which people are still litigating at the
• 11:45
  Speaker 2: moment in public. The best outcome is that suddenly people
• 11:49
  Speaker 2: were saying, what are these testamentary trusts and should I
• 11:52
  Speaker 2: have one?
• 11:53
  Speaker 1: Okay. Now, listeners would know that there's been a lot
• 11:56
  Speaker 1: of coverage about trusts. I want to be very careful here, okay,
• 11:59
  Speaker 1: and separate family trusts and all that from this issue.
• 12:03
  Speaker 1: This is estate planning. This is to do with what
• 12:06
  Speaker 1: happens after you die, basically. In simple terms, the government said, OK,
• 12:11
  Speaker 1: we back down, we'd exclude them. All fine. You can
• 12:15
  Speaker 1: continue as you were. Is it quite that simple or
• 12:18
  Speaker 1: is there any niggles that yet need to be clarified?
• 12:20
  Speaker 2: There's a few niggles still coming out of this budget.
• 12:23
  Speaker 1: Surprise, surprise.
• 12:25
  Speaker 2: And these niggles seem to arrive at 8pm on a
• 12:28
  Speaker 2: Thursday night when the latest draft of the proposed legislation arrives,
• 12:33
  Speaker 2: just as you think you're winding down for the evening.
• 12:35
  Speaker 2: The proposed legislation states exempting testamentary trusts the minimum 30%
• 12:41
  Speaker 2: tax landed last week. And great, tick, they are not
• 12:47
  Speaker 2: going to be subject to the minimum 30% tax. But
• 12:50
  Speaker 2: there's a bit of a question between how they're going
• 12:52
  Speaker 2: to be eligible for that exemption. And there is a
• 12:55
  Speaker 2: tension between what the proposed law says, what we call
• 12:58
  Speaker 2: the operative provisions, versus what the government thinks the law says,
• 13:02
  Speaker 2: which is what we call the explanatory memorandum. So the
• 13:06
  Speaker 2: operative provisions say that that these testamentary trusts, provided they're
• 13:10
  Speaker 2: created on death, tick, because they come into effect under
• 13:14
  Speaker 2: someone's will, provided they only have assets from the deceased's estate, tick,
• 13:18
  Speaker 2: so you're not adding assets to them, and provided they
• 13:23
  Speaker 2: benefit only individuals and income tax exempt entities, then the
• 13:29
  Speaker 2: trust will be exempt from the minimum 30% tax. That's
• 13:32
  Speaker 2: sensible and that's great. The question and the niggle that
• 13:35
  Speaker 2: we have is around that third bit, around who benefits
• 13:38
  Speaker 2: from the trust. Now, what the law says, the operative provisions,
• 13:43
  Speaker 2: it says that if you make a distribution to someone
• 13:46
  Speaker 2: who is not an individual and not an income tax
• 13:50
  Speaker 2: exempt entity like a charity, it will be subject to
• 13:53
  Speaker 2: that minimum 30% tax, but just that slice of the income.
• 13:57
  Speaker 2: So if I use the testamentary trust to distribute income, say,
• 14:00
  Speaker 2: to a company or another trust, that income will be
• 14:04
  Speaker 2: subject to the minimum 30% tax, but only that slice
• 14:07
  Speaker 2: of it. the rest of the trust is protected. It's
• 14:09
  Speaker 2: not tainted by that distribution. That's under question because the
• 14:14
  Speaker 2: explanatory memorandum, which is what the government uses to explain
• 14:17
  Speaker 2: what they think the law says, suggests that actually it's
• 14:21
  Speaker 2: not enough about who's actually received the income. If someone
• 14:26
  Speaker 2: other than an individual or a charity or income tax
• 14:30
  Speaker 2: exemption entity could potentially benefit from the trust, the whole
• 14:34
  Speaker 2: trust is tainted. We don't care who receives the income.
• 14:37
  Speaker 2: We just want to know who could potentially benefit. And
• 14:40
  Speaker 2: that creates a huge problem for the existing wills with
• 14:45
  Speaker 2: testamentary trusts in them.
