providing for the blended family in a testamentary discretionary trust

Background

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It is a tired trope in estate planning practice that the most difficult family to provide a certain and secure estate plan for, is the blended family.

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The spouses wish to provide for each other, but they also wish to provide for their own children who are not the children of their partner. 

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When "I love you wills" are used, whereby each spouse gives everything to the other and then if their spouse predeceases them, to their children in equal shares, there is a lingering doubt in their mind that their spouse may not, over time, do the same thing. The survivor may change their mind, and instead divert what assets were meant for their step-children, to their own children.

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This doubt is not caused by a lack of faith or a lack of love.  It is the reality that sometimes, one's moral and emotional connections to one's own children are greater than that to their step-children.  There can be enormous pressure brought to bear by family members.  Good intentions are difficult to maintain, particularly if decades pass and the surviving spouse does not have a continued relationship with their (former) step-children.

 

Traditionally a life interest was used in these circumstances.  The property owner might grant a life interest in a property to their spouse.  This way the surviving spouse is entitled to reside in the property and receive any income from the property.  However, these interests are inflexible, almost impossible to refinance, cannot be sold and difficult to deal with in general.  Life interests are generally unsuitable for modern life.

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There is also the little brother to the life interest, being the right to reside, which does not grant an interest in property but merely the personal right to reside in the property on certain terms.  This is useful and appropriate in some circumstances, but does not provide any income for your spouse.

 

There is also the mutual will / contractual will.  Each spouse enters into a binding legal contract whereby they promise not to change their wills.  The contract says that they will give the whole of their estate to their spouse, and their spouse promises that on their later death they will honour the wishes of their predeceased spouse to provide for that predeceased spouse's children in their will. 

 

Mutual wills/contractual wills are legally enforceable but are practically restrictive and inflexible.  A contractual will can spell disaster when a simple change in life is enormously difficult to cater for with the wills bound up tight in a contractual will.  The other issue with a contractual will is though it might be legally enforceable, if the relevant assets are dissipated by the surviving spouse, then the right in contract law to have those assets is in practice worthless.

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The Goldilocks Trust®

 

​The Goldilocks Trust® has been developed as a potential answer to the difficulties of estate planning for blended families[1].

 

The Goldilocks Trust® is named after the habitable zone around planets, close enough to the sun for warmth but not so close as to get burned.  It is a testamentary trust for use in a will which sits on the spectrum between having a certain, but restrictive and inflexible, estate plan (e.g. a mutual will) at one end and, at the other end, having a "I love you will" which are substantially flexible but ultimately uncertain. 

 

It is the happy medium between providing little for your spouse through fear that they may not honour your wishes or that they may have their will over-borne by their own children; and the other end of the spectrum being providing everything to your spouse but having a lingering doubt in your mind as to your own children's future prosperity. 

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​It works as follows:

 

The Goldilocks Trust® is a testamentary trust set up in your will[2]​

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Your spouse is the life income beneficiary, and is entitled: to all income from the trust (noting that related trusts and companies are also entitled to:

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1. receive income;

2. to occupy / reside in any main residence property owned by the trust;
3. but is not entitled to receive capital distributions from the trust. 

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Your children are the remainder beneficiaries[3].  On the death of your spouse, the trust then becomes a standard modern testamentary discretionary trust, with your children as the primary beneficiaries.  There is flexibility for your children, as controllers of the trust, to pay capital and income to themselves or to their family members or to related trusts and companies.

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An example scenario for the Goldilocks Trust®:

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• Jane Green is in her 50s, has 3 adult independent children and is divorced. She meets and marries John Brown. John is also in his 50s, has 2 adult independent children and is recently divorced

• Jane has the following assets:

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1. cash and investments of $1.5M.
2. a house on the top of a hill in a leafy suburb worth $1M debt free; and

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• ​John has $450,000 in listed shares held personally by him.

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• They are living together in Jane’s house.

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In her estate plan, Jane wants to provide that John can live in her home for as long as he likes but ultimately she wants the home to pass to her children.

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Jane receives an advice on a range of options open to her[4], and decides upon utilising a Goldilocks Trust®.  She sets up her will as follows:

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1. She establishes a Goldilocks Trust® and gifts her home and $1M into the trust.  She gives the remainder of her assets to her children.

2. She appoints John, and one of her children, as trustees of the Goldilocks Trust®.  Her children will represent their own interests in the trust.

