Words on Trusts, Tax and the Budget Changes

Words on Trusts, Tax and the Budget Changes

This episode is also available on Apple Podcast. 

Ishara Rupasinghe (00:16)

welcome back to the show. I’m Ishara Rupasinghe, Senior Strategy Advisor at Evans and Partners in Canberra. Now, today I’m talking with someone who’s spent her career helping families navigate exactly what’s happening right now. You know, we’ve got this wave of tax and property changes that’s really forcing a lot of families to rethink how their wealth is structured. Now, Jacqui Clarke has spent over 20 years at Deloitte, most of that as a partner, before building a second career as a chair, non-executive director, and advisor to some of Australia’s most significant private families. Now she’s also the founder of Maxima Private and the author of Stop Worrying About Money. Now her whole practice is built around this one idea that families handle money better when they can talk about it, and it’s certainly something we advocate for here at Evans and Partners as well. And a lot of my own work is focused on client education, including sessions specifically for women, because, you know, in my experience that the biggest risk to a family’s wealth usually isn’t the strategy itself, it’s that gap in understanding along the way. Now Jackie calls herself the sense maker in the room, which I love that concept. It’s the she’s the person who pulls together the tax advisor, the lawyer, the accountant, and the family’s own view into one picture instead of five separate opinions pulling in different directions. And of course, with all that’s happening in the world of tax and super, having someone like Jackie to help you navigate all the various aspects can be invaluable. And so what we want to chat about today is centered around some of these proposed changes announced in the budget and specifically this trust taxation and really how families should think about handing wealth to the next generation and why having the right team of advisors around you matters now more than ever. So let’s get into it. Jackie, welcome to the show.

Jacqui Clarke (02:21)

Thanks, Ishara. Lovely introduction. You know, like all things, it always feels like you’re planning this conversation and then finally we’re here. So I’m really excited to be here with you today.

Ishara Rupasinghe (02:32)

Wonderful. Well very excited to have you as well. So let’s get into it. You know, this year’s budget obviously was a pretty big one in terms of changes to trust, trust changes to the tax system and trusts in particular. You know, we’ve certainly had a lot of interest from our clients, perhaps a little bit of panic perhaps immediately after the announcements. What are you seeing from clients in response to the but budget changes?

Jacqui Clarke (02:59)

Well you know, you probably felt a little bit like me. The night that the budget was read out, I definitely felt things shift. And unlike maybe past budgets, I was certainly in a hurry to get through all of the information I could in the preceding day, two days, three days as we were all unpacking the significant implications of the budget. And look, I think what I had advised people initially, is shifting now, which was it’s not all legislated. Let’s take our time, let’s understand what we’ve heard and be aware. And I think how we’re shifting now is we have some information that’s concrete, that’s locked in, and we need to respond to that. And then there’s some other information which we still need to navigate our way around. So I feel like we’ve kind of got this big bucket of certainty, which is on the CGT and the loss of negative gearing.

But then we have this little bit of uncertainty around trust. But we have some information again around the fabulous continuing benefits of testamentary trust, for example, that I think are going to become very popular. but we need to get acting on those quickly.

Ishara Rupasinghe (04:15)

Yeah, exactly. I mean look, certainly I can remember that budget night quite clearly ’cause it was a very late night for us as well. Yeah. but look, I mean it sounds like we’re on the same page. I mean, that’s pretty much the same message we’ve been giving our clients since that little sort of mob panic after budget night. You know, we don’t want to we don’t really want anyone acting on draft legislation and you know, there is a bit of a window to plan and act as well. And you know, obviously having to reverse things if certain things don’t pass is is a lot harder. Yeah, exactly. It can be very costly. So with the proposed changes to trusts, you know, what are you seeing shifting in terms of how families approach trust structures right now? And does it look different for a family who has an existing trust versus one that might sort of be thinking about setting one up from scratch?