• 14:47
  Speaker 1: Okay, we'll take a short break. We're going to be
• 14:48
  Speaker 1: back in a second. Hello, welcome back to The Australian's
• 15:01
  Speaker 1: Money Puzzle. James Kirby here with Rachel Roth, estate planning
• 15:05
  Speaker 1: specialist lawyer, and I would like to say activist in
• 15:09
  Speaker 1: many areas, including philanthropy, which hopefully we will get a
• 15:12
  Speaker 1: chance to talk about before we finish. So Rachel, just
• 15:14
  Speaker 1: on that first statement, the one thing I should have
• 15:16
  Speaker 1: asked you about the testament, and I'm going to be
• 15:19
  Speaker 1: really precise here, testamentary discretionary trust that you think most
• 15:23
  Speaker 1: people should have along with their will so that what
• 15:27
  Speaker 1: they hope will happen to their money really does happen.
• 15:32
  Speaker 1: Like how, I'm sure all your clients have them, but
• 15:36
  Speaker 1: how common are they across Australia? Would you say 10%
• 15:38
  Speaker 1: of people have them? And what percent of people do
• 15:41
  Speaker 1: you think should have them?
• 15:43
  Speaker 2: I think not enough people have them. And that partly
• 15:45
  Speaker 2: comes from the fact that they sound complicated. As lawyers,
• 15:49
  Speaker 2: we've got a propensity to make things sound harder than
• 15:51
  Speaker 2: what they are. But I think if your goal, which
• 15:54
  Speaker 2: is I think the goal of most people that I
• 15:56
  Speaker 2: speak to, is to make sure that the wealth that
• 15:58
  Speaker 2: you have worked hard to accumulate during your lifetimes ends
• 16:03
  Speaker 2: up in the hands of the people that you want
• 16:05
  Speaker 2: and is protected in their hands, then you should be
• 16:08
  Speaker 2: thinking about a testamentary trust. That secondary benefit, that ability
• 16:12
  Speaker 2: to save income tax or to reduce the tax on
• 16:16
  Speaker 2: income generated from inheritance is a significant benefit. There is
• 16:19
  Speaker 2: no doubt about that, particularly where there's beneficiaries of the
• 16:23
  Speaker 2: trust who are minors. That is just a cherry on
• 16:25
  Speaker 2: on top.
• 16:26
  Speaker 1: Yeah, or incapacitated in some fashion.
• 16:28
  Speaker 2: Precisely. If you've got a beneficiary... And statistics will.
• 16:30
  Speaker 1: Suggest, as your family gets bigger or your grandkids or
• 16:32
  Speaker 1: whatever it is, it multiplies.
• 16:34
  Speaker 2: That's right.
• 16:34
  Speaker 1: Statistically, it's more likely to happen.
• 16:36
  Speaker 2: Some people ask me for a dollar figure. How much
• 16:38
  Speaker 2: do I need to be passing to make this worthwhile?
• 16:40
  Speaker 2: Because obviously you need to pay a cost to draft
• 16:42
  Speaker 2: your will to include a testamentary trust. But I think
• 16:45
  Speaker 2: if a beneficiary is receiving, say, anywhere from about $ 700, 000,
• 16:48
  Speaker 2: I'd definitely be looking at offering them the option of
• 16:52
  Speaker 2: a testamentary trust or where you definitely need to ensure
• 16:55
  Speaker 2: that inheritance is protected because they are vulnerable you're making
• 16:58
  Speaker 2: that testamentary trust mandatory so that is not a high
• 17:02
  Speaker 2: threshold when you consider the wealth of a lot of
• 17:04
  Speaker 2: people when looking at their home or with their super
• 17:06
  Speaker 2: so on that basis a lot more people than currently
• 17:09
  Speaker 2: have one.
• 17:10
  Speaker 1: And even if the numbers are not that large, it's
• 17:12
  Speaker 1: the intention, isn't it?
• 17:13
  Speaker 2: Yes, precisely.
• 17:14
  Speaker 1: The intensity of the intention, shall we say.
