In recent years, the changing landscape of Trust Law in New Zealand has meant that Trustees of trusts are facing a greater level of compliance, reporting obligations, and scrutiny from beneficiaries than they have in the past.
We often find clients who have set up a trust in the past, only to now find themselves questioning what, if any, benefit the structure is providing. This can sometimes be accompanied by a sense of lost control over Trust assets, which (once in the Trust) are legally owned by Trustees (albeit, for the benefit of the Trust’s beneficiaries) and are unable to be dealt with in the same manner as they were prior to the formation of the Trust.
Reason for Forming Trust in the first place?
When considering if a Trust is still fit for purpose, it can be useful to review the original purpose for forming the Trust, and whether those circumstances are still relevant today.
Despite changes to the law over the years, the Trust structure can still provide benefits in the right circumstances, for instance:
- Ring-fencing family assets from business risk and claims from creditors.
- Allowing significant family assets (e.g. a business, farm or holiday home) to pass to the next generation without forming part of a deceased’s Estate.
- Historically, trusts were seen as an effective structure for circumventing Estate Duties (commonly referred to as “inheritance tax”). Estate Duty has not been payable since 1992, but there is no guarantee a future government won’t seek to reintroduce it.
- Providing for special family needs, such as a child with a disability, particularly where it may not be appropriate for a child to personally inherit and manage a lump sum of money on the death of a parent.
- Use as an estate planning vehicle that is not subject to the provisions of the Family Protection Act 1955 and Law Reform (Testamentary Promises) Act 1949 (although note, this is an area of law that may change in the future, after the review of succession law by Te Aka Matua o te Ture Law Commission).
- Setting aside assets for children from a previous relationship to inherit, ahead of entering into a new marriage/relationship.
- In very limited cases, eligibility for a Residential Care Subsidy may be improved, however, the rules have tightened significantly in this regard in recent years, and for most clients, a trust will not be of assistance in improving eligibility.
Reason for forming the Trust no longer relevant?
Say for instance, the family business has been sold and the need for creditor protection is not as pertinent as it once was. In a case such as this, the ongoing administrative cost and compliance of retaining the Trust should be carefully weighed up against any anticipated benefit.
Another complicating factor can be the cross-jurisdictional tax issues that can apply to off-shore beneficiaries of trusts at the time of inheritance, such as a son or daughter living overseas. These tax implications can often be much more significant when compared to someone inheriting the same assets, from a natural person, via their Will (rather than via a Trust).
In some instances, if the benefit of the trust structure has run its course, it may be more cost effective, and easier from administration perspective, to distribute the assets and wind up the Trust.
Trusts for Creditor Protection
Part of the strength offered by the Trust structure is derived from the idea that trust assets are not personal assets, but rather are legally owned by the Trustees, who hold them for the benefit of multiple beneficiaries (subject to the terms of the Trust Deed). This is particularly relevant in a creditor protection context – although creditor protection can be lost in certain circumstances (e.g. incomplete gifting, timing of transfer and the prejudiced creditor regime).
In order to benefit from the protection offered by the trust structure, Trustees should be able to illustrate that not only has there been a clear change in legal ownership, but that all Trustees are carrying out their role, are involved in the decision-making process and adhering to the terms of the Trust Deed, for the benefit of a wider group of beneficiaries.
While there is no legal requirement for trusts to have an “independent trustee” (a trustee that is not a beneficiary), having one involved in the trusteeship can introduce an impartial perspective and help demonstrate the Trustees are genuinely acting and fulfilling their role.
Having a professional independent trustee (such as an accountant or lawyer) will come with an additional cost, but the involvement of a good professional trustee will often mean there is improved record keeping, a paper trail of decisions made and that, more generally, the administration of the trust is kept in order.
A well maintained and administered Trust will be much more effective in defending against interested creditors who are looking to “bust the trust” and claim against its assets. Conversely, where a Settlor forms a trust and acts as Trustee (whether as sole trustee or with one or more co-trustees) and:
- retains a large degree of control over the trust;
- doesn’t have sufficient checks and balances on their authority;
- makes self-interested decisions about Trust Assets as though they were still the outright legal owner;
- has poor record keeping and a paper trail of decisions made by the Trustees;
- does not consult with their co-trustees before making a decision, but approaches their co-trustees after the fact to “rubber stamp” a decision they’ve already made;
the genuineness of the trust may be questioned, and the protection offered by structure will be at risk of being compromised or lost altogether.
Trusts Act 2019 Considerations – Disclosing Information to Beneficiaries? Trustee Duties?
The Trusts Act 2019 (Act) came into force in January 2021. While the new legislation did bring about significant changes, the over-arching purpose of the Act was to re-state the existing law in a more accessible format, so that beneficiaries were better placed in holding trustees to account.
To this end, among the more significant changes introduced by the Act were two key presumptions that mean Trustees should be proactively providing Beneficiaries with basic information about the existence of the Trust (including the fact that a person is a Beneficiary) and informing them of their right to request further information about the Trust.
This represents a significant departure from how many Trusts have operated in the past where it was fairly commonplace for Trustees to keep the existence of the Trust and its assets relatively secret from the Beneficiaries.
Because of improved transparency, Beneficiaries of a Trust should be limited to those who are expected to benefit from the Trust. Most modern trust deeds include the ability to add and remove beneficiaries, which could be used to streamline the beneficiaries where appropriate (although powers under a trust deed such as the power to removing beneficiaries do come with obligations, such as exercising the power for a proper purpose).
Conclusion
If you are involved in a Trust as a Settlor or a Trustee, and you:
- have not been through the exercise of confirming the need for the Trust; and/or
- have not reviewed the Trust Deed or your trust administration practices in light of the new Act; and/or
- are generally unsure of what your obligations are under the new legislation;
then we recommend you get in touch with one of our trust specialists.
Special thanks to Partner Lisa Small and Associate Jonathon Russell for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