Jacqui Clarke (05:14)

Yeah, look one hundred percent. So I mean I think in some cases the pr people are furious and y you may well have inherited a structure from somebody you know, a typical discretionary trust in Australia. They were very popular for holding assets, they still are or they they will soon cease to be. But they were great from an asset protection point of view. Families use them as tools to particular sort of set assets up in buckets. But really now, if you’re somebody who has built a portfolio of assets, whether that be property or shares in listed companies, whatever it might be in those trusts, it’s a time to rethink. Now you sort of gotta step right back from this because the I think the biggest challenge is for the aspiring wealthy in our country because when you’re when you’re teetering on that magic sort of two hundred thousand dollars worth of income at the individual level, their benefits shift substantially. So if everyone in your family is earning over two hundred thousand dollars, then what does the budget really mean? Well, it might mean that it’s okay for this generation. It there might be challenges for the next generation. But the reality is perhaps if you’re the the sort of my typical client, they’re they’re really saying, Well, we’re kinda happy with paying thirty percent tax. and and that may be oversimplifying things. The difficulty now is that that impost of, say, the thirty percent on the way things are structured now can be pretty painful if you’re a mum and dad sort of investor with a couple of million dollars under your belt that may or may not be producing those levels of income for every family member and therefore this structure is a real problem. And the transaction cost to exit that is substantial, particularly if you’ve got property. And I look I I do have one lovely client who’s got approximately $10 million of property in a discretionary trust, which would be a normal structure to have. That will no longer work for her family, but how to get out of that. Exiting in a downturn in a property market, dealing with the tax consequences, whether it be capital gains or otherwise, sure, we know what the rules are around how they’re going to be calculated today. But all those transaction costs to what end? So it’s it’s a lot. It’s a lot to digest. But I think the number one thing is people are furious.

Ishara Rupasinghe (07:48)

Yeah, and y as you said, it’s it’s absolutely made things more complicated. and you know, I feel like it used to, you know, when people talk about building wealth and certainly as financial advisors, sort of the number one thing we tell people to do is get that structure right first from the get go. And you know, it used to be just about tax, like whichever entity allows you to minimize that tax on your wealth is usually the one you’d use. But obviously the budget proposals have as you s I think you said that sort of leveled the playing field a little bit. Absolutely. and so now it’s much more than just tax and, you know, that that does make things complex. You can’t really answer that structure question without sort of answering some broader family questions, I guess.

Jacqui Clarke (08:38)

Yeah, and I think it that’s a really good point because I think that there’s something that might work for this generation, but this structure might not work for the next generation. And I think we have to think more broadly like that. There’s there’s no doubt every case is different. And my sense is so far that most of the w wealthy families I work with will manage this, no problem. But I think again, it’s the aspiring wealthy, you know, you’re at what we’d call our average Australian, that this hits really hard. You know, perhaps one thing that the government really left off the table, not that I’m seeking it to change, but the family home is still exempt from capital gains tax. So how where the you know, if you’re James Packer and you’ve got a twenty million dollar or fifty million dollar house and you make a twenty million dollar gain on that, it’s tax free. Right.

Ishara Rupasinghe (09:31)

That’s right.

Jacqui Clarke (09:31)

Yeah. It’s not it’s not the same when the numbers get smaller. But that’s something that perhaps was left off the table and unfortunately then the burden of these taxes falls, you know, not necessarily

Ishara Rupasinghe (09:43)

the areas.

Jacqui Clarke (09:44)

it makes sense.

Ishara Rupasinghe (09:45)

Yeah. Yeah, that’s right. So I’d like to get into this the the family side of it a bit more. And I think you’ve said Al as I said as well, you you know, you’ve you’ve said families handle money well when they talk about it with each other. What does that look like in practice and what approach do you take when you’re leading those conversations with a family?

Jacqui Clarke (10:07)

Yeah, look, obviously I say communication is key. And when people have money, they don’t actually always communicate so openly. You know, it’s a bit like secret squirrels. I do see parents often treat their children differently or different children differently, and that’s okay. But when you’re providing information, I think you need to make sure that that’s being provided in a space where the person has got appropriate education to understand what you’re telling them. And you know, if you look at the ground up, how I focus is developing or building the educational skills of the next generation so that when they’re being handed this financial information or structuring information that it actually makes sense. They can make decisions around it. So yes, communication is key, but perhaps what I’ve been work the the the space I’ve been working in recently is a lot to do with where things are going wrong with family provision claims and where parents are making promises to their children that aren’t documented in their wills. There’s a massive exposure here for families because if you think that and the classic case where it’s happening is particularly in places like farms, where one child might go and help the parents, the parents are getting older, one child leaves their city job to go and help and Lo and behold, mum and dad say, Well, this will all be yours one day. And then there’s three other siblings, one who’s a doctor in Sydney, one who’s a lawyer somewhere, you know, one who’s

Ishara Rupasinghe (11:42)

Not interested in the farm, basically.

