Callen Dendle: Every meaningful financial decision comes down to a considered move: the right structure, the right timing, the right tax and legal advice before you act, not after. Welcome to The Considered Move, the podcast from Andersen in Australia. Over this series we work through the tax and advisory questions that matter most, whether you are running a business, looking after family wealth, or advising people who do. Callen Dendle: I'm Callen Dendle, National Technical Tax Director at Andersen, and I'll be guiding the conversation. With me across the series is Cameron Allen, Chief Executive of Andersen in Australia, who brings the firm's view to each conversation and turns the technical changes into what they mean in practice. Joining us today is Susan Bonnici, Principal Estate Planning Lawyer at Aitken Partners. She has worked exclusively in estates and trusts for more than a decade, and helps build the discretionary and testamentary trust structures these changes may affect. Today we are talking about trusts and what the changes might mean for you. Susan, the question we keep hearing is a simple one: if I have a family trust, what do the changes mean? But before we get there, let's get a lay of the land. Cameron, could you take us through what happened to trusts on Budget night? Cameron Allen: Budget night was interesting. These are probably the biggest changes to discretionary trusts we have seen in decades, over and above the trust loss provisions from some years back. The government has proposed a minimum 30 per cent tax on discretionary trusts, including testamentary trusts, from 1 July 2028. It has also proposed a three-year restructuring relief window from 1 July 2027, which gives affected taxpayers, family groups and other clients the opportunity to restructure where necessary. It is very much a landmark change, and I look forward to working through with Susan and you today, Cal, how it looks in practice. Callen Dendle: Now, Susan, I hear we may have had some news this morning that could alter some of what was proposed on Budget night. Is there something you can share with us? Susan Bonnici: Yes, that's right, Cal. This morning it was announced that there has been a slight change to the Budget plans as they relate to trusts. The first thing to note is that there is a big difference between two kinds of trust. A discretionary family trust is one somebody establishes during their lifetime, often called an inter vivos trust, which many people use to generate wealth and to distribute income to their family group or to other structures. A testamentary trust is another type of discretionary trust, established in somebody's will after they pass away, to hold an inheritance for the benefit of their beneficiaries. Susan Bonnici: This morning, encouragingly, the government announced that the 30 per cent minimum tax it was going to impose on all discretionary trusts will no longer apply to testamentary trusts. There is some interesting wording around that: the trust has to be established for a genuine testamentary purpose. I'm not yet sure what that will mean. As with all things in this Budget, we will have to wait until we see the legislation to know what the fine print is, and what it will mean for family trusts and testamentary trusts. Callen Dendle: That is quite a change, and as always we'll look forward to more detail from the government. Now, trusts are where tax and estate planning meet. Cameron, you tend to look at the structural side, whereas Susan, you look at it more from a succession or protection perspective. I'd like to get a sense from each of you of where those two views come together, and where they sometimes work in opposite directions. Susan Bonnici: When clients come to me for their estate plan and succession planning, whether that is for themselves, their business or their family group, tax is one small piece of the puzzle. We also look at the wider picture: family dynamics, the needs and circumstances of the beneficiaries, any asset protection concerns, and who they want in positions of control over their ongoing wealth, businesses and entities. For some clients, tax is not a major consideration. Others want to be sure the transfer of wealth is handled in the most tax-effective way, and that is where we work with tax advisers to get them the right advice. But it is usually a small part of estate planning, which covers the assets people own personally and the assets held in their non-estate entities, such as their trusts and family businesses. Callen Dendle: From your perspective, Cameron? Cameron Allen: Trusts are not just tax structures. People use them for all sorts of purposes: asset protection, succession planning, family governance, control and flexibility. The tax outcome is only one part of the discussion with a client. We don't recommend that clients set up a trust just for the sake of it, because it sounds good. Tax is an important part, as it is with any structure, but there are more substantive commercial, family and asset-protection reasons to establish a trust. Callen Dendle: Susan, to build on Cameron's point, when you have that first discussion with a client, can you give us some insight into the questions you ask and what you are trying to tease out to get the fuller picture? Susan Bonnici: Definitely. If a client comes to me with a family trust already established, I first look at the whole picture. What is the purpose of that trust? Do they have any other entities around it? Then I look at the deed to see who holds the controlling positions. Who is the current trustee? Who is the appointor? Are there other people or roles with key decision-making power, and what is the succession plan for those roles? A major consideration is the ongoing control of those entities, because the trust assets are not something a client can gift in their will. It is about handing on the succession of control. Susan Bonnici: We also look at why the trust was established. Is it for the benefit of one person or one family group? Are people being excluded from benefits? Are there restrictions on the use of the trust, on the release of capital, or on what income can be used for? It is important to go back to the trust deed, which sets the governing rules. I spend a lot of time going through deeds to see what can and cannot be done, and who holds those key decision-making roles. Callen Dendle: In terms of the changes, not every trust will be affected in the same way by the proposals. If someone is wondering whether their trust is implicated, is there a quick test, or a way they might start the considerations for themselves? Susan Bonnici: There are probably people who wrote a will a long time ago, put it in a drawer and forgotten what is in it. The