One of the key skills an estate planning adviser needs is to know how to communicate the benefits of complex structures to clients in a way that is simple and easy to understand. If your client can understand the benefits that a testamentary trust can offer to their family, it will significantly increase their confidence in the process, the trust they have in you and the ability for them to contribute to designing the best strategy to achieve their ideal legacy. In this video I expain some of the techniques I use to simply communicate the benefits of testamentary trusts to clients.

Ready to start offering testamentary trusts to your clients? Check out our resources to get you started here:


Let’s talk about selling the value of a testamentary trust. And I’m using the word selling. I don’t want to come across as like a sleazy used car salesperson, right? That’s not my intention. But we, I would be remiss to say that a big part of successfully offering testamentary trusts is communicating the value to your clients. So what my goal always is, is to empower your clients to know about their options and then make the choice that works for them. And the best way that we can do that is to simply communicate the concepts relating to a testamentary trust and break down some of that complexity that relate to this legal structure in a way that they can really understand whether or not their family will get benefit. So I want to talk to you a little bit as if I was talking to a client in a like introduction meeting or a call, and I usually get about an 80% conversion rate when clients go through this process, so let’s say you’re meeting with Dan and Ava.

They’re a young couple, they’ve got three minor kids, and they want to get their wills done. So let’s talk them through their options. Firstly, they’ve probably come to you with this, I love you will in mind, right? So here’s Ava. If she passes away, she leaves everything to Dan. If Dan passes away, then they leave everything to their three kids and they’ve nominated Ava’s sister Kylie to be in charge of managing the inheritance for the kids until they each reach 21. So this is probably what Dan and Ava have in mind when they come to see you. So we technically actually have a bit of a testamentary trust here because the children are minors and Ava is a trustee, but it’s a bare fixed trust. So most people don’t think about a trust being involved in this structure. So the alternative that I would say to them is, I would really love to talk to you about whether a Testa trust could be annauseful for your circumstances.

So if Ava passes away, instead of leaving everything straight to Dan Ava, you leave everything to a trust established in your will. And Dan is going to run that trust for himself and the kids. It’s gonna look and feel like Dan’s money while he’s the trustee. And here’s the three things, or the reasons why I think we should think it through. So the first one is, it will, the ttestamentary trust will protect the inheritance in case Dan has repartnered. Secondly, we’ve got the tax free income every year per child. So they’ve got three children, that’s $66,000 of tax free income from that inheritance every single year until they reach 18. And then the third reason why I think you should think about it is in case you both pass away to protect the kids from getting their inheritance too early and wasting their inheritance. So these are the three things I would focus on and explain to Dan and Ava in this situation. And I’ll dive into a little bit more about how each of those works with the testamentary trust. So you can talk through some war stories. So let’s say Ava dies after a suitable mourning period. Dan has met a new spouse. So what happens to that money from Ava? Let’s assume she had a pretty good life insurance policy, say $1 million dollars and a bit of super. I’d say, you know, in this case the family home probably held us joint tenants and would’ve gone straight to Dan, but we’re looking at protecting that $1 million dollars of life insurance.

So Dan has repartnered and it’s Dan and the three children that he had with Ava. So under a simple will the inheritance from Ava that is held 100 percent in Dan’s name, he takes that to that new relationship and it just joins that property pool with his new spouse. So if they do go through a relationship breakdown the money from Ava that was meant really for her kids is on the table in those family law proceedings. Secondly, even if they stay together, if Dan stays together with his new spouse, he’s gonna make a new will probably. And the money from Ava is going to be subject to his new will and gifted wherever he divides it up. And it can get really complex. If Dan has more children with his new spouse or wants to leave everything to his new spouse, especially if they’re together for a really long time, there’s a, a much reduced likelihood that Ava’s children are going to get the full benefit of that million dollars.

Even if Dan is trying his darnest to keep that $1 million dollars for Ava’s children, it’s in his name. And it will be exposed to family provision application risks from Dan’s new spouse and any children that he has. So if you’re not in New South Wales, you know, we’ve got the notional estate rules. So the testamentary trust doesn’t offer quite as much protection, but in every other state the testamentary trust would exclude the inheritance from Ava from a family provision application. So let’s look at what the testamentary trust does. The million dollars from Ava does not automatically form part of that property pool. If Dan goes through a relationship breakdown and, I

dont know, if there’s any family lawyers on here today? We could spend, you know, a whole hour just talking about that. But I’ll just say this. So the testamentary trust shifts the onus of proof so that rather than Ava’s money automatically forming part of the property pool, it’s separate. And so then Dan’s new spouse has to try to argue that it’s in, so he’s gone from the back foot to the front foot in terms of protecting that inheritance for Ava’s children that he has with her. Secondly, Ava’s no longer relying on Dan’s will to pass her inheritance to her kids. She’s already set up that plan when she made her will because the money goes into the testamentary trust. Yes Dan is in charge of that while he’s the trustee, but when he dies, the money stays in that testamentary trust and a new trustee takes over.