Jacqui Clarke (11:44)

No. And so they’ve got you’ve got all these trade-offs, and yet mum and dad have said this will all be yours one day. Well, there’s a reason there’s a great case on that, and it’s not great at all. But you think of four siblings battling it out for their share of an estate that they w their parents said was equal four ways, and you’ve got one who’s basically given up their life or career to help mum and dad. And this happens in lots of different scenarios. Anyway, I I’m sort of I am going off on a little bit of a tangent, but I think there’s communication is key, but also being mindful of not making promises you either A haven’t documented or B you can’t keep.

Ishara Rupasinghe (12:18)

Yeah, absolutely. That that’s a very good point. And and so even with that communication then Jackie, is it you know, is it a conversation that you have with the next generation where, you know, you sit down over the dinner table and and you know, have this big discussion as a family, or how do how do you encourage families to do that?

Jacqui Clarke (12:41)

Actually, it’s a it’s a really good point because I hadn’t thought about this part of it, but one thing I do try and ensure is that we’re not at the dinner table. So trying to professionalize the conversation, you know, it’s like taking you out of that environment where you’re more likely to play your typical role, which is eldest child, youngest child, you know, all those dynamics. they’re gonna play out in any room, but actually stepping you out into say an advisor’s office or somewhere else might actually be a good space. So that’s something I think about first. without without being specific about it. But as soon as you said the dinner the you know the dining room, I was thinking, yeah, actually it’s the one place I’d try and avoid. but then I I take people on a journey. So when we’re working through how to bring and I talk about bringing that next generation online, but bringing a family into the conversation can come at any stage. It can be because parents are just getting older thinking about their own succession, what they might be doing, wanting to introduce the kids to their advisors. These are all important steps in building that communication out. But I think also part of it is having a bit of practical experience. And so with with some parents I’ve worked with, I’m talking, I’m getting them to explain to their kids their journey. That’s like some of the really significant moments that they’ve had in their lives around their wealth where they’ve had to make decisions and how they’ve got to that decision. So, you know, one of the single biggest mistakes I see happen with a lot of our wealthy families in Australia is that their network of advisors is not shared with their children. So when you’re presented with a problem or something quite complex, how am I supposed to determine how to navigate my way out of that? without my Evans and Partners team member, without my advisor, so without Ashara and Jackie and maybe my business coach or people have family whisperers these days, you know, without them at the table, you you know, it’s like trying to do something with your hands tied behind your back, and let alone the fact that you haven’t actually had the experience. So talking through those practical experiences, I think, is a really valuable way to bring the next generation online.

Ishara Rupasinghe (14:57)

Yeah, look, I certainly see that with a lot of our clients as well and our older clients that I’ve helped over the last couple of decades, being open about having discussions about their child you know, finances about with their children. but it’s interesting because obviously every farm family dynamic is a little bit different. Some families are a little a lot more open about these things and you know, just on that practical side of it, I think that’s a really good point because you know, it’s s sort of like a life skill really, isn’t it? Is and and you you like with anything, it takes practice and exposure to be comfortable with it. And certainly from our point of view as advisors, we like to see or bring in children into the conversation as early as possible, even if it’s just to you know, talk to them about their super. A lot of them do have superannuation from casual jobs. That’s I find a really good starting point to build that education. And I often find parents saying to me, maybe they’ll listen to you, they won’t listen to me. And, you know, I’m happy to do that. But again, it’s that convert going back to that conversation. It’s talking to your children openly about money. I think you you’ve really hit the nail on the head. And again it’s that also what you said about that network of advisors and exposing your children to that, I think that’s a really good point because I feel perhaps the younger generations maybe do feel intimidated, you know, coming into a flashy office and meeting someone who they’re worried about, you know, talking financial jargon at them. but, you know, if they understand some of that financial jargon to begin with, it may not feel that intimidating.