• 17:16
  Speaker 3: OK, so folks, you heard it here first. You heard
• 17:19
  Speaker 3: it on Budget Week first for the first time. So thanks, Treasury,
• 17:24
  Speaker 3: for highlighting the importance of the testamentary discretionary trust. OK,
• 17:28
  Speaker 3: now stick with us. Hang in there, folks. The other
• 17:32
  Speaker 3: part of the... We all know that in the budget,
• 17:34
  Speaker 3: there were some big changes. Capital gains tax is higher
• 17:36
  Speaker 3: than it used to be. Negative gearing on existing homes
• 17:39
  Speaker 3: is scrapped. These are important ones. Lending, borrowing in self-managed
• 17:43
  Speaker 3: super funds is gone. The other big one, if you
• 17:46
  Speaker 3: look at the amount of money they're going to pull
• 17:47
  Speaker 3: in in terms of revenue, is the changes to trusts,
• 17:50
  Speaker 3: family trusts. And put very simply, the killer line in
• 17:56
  Speaker 3: the budget from Jim Chalmers was the 30% minimum on
• 18:01
  Speaker 3: CGT and the 30% minimum on family trusts. Now, More recently,
• 18:07
  Speaker 3: there's been the sort of mechanics of partners where they're
• 18:09
  Speaker 3: trying to get the CGT is through. They're trying to
• 18:13
  Speaker 3: get the family trust part.
• 18:15
  Speaker 1: Through as well. I don't want to go too deep
• 18:19
  Speaker 1: here in the thickets. I just want to ask you, Rachel,
• 18:21
  Speaker 1: in relation to estate planning, in relation to what we've
• 18:24
  Speaker 1: been talking about in the first segment, what do people
• 18:28
  Speaker 1: need to know about what's going on with trusts and
• 18:33
  Speaker 1: family trusts? A lot of people, for instance, who have
• 18:35
  Speaker 1: small businesses, And farms, et cetera, have family trusts.
• 18:39
  Speaker 2: It's going to have a significant impact on people's estate
• 18:42
  Speaker 2: plans because I think the result of these trust changes,
• 18:46
  Speaker 2: not just the trust changes, a bunch of other changes,
• 18:49
  Speaker 2: including changes to superannuation and the capital gains tax and
• 18:53
  Speaker 2: negative gearing regime generally, is going to result in significant
• 18:57
  Speaker 2: asset restructuring of a scale that we've not seen in
• 19:00
  Speaker 2: a long time. And what we know is that when
• 19:02
  Speaker 2: your asset structure changes, your will is likely going to
• 19:06
  Speaker 2: be out of step with it. So you need to
• 19:09
  Speaker 2: think about if my assets have changed and the nature
• 19:11
  Speaker 2: of them have changed, then I need to think about
• 19:13
  Speaker 2: how does this affect my estate plan? How does this
• 19:16
  Speaker 2: affect my will? Does this asset still go in accordance
• 19:18
  Speaker 2: with my will? What happens if I gave this particular
• 19:22
  Speaker 2: asset to a particular person and it no longer exists
• 19:24
  Speaker 2: in this current form? So whenever you're changing your asset structures,
• 19:28
  Speaker 2: as we're about to see during your lifetime, you need
• 19:31
  Speaker 2: to think about, does this mean I need to revisit
• 19:33
  Speaker 2: my estate plans? And what I'm doing in my will.
• 19:36
  Speaker 1: Okay. Again, you know what's really hard, folks, is to
• 19:38
  Speaker 1: get stats on this stuff. Really difficult. Matthew Cranston, who's
• 19:42
  Speaker 1: done fabulous work in Australia on the budget and indeed
• 19:45
  Speaker 1: got a lot of the big leaks on the budget
• 19:47
  Speaker 1: prior to it formally being announced. He has covered this
• 19:51
  Speaker 1: and we have talked about how it's so hard to
• 19:53
  Speaker 1: get statistics. But have you any sense of how many
• 19:57
  Speaker 1: family trusts there are?
• 19:58
  Speaker 2: No, I don't.
• 19:59
  Speaker 1: Are we talking tens of thousands or thousands?
