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Investment guru sees end to trust benefits

Martin Hawes wrote ‘the bible’ on trust law in New Zealand in 1995. That first book, revised and reprinted many times over, remains the ‘go to’ reference for those considering putting their assets into a trust. The book’s latest iteration, Family Trusts: The must-have New Zealand guide, considers trusts in light of the new Trusts Act, which comes into force on January 30. Here, Martin argues that the new law means many people will want to wind up trusts as they will become more trouble than they are worth.

We have four copies of Martin’s book to give away. See below for details.

Almost certainly, New Zealand has more family trusts per head of population than any other country. With changes to the rules surrounding these trusts, many now no longer give any benefit to the people who set them up and I think many of them could now most usefully be wound up.

About 20 or 30 years ago, trusts gave considerable benefit to individuals and families. These benefits were in areas such as:

  • Asset testing for residential care
  • Superannuation surcharge
  • Taxation
  • Relationship property
  • Asset protection for businesspeople and professionals
  • Estate duties
  • Succession planning

Some of these potential benefits are now gone – estate duties and the superannuation surcharge were abolished many years ago. In addition, there are other areas that see any potential benefit much reduced:

  • Asset testing for residential care has much tighter rules applied by the Ministry of Social Development – only a minority of people would be able to have significant assets in a trust and still get a rest home subsidy. Asset values are much higher than they were and allowable gifting rates lower ($27,000 p.a. for a couple) and, as a matter of course, MSD has a hard look at where there is a trust with valuable assets.
  • Taxation law is now such that very few people would be able to reduce their tax through a trust. The Associated Persons rules have been changed so that property developers can no longer use trusts to hold investment property without attracting tax. Also, the “minors” rules mean that income distributions to people under 16 years are taxed at the top personal rate.
  • Trusts have been called the “coward’s prenuptial agreement” but getting around the Property (Relationships) Act is not as easy as simply tucking assets away in trust and expecting them to be treated as separate property. There have been many court cases overturning trust arrangements designed to protect people from relationship property claims.

The benefits of trusts have certainly diminished over the years. There can still be good reasons for forming a trust (e.g. asset protection for businesspeople and professionals, and for succession planning) but the widespread benefits that used to apply are much reduced.

As well as this, many people over the years have managed their trusts badly. I know of many instances where trusts have not been administered for all the beneficiaries, and trust assets have continued to be treated as if they were still the settlors’ own personal property. Some trusts have been looked through by the courts and treated as shams, and I suspect that many more would fall into that category if they were closely scrutinised.

And now we have the advent of the new Trusts Act, which is likely to put a much greater burden of management on trustees. When people are weighing the benefit of continuing with a trust against the cost, it may be that the Trusts Act and the costs associated with it tip the scales and encourage people to discontinue the trust.

There are two main aspects of the Trusts Act that people need to be aware of:

  • The Act codifies and brings together a lot of trust law. Instead of much of it being scattered across different Acts and court judgments, it is now largely together in one place. Although the law is not greatly changed, the duties of trustees and requirements for good management are spelled out clearly. Good trust management has now become essential.
  • There is a presumption in the Act that all beneficiaries are entitled to information regarding any trust. The beneficiaries are entitled to know things like the fact that a trust exists and names of trustees. They may also ask for more information (e.g. financial position, beneficiary distributions) although such information may be withheld depending on the trust’s circumstances.

Taking all into account, many people will want to wind up trusts. There is likely to be a cost for this depending on what assets are in the trust and the complexity of affairs. There will be some legal advice required for most and there may well be some cost to document the wind-up and transferring property to beneficiaries. For some people, the wind-up of a trust could trigger a tax liability (e.g. depreciation recovered).

This is a good time to get some legal and possibly accounting advice. If you are likely to receive little benefit from a trust you may well be best to wind it up and simplify your affairs, but talk to your lawyer or accountant first.

  • You can WIN a copy of Martin Hawes’ fully revised book Family Trusts: The must-have New Zealand guide (RRP $35, Random House NZ) by entering our lucky draw. Email your details to media@eldernet.co.nz with ‘Trust book competition’ in the subject line, or put your details on the back of an envelope and mail it to ‘Trust book competition, Eldernet, PO Box 18603, New Brighton 8641’. Competition closes 5pm, Friday December 4. Winner will be notified.

About Martin Hawes

Martin Hawes
Martin Hawes is the Chair of the Summer Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd and a Product Disclosure statement is available on request. Martin is an Authorised Financial Adviser. A Disclosure Statement is available on request and free of charge at www.martinhawes.com. This article is general in nature and not personalised advice.

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