Jacqui Clarke (16:47)

Yeah, it’s like it’s like building an an essential skill. The the other thing I liken it too, I’ve had quite a few people come to me recently who have used AI for advice. And what I’ve been able to unpack, and you might have seen this classic area is superannuation, and people can ask the questions, but if you don’t know what the question is to ask, you’re unlikely to get the right outcome. And I’ve had some people come close to making some pretty serious mistakes off the back of now the I’m illustrating that more in the context of saying knowing the questions to ask and I think that skill development or knowledge or information that you build up over time comes from when you’re sitting down in the advisor’s office to actually know what to ask. And that takes time to sort of develop that muscle. You know, think of it as financial capital. I had someone use that term recently, which I thought was quite powerful, which is actually developing those skills to understand what that really we think about wealth as like one big bucket, but actually there’s a whole lot of financial capital that’s built up into there that again you wanna communicate with that next generation.

Ishara Rupasinghe (17:54)

Yeah, absolutely. And I like that analogy of the wealth being a bucket or feeling like a bucket, but it’s really a lot of small things, isn’t it? Like there’s so many different aspects of a family’s wealth. And yeah, obviously learning all of it in one go can be overwhelming and taking that gradual approach over time certainly helps build that muscle as as you said, which is which is a great analogy as well. Now If we zoom out a bit, I guess, tell me, I mean, what what are you what are you seeing that’s being done really well by the the most successful families you work with in this space? What are some of the things that whether that’s tips or you know, strategies, what what what are some of those things that you’re seeing that’s working well?

Jacqui Clarke (18:46)

Yeah, look, I I I think I feel like we’ve talked about it today in the context of communication. So it sounds easy, it’s not done well necessarily, but where it is done well, and I think working with families to establish like a board, like a family office, somewhere where there’s a little bit of a framework where you might not be in the business or you might not be directly helping managing the assets, but there’s a forum where we come together and we share information, it’s really powerful. So I think you might not necessarily have the keys to making decisions today, but you are around a table where you’re being informed of what’s been going on. So you start to build up. It’s like when I join a board, it takes time to understand all what got us here. And maybe what got us here is not going to get us there, but you need to know sort of the basis on which some of those decisions were made. And I think that starts to help frame up for you and the next generation how to build their skills. When I’m meeting families where parents are in their 60s. That’s a really positive time when kids are like in their twenties where they’ve got a little bit of an interest in like the stock market. they’re not interested in super. And look, some families don’t really focus on super when they’re certainly in the wealthy stakes. It’s just a small part of their overall wealth if they’ve bothered with it at all. but actually getting those kids in the room to start baby steps with financial information, teaching people how to read balance sheets, and then you start to build up from there. And over time

You can start to delegate responsibility to family members, even in their twenties. And it might not be around, for example, I worked with a family where we worked on the skills matrix of the first or the founding board that would we would create around the family wealth. So understanding what skills we had at the table, you know, ever whether it be IT skills, an industry specific skill, some other type of technical skill or qualification that was relevant. And then you start to look for your gaps and where you might need support so that as a family we can work together in actually solving whatever challenges might come our way with respect to our wealth. So so yeah, look, I do think the critical thing is communication. It’s not easy, but I have just been on this bandwagon about seeking parents to communicate with their children about wealth. The other way it happens, of course, is when someone gets sick. And sometimes the kids really have to step up and when I say kids, twenties, thirties, whatever it might be, and start it’s almost a reverse situation where you’re navigating a pathway for your parents. You might be navigating their care, understanding how you can help them. But if you’re somebody in your seventies, super capable, and you haven’t told your kids yet what’s in the will and how it works, that’s on you and you need to make that happen. The other thing is if you can, is make it clear what your expectations are around care for you. If you can’t make decisions for yourself anymore. These seem like really obvious things to Shara, but a lot of people skip them. In fact, people will avoid I had someone the other day just avoiding finalizing their will. And it was in relation to guardianship of children. And they’re a bit younger, so it sort of made sense. But I said, Hey, no will is really bad. If you you yourself and your husband can’t agree, put the names on there. Let’s hope we don’t have to use them, but put something on there, not don’t avoid putting the will together. It’s a similar thing. People just hold back. They’re tough, they’re tough conversations. I want to acknowledge that. but what perhaps comes from the other side of having them is you in your lifetime get to deal with it rather than leaving the next generation to sort the mess out, which is invariably what happens.