first step is to go back and look at what your will says. There are different types of wills. Some are direct-gift wills, where each beneficiary receives their inheritance directly in their personal name. Others involve testamentary trusts, and there are different types of those too: a fixed testamentary trust, a discretionary testamentary trust, a capital-protected trust, a life interest, a right to reside, a disability trust. There are many kinds of trust that could sit in your will. Susan Bonnici: If you wrote that will 10 or 15 years ago, the trust you set up at the time may no longer be appropriate for your beneficiaries. So go back and see what is in it. With these new Budget measures, we are not yet sure of the outcome. This morning's exemption for testamentary discretionary trusts is encouraging, but we still don't know the final shape of the legislation, and the law may change between the time it is passed and your date of death. So it is important to keep reviewing your will, or to have a will that builds in flexibility. A key part of that, for me, is giving the beneficiary options where appropriate, so that at your date of death they can look at their own circumstances and the laws in place at the time, and assess whether a trust is in their best interests. Callen Dendle: Cameron, you do a lot of work for family groups from a tax perspective. Are you seeing anything particular in how they have their discretionary trusts set up, or in how this is landing for them? Cameron Allen: It's a good question. A lot of people are shocked, if not surprised, by the changes. At a surface level, the questions we are seeing are: do I still need my trust? Is my bucket company still appropriate? Cameron Allen: A bucket company is typically a separate company, usually owned by the trust, that receives distributions of income and allows that income to be capped at an effective tax rate of 30 per cent. It is a deferral strategy, and in most cases the funds can later be paid out as a fully franked dividend. So there are real questions around the bucket company strategy, and whether we can modify it. Cameron Allen: Then there is: should I move assets? The government announced a three-year restructuring window from 1 July 2027, which gives people time to reorganise their affairs. Do I need to do something before the 2028 tax year? One important point, and to echo Susan, is that we have not seen final legislation. There is the interplay with the trust loss rules, where you have other trusts within a family group and have made a family trust election or an interposed entity election. How do you use distributions from a trust that now has to pay 30 per cent tax at the trustee level? How will that credit flow through, and how will you cascade and use losses within a family group? Are those losses still valid within the group? If restructuring occurs, there is also the need for valuations. There are a lot of questions to be answered. Callen Dendle: From your perspective, Susan, is there a risk or a gain in people looking at the transitional window and thinking they can defer this for a few years? Or is it more important that people take stock as soon as they can of how it might affect them? Susan Bonnici: It is a good idea to start thinking about it, considering alternative options and getting advice. When people restructure, I always look at where the assets are going if they are moving out of a trust, and what impact that has on their estate plan and family succession plan. For example, if someone decides the new tax environment for discretionary trusts is no longer appropriate for them, and thinks they will move those assets into their own personal name or a family member's, that has a big impact on estate planning and on estate disputes. One reason people use discretionary trusts is to take assets out of their personal name, to reduce the risk of estate disputes and for asset protection. You lose those benefits by moving assets back into your personal name. After someone dies, only the assets in their personal name form part of their estate, so if you have a disgruntled beneficiary, increasing that pool raises the risk of a challenge, and the risk that it succeeds. There is a lot to consider with the restructure window: what the alternatives are, and the risks and benefits of each. Callen Dendle: On the options that are on the table, Cameron, you mentioned that streaming and bucket companies are potentially a little more difficult. Are there particular options being considered for clients in that bread-and-butter family group planning scenario? Or is it still a case of one size not fitting all? Cameron Allen: That's a good point. One option is that the bucket company strategy might still work from a trading company perspective, where you interpose a company between an existing family trust and an existing trading company. It becomes a holding company strategy: you distribute profits from the trading company into the holding company. If that holding company is part of a tax-consolidated group, it may have the same tax rate. If it does not qualify for base rate income, depending on what it does, it may be taxed at the higher rate of 30 per cent, so there might be an additional 5 per cent. But you can then use that company to invest and pursue other things. Cameron Allen: One of the issues is that there will be no refundable credit for the trustee tax paid at 30 per cent. If you are a beneficiary who receives a distribution from a discretionary trust after these rules are implemented, you effectively have a 30 per cent tax credit. If your marginal rate is below that, for example you have no other income and it is under $18,000, you lose the benefit of that credit. Normally, if you held a dividend individually, you would receive the franking credit as a refund of tax. So there will need to be some thought about how you distribute income out of a discretionary trust, because the old deferral mechanism of distributing to a bucket company is now gone. There will be no credit for the tax paid by the trustee, and that is effectively double taxation, which is a poor outcome. It is arguably even more punitive than the trustee being taxed where no beneficiary is presently entitled. Callen Dendle: So not necessarily all doom and gloom, but there is a need to look closely at the impact before you distribute anything. Cameron Allen: Correct. There will be a class of taxpayers who no longer get that benefit. The news on testamentary trusts is a positive, because a class of taxpayers will be very happy, particularly anyone who is a discretionary object of a testamentary trust established as a result of someone's death. It is not all doom and gloom; we can structure around it. But trusts