• 20:01
  Speaker 2: Well, they had over 10,000 trusts were going to be
• 20:04
  Speaker 2: affected and that was in the Treasury's details. But no,
• 20:07
  Speaker 2: I don't have the numbers. But they are a very
• 20:10
  Speaker 2: popular structure. Think about how many people you know who've
• 20:13
  Speaker 2: got a family trust. So I think anecdotally, we're going
• 20:15
  Speaker 2: to say that this is significant. The interesting thing that
• 20:18
  Speaker 2: I'm seeing a lot of is around super, particularly people
• 20:21
  Speaker 2: who have over $ 3 million in super, might feel okay
• 20:26
  Speaker 2: about that. They don't want to pay this additional tax.
• 20:28
  Speaker 2: And what I'm seeing is people pulling money out of super,
• 20:31
  Speaker 2: that excess, and gifting it to their kids while they're alive.
• 20:36
  Speaker 2: The kids are then investing that into their principal place
• 20:39
  Speaker 2: of residence, so they can start accumulating this asset tax-free
• 20:43
  Speaker 2: during their lifetime. That creates a whole heap of issues
• 20:46
  Speaker 2: as well around if you're giving it to one kid
• 20:48
  Speaker 2: or you didn't give it to the other, or if
• 20:50
  Speaker 2: you gave less to one and more to the other.
• 20:52
  Speaker 2: All of those issues are potentially a recipe for disaster
• 20:55
  Speaker 2: if you don't deal with it properly in your estate plan.
• 20:57
  Speaker 1: Yeah, it's so tricky because if you have one child
• 21:02
  Speaker 1: who's a neurophysiologist, who's married to another neurophysiologist, And then
• 21:07
  Speaker 1: you have a second child who is, I don't know,
• 21:09
  Speaker 1: a ceramist, married to a ceramist freelance. Guess what? Is
• 21:13
  Speaker 1: it fair to give them the same amount? Hey, work
• 21:15
  Speaker 1: it out for yourself. Talk to your lawyer.
• 21:17
  Speaker 2: Fair versus equal. That is the biggest question. I'll tell you, James,
• 21:20
  Speaker 2: silence is a killer.
• 21:21
  Speaker 1: Oh, that's a very interesting idea. Okay, look, on super,
• 21:24
  Speaker 1: stay with us now. We're going to switch to super, folks.
• 21:27
  Speaker 1: Are you hanging on? I know it's not easy. It's
• 21:29
  Speaker 1: very important, though. Okay, on super, this is something most
• 21:32
  Speaker 1: people don't realize. You're... The biggest investment outside your home
• 21:36
  Speaker 1: may well be your super. And the chances are that
• 21:39
  Speaker 1: over the years, unless you made voluntary contributions, your entire
• 21:43
  Speaker 1: super was basically on a concessional basis. And that means
• 21:49
  Speaker 1: at the other end, when you pass, your super gets inherited.
• 21:54
  Speaker 1: And the people who inherited your super, they're going to
• 21:56
  Speaker 1: have to pay 17% on the super they get from you.
• 22:04
  Speaker 1: I think most people understand that, Rachel. Is that news
• 22:06
  Speaker 1: to a lot of people? It seems to me every
• 22:08
  Speaker 1: time I say it, people are like, you're kidding.
• 22:09
  Speaker 3: Yeah.
• 22:10
  Speaker 1: It's not technically inheritance tax, right? But it's pretty close.
• 22:13
  Speaker 2: Well, it's called death benefits tax. It's close in name,
• 22:16
  Speaker 2: but to my mind, it's actually close in impact as well.
• 22:19
  Speaker 2: It's reducing the amount of super that you can pass
• 22:21
  Speaker 2: on to the next generation where the beneficiary of your
• 22:25
  Speaker 2: super is what we call a non-dependent or non-super dependent. Sorry,
• 22:31
  Speaker 2: a non-taxation dependent.
• 22:32
  Speaker 3: An adult.
• 22:32
  Speaker 2: Yeah, your spouse is fine, but usually it's anyone who,
• 22:35
  Speaker 2: an adult child would be the most common example of
• 22:37
  Speaker 2: a non-taxation dependent.