Ishara Rupasinghe (22:22)

Exactly. Yeah, exactly. And sometimes, you know, doing it that way where you’re leaving it to the last minute and and the next generation sorting that mess out can end up sort of undoing a lot of the hard work that you’ve done over the

Jacqui Clarke (22:36)

Pride themselves on keeping the peace. The reality is the minute you’re gone, it’s like

Ishara Rupasinghe (22:41)

There’s no peace.

Jacqui Clarke (22:42)

just exactly. and there’s no sort of patriarch or matriarch to fix it or solve it or take the heat. You they’re gone. So the the more you can develop the skills in family, whilst you’ve got them to pass on, then the better for everyone.

Ishara Rupasinghe (22:59)

Absolutely. And you know, I see that a lot myself doing aged care advice as well. Often see people coming to us for advice when they’re forced to make a decision and the parents haven’t had that conversation earlier on. And it’s it’s difficult because there’s usually a time constraint as well. And you know, you’re sometimes forced to make decisions that you would rather not, but you you kind of have to. So that coordination and communication absolutely resonates with us. Now you talked about advisors and this sort of board or network, I guess. what does a well built network of advisors look like for a family managing, you know, a s significant

Jacqui Clarke (23:44)

Great. Yeah, look, that’s a really good question. I do talk a lot about what I call the personal finance village. And I think we all should have a personal finance village around us and whether that it can be as small as like having your tax agent and your bookkeeper right through to having your Evans and partners advisor, your accountant definitely, a tax advisor, definitely a lawyer. I mean, in my work, I’m pretty much with financial advisors and lawyers the whole time and then there’s other people, like I think psychologists can have a role or coaches. I mentioned whisperers before, you know, insurance advisors depending on where your wealth sits and where your debt profile sits, things like that. But these are r really this is about who do you trust. And if I think about money conversations and conversations about finance, they tend to be highly emotional, especially when family are involved. And so having somebody you can trust and identifying where there might be skill gaps in that network you’ve got. And what I see often and and you mentioned it in the intro actually, thank you, which is considering myself as a sense maker, I often see advisors working with a family, but independently and not often coming together to solve or strategize what we do next. And so, you know, it reminds me a little bit of like those clowns at the show, you know, when you’re with one advisor, you get the advice, you go to the next advisor and you’re bobbing your head around no one’s necess or someone is not necessarily pulling that together. And often you need, you know, I was doing something recently like a buy sell agreement with a state planning, with a business, with a family, multi-generational, having just the lawyer and the accountant in the room isn’t actually enough there. So you need somebody saying, Well actually this is a great agreement, but how does this work it with the existing structure and perhaps an exit plan or whatever that might be. So, it is important to have good people around you and people that you trust. And part of that village, if if I call it the I call it the personal finance village, is making sure that you have done your research or you have done your due diligence on the people that you work with. So there’s obviously particularly in financial services, obviously there’s been over time there’s been a lot of experience with fraudulent advisors and you want to make sure that people that you’re either investing with have got the credentials, have got the experience, have got the qualifications that they say they have. I just think that’s an important part of due diligence. Just because they’re your friend or my friend isn’t enough. I think it’s really important that people do their due diligence in that process. yeah.

Ishara Rupasinghe (26:32)

Yeah, great point. Great point. And you know, certainly as a financial advisor, we so appreciate that coordination. because, you know, a lot of what I do as a financial planner does cross over a little bit to sometimes estate planning or, you know, superannuation estate planning particularly. And you know, there’s accounting certainly. And so having that coordination approach just makes things a lot more efficient for our for us and obviously the client as well.

Jacqui Clarke (27:02)

Because you you would know too, something could be a brilliant investment. But let’s say it locked me in for three years and we knew that I had to meet some other financial commitment. Exactly. That’s a problem. Or there was a deferred tax liability on something that I’d sold, you know, that type of thing. And so having then the tax view in the room with the advice, you can see kind of how essential it is to pull that together like

Ishara Rupasinghe (27:25)

Absolutely. Absolutely.

Jacqui Clarke (27:27)

I think now for people there’s a lot more at stake, and particularly in the context of things like testamentary trusts. some people have them, some people have never really known what they’re good for. They have we currently have a very good option to get those implemented in our current estate planning, but you need good people around you to do that too and understand what the benefits are for your family or that next generation. Not not just purely the tax side of it, but recognizing what other benefits it might offer around asset protection or bloodline, wealth protection, whatever it is you’re aiming for.

