Duncan Dovico - New Plymouth Central

Expect to hear a lot more about Trusts over the coming months

There is currently a Bill passing through parliament which will bring about significant changes in improving the accountability of trusts and Trustees. Despite the popularity of trusts – there are possibly up to half a million in existence in New Zealand – there is no register maintained on them, unlike companies where each year Directors must reaffirm the existence with the Registrar.

Key benefits

Like the vast majority of professionals, we have favoured the use of trusts over the years as a primary means of protecting assets. Further, these assets can be maintained so that future generations may be able to enjoy these. Current trust law, which dates back to the 1950s, allows trusts to have a life of not greater than 80 years. Proposals have suggested that this may extend out to 120 years.

The main theme of asset protection is, we believe, especially important for those in business. Despite best intentions, mistakes and other unfortunate incidents can and do happen. Sometimes these are beyond the control of individuals. Placing key assets – such as the family home, and the majority of shares in the family business – significantly reduces the risk of these assets being attacked by any creditor. A creditor could be a business “associate” – the word associate being generic and across the board – former life partners, children and even the State.

How it works

A trust is formed by an individual who settles (the Settlor) the new entity through the construction of a trust deed. This legal document is normally constructed by a lawyer (we recommend this process) and this sets out the rules under which the trust will operate. Ordinarily, the Settlor will also become one of the Trustees, who have the role of managing the affairs of the trust, in accordance with the trust deed and legal requirements, such as those currently being discussed in parliament. Beneficiaries, who can also be Trustees now, are those who get to enjoy the assets owned by the trust and the income generated.

Rest home subsidies

Over the years, trusts have been seen as one way of dodging rest home levies. In New Zealand the current rules say that everyone who is assessed as needing full-time care over the age of 65 will be entitled to receive this for free if their asset base is below a certain level. The current threshold is $224,654, or where one partner is in care and the other lives independently, the same level, or $123,025 (but with the exclusion of the family home, car and prepaid funeral expenses). The use of a trust was seen as one way of minimising this asset value. However, we have seen Work and Income become a lot tougher in assessing these asset bases.

It is one thing to form a trust and place assets into it. Another task is to gift the value of these off to the trust. While such a gift no longer attracts any tax, Work and Income now add back any gifts made of the preceding five years where the amount is in excess of $6,000pa. Further, gifts of greater than $27,000pa for the years beyond five will also be added back.

Key risks

A lot of individuals think that even after a trust is formed, that they can still use the assets and income as they wish. The requirement to adhere to the trust deed, including the consideration of the Beneficiaries, is often over-looked. This is when a trust can be termed a sham. We live in a much more litigious environment in 2018. And all of these reasons have contributed to the need to review trust law in this country.

New trust Bill

It is anticipated that the new Bill will provide better guidance for trustees and beneficiaries, and make it easier to resolve disputes. Generally, the proposed reforms seek to clarify core trust concepts, make trust legislation more useful, fix practical problems and reduce costs. It also aims to modernise outdated language and concepts.

Some of the changes include:

• a description of the key features of a trust to help people understand their rights and obligations
• mandatory and default Trustee duties (based on established legal principles) to help trustees understand their obligations
• requirements for managing trust information and disclosing it to Beneficiaries (where appropriate), so they are aware of their position
• flexible Trustee powers, allowing trustees to manage and invest trust property in the most appropriate way
• provisions to support cost-effective establishment and administration of trusts (such as clear rules on the variation and termination of trusts)
• options for removing and appointing trustees without having to go to court to do so.

The Bill’s first reading was passed in December 2017. This has now been referred to the Justice Committee, who are due to report back in early June. The next step will be the second reading.