Together with Jonathon Naef, co-founder of Balance Family Law and College alumnus, we explore the misconceptions, mistakes and other crucial points to note when it comes to trusts in estate planning.

A quick overview of trusts

Trusts are often used in estate planning to stream assets to beneficiaries more effectively.

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There are two main broad types of trusts:

• Testamentary trusts: These are set up in the will and are only established once the person dies. They include discretionary trusts and protective trusts; and
• Inter vivos trusts: Created while the person is still alive, some of the common inter vivos trusts include discretionary trusts, unit trusts and hybrid trusts (a combination of discretionary and unit).

Jonathon Naef, a specialist estate planning lawyer at Balance Family Law, said: “To be a good lawyer, you need to have a comprehensive understanding of all the trust structures. Only then would you be able to know what would work best, and advise your client accordingly.”

A common misconception about testamentary trusts

Many people incorrectly assume that testamentary trusts are only useful for those who will be leaving substantial estates. In other words: individuals who own millions of dollars or large property pools.

But Jonathon begs to differ.

“Testamentary trusts can actually be very useful for a lot of people, not just those who are leaving a vast amount of wealth,” he said.

“In fact, as long as your client is leaving assets that could generate income, they should consider setting up a testamentary trust in their will. The asset threshold doesn’t have to be high for the trust to be beneficial.”

Your client may also want to consider testamentary trusts if they’re looking for:

• Tax benefits: Testamentary trusts, more than any other types of trusts, offer greater flexibility when it comes to income streaming and family tax planning. One stand-out benefit is that testamentary trusts allow children (under 18) to receive the same tax-free threshold as adults;
• Asset protection: In testamentary trusts, beneficiaries do not own the inherited assets. This means the assets will be protected from third-party claims (such as bankruptcy or family law proceedings). Testamentary trusts can also protect beneficiaries from themselves or other people, especially if the beneficiaries have specific vulnerabilities such as illnesses or disabilities; and
• Multigenerational benefits: A testamentary trust that is set up now can last for up to 80 years. This allows your client’s assets and the income from those assets to continue to benefit even their grandchildren and great-grandchildren.

Inter vivos trusts, also known as living trusts, are like testamentary trusts — except that they are set up while the person is alive.

Some of these trust structures, such as the unit trust or the hybrid trust, are often used for businesses to manage and protect them from potential lawsuits. Discretionary trusts, or family trusts, meanwhile, are established as a vehicle to buy, sell and manage family investments.

In estate planning, you sometimes need to help clients set up inter vivos trusts to manage their assets. But most of the time, you’re likely to come across clients who already have inter vivos trusts.

And as an estate planning lawyer, that’s where your real work starts.

“In such situations, the first thing you need to do is study the trust deeds to get an accurate idea of the trust’s financial state,” Jonathon advised.

Then, check if a succession plan is in place. You may find that either:

• A plan is in place and your client is happy to maintain the status quo;
• A plan is in place, but your client wants to change it; and
• No succession plan is in place — which means you need to help your client put one in place.

No matter what type of trust you help your client set up, there’s one part of the document you mustn’t overlook: power positions.

Power positions are the people appointed to manage the trust.

Jonathon stressed: “These control positions are one of the important factors that will determine how effective the trust structure will be in meeting your client’s goals. And it’s crucial that you check and work with your client to appoint the most appropriate people.”

Because if you’re not careful, these positions can be the loophole that unravels the trust structure.

For example: A testamentary trust that is set up with the beneficiary also appointed as the trustee, may eliminate the trust’s asset protection element. Because this means the beneficiary has the power to make decisions about the trust. And so, in the event of a bankruptcy or family law proceedings, the courts may decide to treat the trust assets as personal assets — and use them to pay off claims.

So, to ensure that the trusts are set up to meet your client’s goals, you need to know:

• What risks and concerns your client have about their assets and beneficiaries;
• How you can mitigate those risks;
• The best people for the control positions; and
• The backup or succession plan for when these people can no longer manage the trust assets and benefits.

If you want to successfully help your client achieve their estate planning goals and address their concerns, it’s not enough to just know the basics.

The College of Law’s Wills and Estates or Estate Planning Masters programs will equip you with the in-depth knowledge you need to be an effective wills and estates practitioner.

Prefer to learn immediately? Check out our short CPD courses.