Ishara Rupasinghe (28:04)

Yeah, indeed. Indeed. And how how would you or how does a family know perhaps when they’ve outgrown just a single advisor and needs some more coordinating that sort of that bigger picture? Can you tell easily?

Jacqui Clarke (28:23)

I can see it a mile away, but that’s not fair. what I see often is if a business and a lot I I do come in often when accountants have been around for a really long time. So less likely an advisor in the context of the area you your space, but more likely an accounting firm might have been looking after the dad or somebody for a really long time, but when the thing was like little and then the thing has grown, the complexity’s grown. And I find that they’re still operating, like I work with organizations where I feel like the accountant’s still kind of operating in that 1990s style. And I’m like, wow. And so you start to just slowly unpack just some things that have been done. It might be fringe benefits tax, it might be Division 7A loans, whatever it might be, but you start to realize that, hey, this is a bit old school and we we probably need to move forward from here because we’re just kind of kicking the can of problems down the road. So that a family might not necessarily see that. The most common time it comes up professionally is when you get an audit from the taxation office. And that’s when it that’s when I really see all those issues come to the surface. Like basically if there’s a problem, you usually discover that maybe somebody’s out of their depth ’cause people don’t seem to naturally say, Okay, I’m out of my death now, especially if they become a key client of a business or practice. So I think it’s a tough one. The other the other thing maybe a s a signal would be is if you’re not getting quick responses to your questions. So if there’s a delay, there’s a reluctance to answer the question, that type of thing could be a sign that perhaps your advisor is either overwhelmed by the question or doesn’t necessarily have the skill. So just be be aware of those types of signals rather than assuming that’s always how that person’s operated.

Ishara Rupasinghe (30:14)

That’s a very good point. Jackie, you’ve shared some really valuable insights, not just for clients listening, but for us advisors too, I think. So look to wrap it up, if there’s one thing you’d want a family listening today to go and do this week, what would that be?

Jacqui Clarke (30:36)

Ensure that you understand the implications of the current budget as we know it on your current structure. I’m not saying they have to do anything, I’m saying they need to understand it.

Ishara Rupasinghe (30:49)

Yeah, very good message. Certainly the same sort of messaging we’re sending to clients. So especially while we have this window, you know, a lot of the changes proposed or changes that are now legislated, as you said, around the CGT and the negative gearing, they don’t come into play till one July twenty twenty seven. So there is still that window to plan. Similarly, you know, division two nine six, the first assessment doesn’t happen until the end of the financial year. So for those who are wanting to potentially act on that. there’s still a window of opportunity there. So yeah, starting early, at least to plan, not necessarily to do any major structural changes, but at least knowing where you stand, I think is is very important.

Jacqui Clarke (31:35)

Yeah, actually and if I could add one thing, or maybe it’s two things, but realistically, estate planning lawyers and valuers as we know are gonna be absolutely flat out. So if you haven’t got relationships with those people now, go get them and be prepared so that when you can fall into line before that date where you’ve got things in place. And yes, it’s one July twenty seven, but there’s also some of the there’s maybe a s slightly another n maybe another year out from that for some of the other changes, but you know, thinking about here we are in say September or October twenty twenty six, you wanna be well and truly in their pipeline before June twenty seven.

Ishara Rupasinghe (32:15)

That’s true. You don’t want to become a new client on thirtieth of June twenty twenty.

Jacqui Clarke (32:19)

We know where you’ll be you we know how you’ll be looked after.

Ishara Rupasinghe (32:22)

That’s right. That’s right. Look, I think that’s a perfect place to wrap up. Jackie, thank you so much for your time today and for being so generous with your insights.

Jacqui Clarke (32:33)

Thanks, thanks, Ishara.

Ishara Rupasinghe (32:36)

It’s been wonderful having you and and sharing or hearing you know, not just the sort of the granular stuff, but that that bigger picture and some really practical steps that families can take. look, just a reminder for everyone listening today: obviously everything you’ve heard today is general advice only. If you do have questions about your own situation, please talk to an advisor. Thank you for listening.