• 22:39
  Speaker 1: Before we explain what you can do, the explanation as
• 22:43
  Speaker 1: to why it's taxed is because Paul Keating, mastermind of
• 22:48
  Speaker 1: the entire super system, the logic was that you were
• 22:53
  Speaker 1: concessionally taxed when you made those contributions. Okay, so you're 12%,
• 22:57
  Speaker 1: not that it was 12% back then. But your superannuation contributions,
• 23:01
  Speaker 1: when they go in, they go in at 15%, not
• 23:04
  Speaker 1: at your marginal rate. And so the logic was, we
• 23:07
  Speaker 1: want to be compensated for that. So that's the logic,
• 23:09
  Speaker 1: just as far as it goes.
• 23:10
  Speaker 2: No free rides. You've got a benefit of it coming in,
• 23:13
  Speaker 2: they'll tax it on the way out.
• 23:14
  Speaker 1: Yeah, so that's the logic. But is there anything listeners
• 23:18
  Speaker 1: can do to soften the tax blow of the people
• 23:23
  Speaker 1: who will inherit their super? Two things.
• 23:25
  Speaker 2: And also, don't forget that death benefits tax goes up
• 23:27
  Speaker 2: to 30%. on the taxed element. So that's usually if
• 23:31
  Speaker 2: you've got superannuation inside your super fund and the beneficiaries
• 23:36
  Speaker 2: of that are going to be say adult children, non-dependent children,
• 23:39
  Speaker 2: that'll be taxed at 30% plus the medicality. So it
• 23:42
  Speaker 2: can be quite high. Two things you can do. One
• 23:46
  Speaker 2: is if you do have that high taxable component, sometimes
• 23:49
  Speaker 2: you can do things such as a withdrawal and re-contribution strategy.
• 23:53
  Speaker 2: So you pull out the taxable component during your lifetime
• 23:55
  Speaker 2: and you re-contribute it back in as tax-free. So you're
• 23:58
  Speaker 2: essentially flushing out that taxable component.
• 24:01
  Speaker 1: You can only do that episodically, right?
• 24:04
  Speaker 2: Yeah, exactly right. So lots of limitations on your ability
• 24:06
  Speaker 2: to do that because you're subject to contributions, caps and
• 24:08
  Speaker 2: the like. The other way to try and avoid that
• 24:13
  Speaker 2: death benefits tax is not particularly simple either because it
• 24:16
  Speaker 2: relies on us having a piece of information that a
• 24:19
  Speaker 2: lot of us can't have or probably don't want to have,
• 24:21
  Speaker 2: which is knowing when you're going to die.
• 24:23
  Speaker 1: Oh yeah, that's a tricky one.
• 24:25
  Speaker 2: Yeah, when you're going to die, you would look to
• 24:28
  Speaker 2: withdraw all of your super out of the fund just
• 24:31
  Speaker 2: before you died because then it's no longer a superannuation asset.
• 24:34
  Speaker 2: It's just a personal asset. So it's not subject to
• 24:37
  Speaker 2: that death benefits tax, but you don't want to do
• 24:39
  Speaker 2: that too soon because you don't want to miss out
• 24:41
  Speaker 2: on that beautiful concessionally taxed environment. But it is a
• 24:44
  Speaker 2: strategy in certain circumstances.
• 24:46
  Speaker 1: Are you familiar with people who have done that?
• 24:48
  Speaker 2: Yes.
• 24:49
  Speaker 1: Yeah, okay.
• 24:50
  Speaker 2: It can be hard to do in a self-managed super
• 24:52
  Speaker 2: fund environment Well, you have to sell the assets and
• 24:55
  Speaker 2: realize the assets and actually get it out of the fund.
• 24:57
  Speaker 1: Oh, I see. I thought it would be easier with
• 24:59
  Speaker 1: an SMSF because you don't have to be dealing with
• 25:01
  Speaker 1: the bureaucracy of a big super fund.
• 25:03
  Speaker 2: Matter of timing. So the assets actually have to have
• 25:06
  Speaker 2: been realized and withdrawn. So simply having a declaration under
• 25:09
  Speaker 2: your desk or your drawer that says, oh, I've This
• 25:12
  Speaker 2: was dated the day before I died with an instruction
• 25:15
  Speaker 2: to actually withdraw everything out. They actually, ATO, actually want
• 25:18
  Speaker 2: to see that it actually has been withdrawn. So it
• 25:20
  Speaker 2: really depends on how much time you have.