And Ava could have nominated who that would be under her will. So it’s not gifted again under Dan’s will. She knows that that money will be there for the kids. So it just can help a couple get a lot more peace of mind that the testamentary trust will set in place the succession plan for that money regardless of what the survivor does. The other thing, the second benefit is the tax free income, right? So let’s say the million dollars earns 5% return, so that’s like $50,000 of income generated from that lump sum, assuming they don’t dig dip into the capital. So under the, I love you, the simple will that $50,000 is taxed in Dan’s tax return on top of his other earnings at his marginal rate. So that might even like push him up a tax bracket of he’s kind of like near the top of a tax bracket that 50,000 could tip him over and he’s gotta pay tax on that money and then use the after tax money to pay school fees, medical bills, sport, all that stuff, right?

Like that’s just exactly what we all have to do with any investment income that we earn. That’s pretty standard with the testamentary trust. The income – that $50,000 – is not automatically Dan’s income. The trustee being Dan can choose to allocate that amongst the beneficiaries. And if he allocates the $50,000 equally between the three kids, well they’ve all got a $22,000 tax free threshold that he can use up equal to like $66,000. So if he allocates it between the three kids, they haven’t paid any tax on that $50,000 at all. So it’s tax free income every year and that tax free

Money can be used to pay for the education, medical bills, basically anything for the children. So suddenly that $50,000 goes a lot further than it did with the simple will. And you know, to the extent that either you can keep accumulating it or you just don’t have to dip into the capital. So this is what I love about testamentary trusts. They just can make such a difference to a family where they’ve lost one of their breadwinners and the money and the inheritance go so much further and it can really make a difference to the financial livelihood of a young family. And look, let’s be real, these are the structures that keep wealthy families wealthy. They all pay for high end estate planning advice. They all set these up and they all have their inheritances in these tax free structures for up to 80 years.

So you can only get this tax treatment for assets that are in a testamentary trust when somebody dies. You can’t get it by setting up a family trust during a lifetime. If you set up a family trust and tried to replicate this outcome, you could only allocate like $416 to each of the kids, so like $1,200 compared to $66,000. The government recognizes that someone had to die. Ava died for this trust to come into existence, which is why you can get that tax rate money for the kids. Lastly, the third benefit is if Dan and Ava both die, the testamentary trust can offer more protection from the kids blowing through their inheritance. So with the simple I love you will, you know, you can specify in the will that you don’t want each kid to get control of their money until they’re like 21 or 25.

But the reality is, you know, there’s the Saunders and Vautier rule, which means if they are entitled at 18, they can demand their inheritance and there’s not a lot that (like Kylie in this case) can do to protect them from blowing it. Versus with the testamentary trust, the kids are not absolutely entitled until the people who are the trustees choose to make them entitled. So Dan and Ava can say a later age that the children take control of their trust or they can put friends and family members who they trust in charge of deciding when the right age is, but it basically stops the kids from blowing their inheritance. And I think for a lot of families that’s really important as well. So we’ve talked about young couples. What about the baby boomer generation? So here we are with John and Sue. They’ve got three adult children and they’ve all got wives and there’s

grandchildren as well. So the three things that I would talk about for this client is protecting the inheritance that they want to leave to any of their adult kids from them going through a divorce. So if one of their sons receives the inheritance and then goes through a divorce, the testamentary trust can really help, as we said, by shifting the onus of proof. So instead of that inheritance just being part of that relationship property pool, the spouse has to try to claw that in to the proceedings. Secondly, the tax-free income can be really helpful for families when there’s grandchildren as well. So for instance, I made sure my parents have testamentary trusts in their will for any inheritance that I might ultimately receive because I’ve got a son and I want to make sure that any income that we earn from investing in inheritance can go to him tax free to help ease some of the pain of private school fees and living costs.

So especially once you’ve got those numbers of grandchildren building up, that can really help each of the adult children beneficiaries and make sure that that inheritance goes a lot further. Lastly, and this won’t apply to like every client in this demographic, but for those who do want to rule from the grave and if they’re worried about spend thrift children, then they can, the testamentary trust can really help get that balance right between making sure the money is there for that child, but that they’re not in charge of making the decisions so that your clients can put people who they trust in charge of the financial management, but the money’s gonna be there for their kids. So with the baby boomer generation, you know, I would say the number one thing that gets them on board with testamentary trust is divorce protection. This really sticks in their mind. Particularly if things can get ‘iffy’ with the sons and daughters-in-law. And then for young couples, like the tax free income for me is the kicker. Like you can’t get this environment anywhere else. So for me, that’s why I think this is so important for young families.