31 August 2021

Are Trusts still worth it?

Today Martin Hawes answers one of the questions we did not get around to answering at the Lifetime Webinar last week.

With the changes to the Trusts Act are there still benefits of having these trusts or should they be wound up?

The advent of the Trusts Act has prompted many people to review their family trusts. The Trusts Act came into effect in January 2021 and sets out clearly the duties of trustees, how they must manage trusts, and information that they are required to give beneficiaries. As such, there is more onus on trustees to ensure that their trusts are properly managed.

This requirement to manage trusts well is not new but the Trusts Act sets out for all to see what trustees must do. Many trusts in New Zealand have been badly managed and, with trustees’ duties now so clearly set down, we can probably expect to see more legal attacks on trusts.

Much the same could be said for the Trusts Act requirements to give beneficiaries information on their trust. Many people will not want to share their financial positions with their children and, like the requirement for good and proper management, this will have many thinking about whether their trust is worth it.

Alongside the Trusts Act, we should acknowledge that the benefits of family trusts have been whittled away over time.

  • No longer can the formation of a trust reduce tax;
  • no longer is it very likely to help an older person get a residential care subsidy;
  • no longer does it allow people to escape death duties.

These things and a good number of others are either gone, or the use of a trust for avoidance purposes is much more difficult.

And so, the advent of the Trusts Act with the gradual erosion of the benefits of trusts has meant that many people have started to review their trusts with a view to possible wind up.

The questioner at the Webinar said that their lawyer had encouraged the formation of the trust. My first response would be to ask why the lawyer had suggested the trust – what was the trust trying to achieve that would make the family better off?

Reviewing a trust should always start with the possible benefits to the family that has set it up. These benefits may change over time as either the rules change, or the family’s circumstances change.

For example, a family may have set up a trust because they owned a business and they were concerned that if the business became insolvent, creditors would be able to force the sale of the house and other assets to make up a shortfall. Having the house and other lifestyle assets held in a trust quite separate from the business could mean that these assets are safe from the business’s creditors. However, things change - if the family sells the business and the adults retire, there is probably no longer a need for a trust, and they can have it wound up.

Many people established trusts so that they could successfully claim a residential care subsidy. However, over time WINZ has applied different criteria for this, and where there has been even quite low levels of gifting (common for most trusts) WINZ is now unlikely to allow a subsidy. This potential benefit has mostly been closed off.

It is important that you are clear on what it is you are trying to achieve from a trust and whether this is still possible or likely. There is no point incurring the costs of carrying on with the trust if there is most unlikely to be a benefit. These are not just costs to manage it but also the time that you have to put into it.

When you have identified a clear benefit, you can then look at the cost of continuing with the trust to see if the benefit makes the cost worthwhile.

With this process, many trusts will probably be wound up. If you are going to keep the one that you established, two things should be certain:

1. You will have a very clear benefit in mind and there is a reasonably high chance that this benefit will accrue.

2. You will understand the management that is required of the trust, and you will commit to managing it in accordance with the Trusts Act.

There are still some benefits that can come from trusts: asset protection for those in business, a means of succession, and, for a very small number of people some tax benefits. However, there are less of these than there once was and you should take a fresh look at your trust to see whether it should continue.

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Written by:

Martin Hawes

Martin Hawes is not a Financial Adviser or a Financial Advice Provider, and the views in this article are not intended to be financial advice. The views and opinions are general in nature, and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. Martin Hawes is a director and shareholder in Lifetime Income.

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