• 25:22
  Speaker 1: But I suppose with an SMSF, you can select, you
• 25:25
  Speaker 1: can just say, okay, those 60 ETFs, bank don't sell
• 25:28
  Speaker 1: them in a day.
• 25:28
  Speaker 2: Yes that's right yeah as long as they're sold on
• 25:30
  Speaker 2: the day that's right yeah.
• 25:31
  Speaker 1: Yeah okay obviously property etc would be considerably more complicated
• 25:35
  Speaker 1: isn't that interesting i hope you're learning a lot today
• 25:38
  Speaker 1: folks i imagine and i hope that you are okay
• 25:42
  Speaker 1: i have some questions i've kept for you rachel i
• 25:45
  Speaker 1: don't know if we get through them all but i
• 25:47
  Speaker 1: there's one or two i want to talk about and
• 25:50
  Speaker 1: i also want to tell you folks just briefly some
• 25:53
  Speaker 1: issues on philanthropy that Rachel is particularly strong on. As
• 25:56
  Speaker 1: I say, she did was 10 years as head of
• 25:58
  Speaker 1: Australian Philanthropy Services. And as we speak, there's a couple
• 26:03
  Speaker 1: of interesting stories on philanthropy going around, including the fact
• 26:05
  Speaker 1: that virtually all the charity bequest money in Australia is
• 26:09
  Speaker 1: in two companies. And those two companies have the barbarians
• 26:13
  Speaker 1: at the gate. There's private equity takeover bids for both
• 26:16
  Speaker 1: of them. Unbelievable. They're going to be snapped up by
• 26:19
  Speaker 1: private equity before anyone realizes unless there's some sort of intervention.
• 26:22
  Speaker 1: Back in a moment on that. Hello, welcome back to
• 26:31
  Speaker 1: the Australian's Money Puzzle podcast. James Kirby here with Rachel Roth. Rachel,
• 26:35
  Speaker 1: we teased out that issue just before in the last segment.
• 26:39
  Speaker 1: I mentioned perpetual inflation. The trustee company is under takeover
• 26:43
  Speaker 1: bid from Bain and Equity Trustees is under a double
• 26:48
  Speaker 1: takeover bid. That is, there are two competing groups bidding
• 26:52
  Speaker 1: for it. If the two takeovers go ahead, which is
• 26:55
  Speaker 1: extremely likely as we speak, the entire charity trustee operations
• 27:00
  Speaker 1: in Australia, $ 7 billion of charity, money in for charity
• 27:03
  Speaker 1: is going to be whipped up by private equity groups.
• 27:07
  Speaker 1: Do you think... There's a building campaign, and you're a
• 27:11
  Speaker 1: key part of that, to stop this, to get the
• 27:13
  Speaker 1: government to intervene and review at least and put conditions
• 27:17
  Speaker 1: on it. That's on Dan Molino's desk. He's the assistant treasurer.
• 27:20
  Speaker 1: He's the key player here. Would it happen?
• 27:24
  Speaker 2: I don't know, is the answer. And I'm not confident
• 27:28
  Speaker 2: because one of the issues is that the interest we're
• 27:32
  Speaker 2: trying to advocate for of deceased people, they have no voice.
• 27:36
  Speaker 1: They have no voice. Which is why we need.
• 27:37
  Speaker 2: The government to intervene. That's right. So these are people
• 27:40
  Speaker 2: who trusted perpetual and equity trustees who play such an
• 27:43
  Speaker 2: important function in the trustee landscape of acting as trustees
• 27:48
  Speaker 2: of charitable foundations, which are set up in perpetuity to
• 27:51
  Speaker 2: provide for the community and to provide the charity. And
• 27:54
  Speaker 2: they've done that service for decades. What we have now
• 27:58
  Speaker 2: is a private equity firm potentially coming in and taking
• 28:02
  Speaker 2: over $ 7 million worth of assets set aside for charity,
• 28:07
  Speaker 2: but their timeline's completely different. So private equity wants to
• 28:11
  Speaker 2: get in there and they want to extract as much
• 28:13
  Speaker 2: value within five or six years. These charitable trusts are
• 28:17
  Speaker 2: set up for in perpetuity. And I think what we're
• 28:18
  Speaker 2: going to start saying is they'll start paying the price
• 28:21
  Speaker 2: in terms of additional fees going to funds under management
• 28:24
  Speaker 2: and the like, as opposed to ending up with charities.
