Is your Family Trust ready?

If you cast your mind back 25 years, family trusts were on everyone’s lips. Family trusts gave tax advantages, protection from asset testing and relief from Superannuation surcharge. They were the coward’s prenuptial agreement (no need to agree how you were going to split before you married – just put everything in a trust) as well a device to let you go bankrupt even while you retained your mansion and your Ferrari.

A family trust was a financial panacea which soothed many (if not quite all) monetary ills.

Gradually, however, over the year the benefits of trusts have been eroded. Superannuation surcharge is gone, asset testing rules have been tightened, family trust arrangements within relationships can be looked through, tax law with respect to minors and property developers were changed and the Official Assignee now looks very carefully at bankrupts whose affairs include trusts.

The Wild West of trusts has gone and with that has disappeared many of the benefits.

Many trust lawyers have been kept busy over the last few years overturning trusts as shams. On behalf of their clients (who may be disgruntled spouses, angry business creditors, a grumpy IRD or a testy WINZ) they are prepared to go to Court to prove that although there is all the documentation to show that a trust was established, there was never a true intention to set up a trust and that it may have been a trust in name but the reality is that this was only a guise.

Trust busting has kept a lot of lawyers well employed. This often means proving that a trust was not genuine and that the assets of the “trust” are really the Settlor’s own personal assets.

Proving that a trust is not genuine is often done by showing that the management of it was inadequate. If all beneficiaries were not considered at the time of distributions, if advice was never taken, if minutes were not kept of all decisions, and if assets were always intermingles and used as if they were the settlors’ own personal property, this is evidence that there was no sincere intention to form a trust.

In fact, many trusts have been very badly managed meaning that they could (and frequently are) attacked as shams.

Now, trustees and settlors have the Trusts Act. This Act was passed into law last year and comes into effect in nine months (on 30 January 2021). The Act sets out a code for the way that Trusts are to  be managed, and this will undoubtedly require greater compliance from trustees. At the moment, there is a great deal of legislation and case law which makes even the basic rules somewhat doubtful and, often, inaccessible to the average person.

The Trusts Act will make management requirements clearer and there will be an unambiguous set of obligations for trustees. These obligations will extend to contacting beneficiaries and giving them certain specified information.

Under the Trusts Act, there are some duties which will become mandatory for trustees (e.g. acting in good faith, dealing with property for the benefit of beneficiaries). There are other duties which must also be carried out unless they are specifically excluded in the trust deed (e.g. investing prudently, acting impartially). In all, there are 16 of these duties and trustees and their advisers are going to have to get to know them. This will require significantly more time to manage a trust. It will also cost more.

New Zealand has too many trusts: many are not properly managed and the benefits for which they were originally established often no longer apply. At the very least, there will be a great number of trusts that will need amendment to their deeds.

In fact, I do think a great number of settlors and trustees should think again about their trusts, examine their original purpose and decide whether or not it is worth continuing with the trust. Many will decide it is not and choose to wind up the trust.

Now is a good time to discuss this with your advisers. By some counts, New Zealand has 500,000 trusts and nearly all should get advice. Lawyers and trust companies are going to get busy advising on the Trusts Act and how change may impact on families’ ownership structures. This is not something where you want to be left short; now is the time to act.