3. John is entitled to income from the $1M, and may reside in the home rent free for his life.

4. Jane is pleased with the outcome because:

 

• John can enjoy the home for his life whilst preserving it for Jane’s children;\

• her children can have some involvement in the maintenance and preservation of the family home; and

• income can be provided to John without there being a risk that the asset is part of his estate or at risk of being taken by his creditors or distributed to a later partner of John’s. If John remarries, then divorces, the property of the trust is not available for distribution to that person in the family law proceedings[5].

• The trust could lend moneys to John to assist with his aged care if thought appropriate.

• The decision of the controllers of the trust (i.e. the trustees) and the appointors is the most critical decision in the establishment of a Goldilocks Trust®. Family dynamics and personal dynamics between the parties would need to be considered. It may not be appropriate to have a John and his stepchildren together as trustees and, instead, it may be better that an independent person be trustee with John and in some rare cases it may be that John is not a trustee at all.

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Tailoring the Goldilocks Trust®

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The Goldilocks Trust® is tailored to meet the needs of your family.  You can choose:

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1. Would you like your spouse to have access to capital of the trust in the event of certain life exigencies?  This might include, for example, medical costs.  This could be require approval by your children if you think appropriate.

2. Should your children be income beneficiaries during the life of your spouse?  This would allow your spouse to distribute some income to them if they so considered.  This would be unusual but is done sometimes when the family wishes to split income for tax purposes.

3. Should there be any termination events other than the death of your spouse?  For example, if your spouse remarries would that bring the trust to an end?

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Typically the trustees of the trust would include your spouse and another person to represent the interests of your children.  We have faith in human goodwill and moral nature and we lock our car doors when leaving our car in a public space.

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The Goldilocks Trust® is an expression of faith in your spouse whilst providing for your children.

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The Goldilocks Trust® and family law

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What happens if your spouse inherits from you by a Goldilocks Trust® and then remarries? 

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The Goldilocks Trust® assets will be clearly separated from the marital assets of your former spouse and their new partner.  The assets were not created or developed by either of the parties to the relationship.  Therefore it is highly likely that the assets of the Goldilocks Trust® will be secure and retained in any property division proceedings that may arise. However there may be circumstances, depending on a range of factors, including how the Goldilocks Trust® is used, who the trustees are, the age of the parties, whether the relationship bears children, where the assets are taken into account and may be divided.  That said, we are confident that the assets will be much more likely to be retained if they are within a Goldilocks Trust® compared to if they are owed absolutely by your former spouse, because of the trust structure.

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We are happy to provide a more fulsome family law advice if this is a particular concern and there are further ways the Goldilocks Trust® can be prepared to strengthen it on this issue.

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What are the disadvantages of a Goldilocks Trust®

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The Goldilocks Trust® is not a once size fits all estate planning tool.  It is most effective in specific circumstances.  Your advisor will consider your family's circumstances before they make a recommendation to use a Goldilocks Trust®.

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A disadvantage to your spouse inheriting via a Goldilocks Trust® is that as with a family trust, there are some modest running costs for the trust.  These running costs only commence in the event of your death and the trust is established.

 

Your spouse does not have absolute control of all of their inheritance.  Whilst this may be a disadvantage for them, it is the purpose of the structure so that you can secure your own children's future.

 

The primary design influence for the Goldilocks Trust® is not tax.  Therefore other structures may have a better tax outcome.  For example, it is possible that the Trust may not be eligible to receive the main residence land tax exemption in Queensland or New South Wales, depending on the circumstances at the time. 

 

In relation to capital gains tax the trust ought to receive the same CGT treatment as other testamentary trusts.  The trust should receive the main residence exemption whilst your spouse is residing in it.

 

However everyone’s tax circumstances are different.  We recommend that each client takes advice to ensure that the Goldilocks Trust® meets the needs of their individual tax circumstances. 

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Launch of the Goldilocks Trust®

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The Goldilocks Trust® is now available for the estate planning needs of you and your clients. 

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[1] Cameron Cowley, is the owner of the Goldilocks Trust® registered trademark, used under licence by Moin Morris Schaefer.

[2] The Goldilocks Trust® can be set up during life if desired.

[3] Note "remainder beneficiary" and "life income beneficiary" may have different meanings in different trust deeds.

[4] Estate planning rarely has one right answer.

[5] A full discussion of the family law permutations is not the aim of this article.