• 28:26
  Speaker 2: So I would hope that the government would take this seriously.
• 28:28
  Speaker 2: They have a commitment to try and double philanthropy by 2030.
• 28:32
  Speaker 2: And I think this sort of issue goes to the
• 28:35
  Speaker 2: heart of that. So I'm interested to see their response.
• 28:38
  Speaker 2: And certainly there's a lot of us who are advocating
• 28:40
  Speaker 2: strongly for their intervention.
• 28:42
  Speaker 1: Yeah. Yeah, I wonder. No one ever, no, these are
• 28:46
  Speaker 1: the kind of unintended consequences. If you said 50 years ago, look,
• 28:51
  Speaker 1: there's something you shouldn't do, Because private equity groups could
• 28:55
  Speaker 1: take over this money. There's no way they would have
• 28:58
  Speaker 1: signed it off. Any government would have signed it off.
• 29:00
  Speaker 1: But see, here we are. It'll be really interesting to
• 29:03
  Speaker 1: see if there is a move on that. I think
• 29:06
  Speaker 1: the fact that Perpetual was under takeover bid was of interest,
• 29:09
  Speaker 1: but the fact that there's now equity trustees. So the
• 29:13
  Speaker 1: two of them, the entire sector could be just whipped
• 29:15
  Speaker 1: away into private equity. What else are they going to do?
• 29:17
  Speaker 1: They're going to private equity, which is cut the costs.
• 29:20
  Speaker 2: That is their function and that is their job.
• 29:22
  Speaker 1: Yeah, that's the formula.
• 29:24
  Speaker 2: And they've got an important role to play. Private equity
• 29:26
  Speaker 2: has a really important role to play in the investment landscape,
• 29:29
  Speaker 2: but it's not in the charitable landscape. They're at cross
• 29:31
  Speaker 2: purposes entirely.
• 29:32
  Speaker 3: Of course.
• 29:32
  Speaker 1: I mean, our listeners have probably made money out of
• 29:34
  Speaker 1: private equity, but I bet they will think twice about
• 29:38
  Speaker 1: whether they really want charities to be online. All right.
• 29:43
  Speaker 1: A question from Sharon. And this is important, folks, because
• 29:45
  Speaker 1: I made a mistake. I've only just discovered the money
• 29:48
  Speaker 1: puzzle and I'm enjoying catching up on some old and
• 29:51
  Speaker 1: new episodes. Thank you, Sharon. I listened to the recent episode.
• 29:55
  Speaker 1: Money are super. Where should I put my extra money?
• 29:57
  Speaker 1: And on two separate occasions, James, you said The concessional
• 30:01
  Speaker 1: contribution cap, that is the amount you can put aside pre-tax,
• 30:05
  Speaker 1: was $ 35, 000. The current cap is actually $ 32, 500. I'm pretty
• 30:12
  Speaker 1: sure that you knew this, and it was a slip
• 30:14
  Speaker 1: of the thumb. It's hard to say. When it happened twice,
• 30:19
  Speaker 1: I thought it would be important to point out. Thank you, Sharon.
• 30:21
  Speaker 1: You bet it was important. Sorry, folks. I knew it.
• 30:24
  Speaker 1: I knew after the show I should have made a
• 30:26
  Speaker 1: note for our producer to edit it, and I forgot
• 30:28
  Speaker 1: to do it. So there you are. The concession cap
• 30:32
  Speaker 1: is 32,500. We wish it was higher, but that's the number. Okay,
• 30:39
  Speaker 1: I have been suitably thrashed by all on that one. Okay, Carl,
• 30:45
  Speaker 1: you might have something to say on this one, Rachel.