are very specific, and they are not something you set up just for the sake of it because of an inherent tax advantage. There are more important reasons to have one, and their use is still very valid. It simply means thinking a little differently about how we apply the tax lens and what the outcomes are likely to be, and marrying that with the capital gains tax (CGT) changes. As I said earlier, there are a number of unanswered questions where family trust elections or interposed entity elections have been made, and around the use of losses within a family group. Callen Dendle: To pick up a point you mentioned earlier, Susan, many of the trusts you see hold family homes or businesses, and the wealth intended to pass on through the family. Setting aside today's changes for a moment, and thinking about the conversations that need to happen, what does that succession discussion really need to look like in the current environment? Susan Bonnici: There are trusts like that, which hold the majority of a family's wealth, built up through a business or a farm. Every family is unique in how they see that wealth being passed on. For some clients, one of the children is set to take over a particular part of the family wealth, whether that is a business or a farming operation. The conversation with those families is then about what provision is made for the other children. If one person is taking control of the trust to run the business, how do you structure things so the other children and their descendants are not missing out, when the family wealth, the business and the home have all been placed in one structure? Sometimes there is some reconfiguring so that different people can take control of different elements of the estate, where the goal is for all descendants to have a broadly equal benefit. It is an interesting discussion, and always different, particularly where there is a business and a business succession plan. Sometimes we bring in our corporate lawyers for buy-sell agreements, to make sure there is a succession plan for one person to take over the corporate interests, while working out how others can receive something as well. Callen Dendle: When a change like this happens, do you expect it to make it harder for people to challenge wills, or do you think it won't really change that landscape? Susan Bonnici: It is hard to say, especially because we don't yet know exactly what it will look like. In general, over the next 10 to 15 years, there will be a large increase in estate litigation, simply because the size of people's estates is growing so much. Some people make distributions to their children while they are alive. If I give my son $500,000 before I die to put a deposit on a house, that takes the money out of my estate, which can be a good thing and gives him a leg up. But you might want protections around that, in case he divorces, or you might adjust your estate to take that amount out of his share so that your other children are equally provided for. There will be a lot of change in the coming years in how estate planning works, and an increase in estate litigation generally. I don't think this Budget will make much difference to that trend. Callen Dendle: It's going to happen anyway. Susan Bonnici: Yes, I think so. Callen Dendle: Cameron, could I ask whether you are seeing a common question, or a common misconception, from clients about these changes? Cameron Allen: What we have seen is a knee-jerk reaction from some, but most clients are quite measured and are waiting to see the detail. That has been our message: wait, then assess, and see what things look like. The whole point of using trusts in a family succession and family wealth setting is succession and control. The issue we are seeing now is more about what the future looks like: how do we pass on control effectively, and what are the mechanisms? These are the discussions we will have with Susan and her team on the estate planning side. How do we succeed the appointor of a trust, who is ultimately the most powerful person? I stand to be corrected, Susan, but that is the most powerful role. Susan Bonnici: It is, yes. The appointor can replace the trustee. The trustee has the day-to-day decision-making responsibility for the trust, but the appointor can remove the trustee and appoint someone else. Cameron Allen: So we are having these conversations now with family groups. A lot of the talk is: have we really been handed an inheritance tax, with this 30 per cent baseline, and the resetting of pre-CGT assets from 1 July 2027? That brings valuations into play, and the question of how we optimise and think about intergenerational wealth transfers. We have discussions coming up, including one with Susan, about what an estate plan looks like after a liquidity event for an existing family trust arrangement, how that feeds into the next round of testamentary trust planning, and whether the family wealth continues in trust or whether there is some deployment of surplus funds as pre-inheritance to family members. So there is a level of wait and see. We don't know what the detail looks like yet, so it is still very much up in the air. And, of course, the welcome news today of the carve-out for genuine testamentary trusts, whatever they turn out to be. Callen Dendle: Whatever they end up being. Susan, if you had one message for people about their next step, over the next month or the next 12 months, what would be the sensible move to make? Susan Bonnici: Look at the documents you currently have in place: your will, your enduring powers of attorney, which are very important, and your trust deed. Review who has control of your trusts and any corporate entities, and the succession plan for them. That includes your self-managed super fund: who would take over the SMSF if you were to pass away, because an SMSF is another type of trust. Look at all of your structures, who is in the controlling positions now, and who the successor controllers are. Then think about whether they are the right people, and whether they would do what you want on your death or incapacity. Callen Dendle: And that is where we'll leave it. Susan, thank you very much for joining us. If today's conversation raised something close to home, the considered move is to talk it through before you act; your Andersen adviser can help you work out what it means for your situation. A quick note: everything we discussed today is general in nature and not advice for your circumstances. If this was useful, please follow The Considered Move and pass it on to someone who might enjoy it. You'll find the series at andersen.com and on LinkedIn, YouTube and your other favourite streaming services. I'm Callen Dendle from Andersen in Australia. Thanks for listening.