• 30:46
  Speaker 1: There's no need to get involved in the other one.
• 30:48
  Speaker 1: You and Doug Turek covered a lot of ground on
• 30:50
  Speaker 1: investing for your kids. The only thing I thought you
• 30:53
  Speaker 1: missed was the option of going guarantor on an adult
• 30:55
  Speaker 1: child's home loan. If you're prepared to do this, It
• 30:59
  Speaker 1: is a much cleaner way of helping an adult child
• 31:01
  Speaker 1: get into their first home while retaining some control over
• 31:05
  Speaker 1: the money. Do you veer into that area, Rachel?
• 31:08
  Speaker 2: A little bit. I definitely go into the area of
• 31:10
  Speaker 2: people giving their kids money to buy property and thinking
• 31:13
  Speaker 2: about the best way to protect that and dispelling a
• 31:16
  Speaker 2: lot of the big myths around how a loan agreement
• 31:19
  Speaker 2: might be the best way to do that. It's not
• 31:21
  Speaker 2: necessarily the case. I would say in terms of helping
• 31:25
  Speaker 2: kids generally, Giving whilst living, if you've got the means
• 31:29
  Speaker 2: to do it and to see your kids benefit from
• 31:32
  Speaker 2: it during your lifetime, go for it. It's going to
• 31:35
  Speaker 2: give you great satisfaction. It's also one of the most
• 31:37
  Speaker 2: tax effective things you can do. So you're going to
• 31:39
  Speaker 2: move capital in your own hands, which is probably being taxed,
• 31:42
  Speaker 2: into your child's principal place of residence where it's going
• 31:46
  Speaker 2: to accumulate wealth tax free. So if you've got the means,
• 31:50
  Speaker 2: go for it. But the ways of protecting that really
• 31:52
  Speaker 2: is in the hands of your kid. And we're thinking
• 31:54
  Speaker 2: about things like binding financial agreements and the like.
• 31:57
  Speaker 1: Okay. And just one last thing. If the loan, the
• 31:59
  Speaker 1: formal loan agreement is not the only thing you suggest,
• 32:01
  Speaker 1: what's the alternative?
• 32:02
  Speaker 2: A binding financial agreement.
• 32:04
  Speaker 1: Between who and who?
• 32:06
  Speaker 2: Between your child and their partner, if they have one
• 32:08
  Speaker 2: at the time, which can be awkward, particularly if they've
• 32:10
  Speaker 2: been together for quite a long time and they've got
• 32:12
  Speaker 2: kids and suddenly you as the parent are saying, hey,
• 32:15
  Speaker 2: I'm going to give you this money. And we love
• 32:17
  Speaker 2: our daughter-in-law. It's not that we don't trust her. But hey,
• 32:19
  Speaker 2: we want you to sign this finding financial agreement.
• 32:22
  Speaker 1: Is it like a reverse engineered prenup? Exactly.
• 32:25
  Speaker 2: Yeah, a little bit like that. Exactly right. It's a
• 32:27
  Speaker 2: mid-relationship prenup.
• 32:29
  Speaker 1: Okay. Yes. All right. Diplomatic minefield, I would imagine. But
• 32:33
  Speaker 1: thanks for bringing it up. Terrific. That was Rachel Roth.
• 32:37
  Speaker 1: Thank you very much, Rachel.
• 32:38
  Speaker 2: My pleasure. Thanks so much, James.
• 32:40
  Speaker 1: Great to have you on the show. We'll have you
• 32:41
  Speaker 1: on again. I'm sorry that it took so long to
• 32:43
  Speaker 1: have you on the first time. The emails, folks, I
• 32:47
  Speaker 1: have been collecting them. Don't worry, I'm going to start
• 32:50
  Speaker 1: really getting into the questions from now on. I have
• 32:53
  Speaker 1: Will Hamilton, Walter Averitt on the show in a few days,
• 32:56
  Speaker 1: and we will start to tackle the correspondence and questions.
• 33:00
  Speaker 1: Keep them coming. They're great. themoneypuzzleattheaustralian.com.au. And today's show was
• 33:07
  Speaker 1: produced by Tiffany Dimmack. Talk to you soon.