The law relating to family trusts is changing and lawyers, settlors, trustees and beneficiaries need to be aware of the new obligations due to take effect next year – and whether the family trust is actually the best device any more.
Henry Stokes* The lack of a national database or any requirement to report trust numbers means we cannot know exactly how many family trusts there are in New Zealand; my guess is there are around 350,000, and possibly up to half a million. If you’re reading this, chances are you have one. It may hold your family home, and possibly some other assets; you are likely a trustee of the trust; and your children and perhaps other family members will be named as beneficiaries in the trust deed.
Did you know that the trust landscape in New Zealand is shifting under our feet, and that new trust law – coming into effect in January next year – means that trustees have new, more onerous obligations in their roles?
The changes matter to anyone who is involved in or affected by a family trust, whether a settlor (creator of a trust), trustee or beneficiary.
Here I have listed the key questions to ask yourself if you are connected to a trust:
- What is the status of your trust?
Let’s say a common scenario applies to you; you bought a house years ago and simultaneously set up a trust to hold the property. Have you been actively administering the trust, or has it been sitting in the bottom drawer? You might have forgotten about it altogether, or maybe you’re not sure exactly what was established in the flurry of paperwork and signatures at the time. Did you just talk about establishing a trust, or did you actually do it?
Did you transfer your house to the trust or is it still in your own name? Review your documents or contact your professional services provider to ascertain what documents you have; with only months until the new law takes effect, this is the perfect time to work out what you did then and what you should be doing now.
- What was the reason for establishing the trust?
This is a crucial question to consider. The reason could be anything from asset protection in the event of a relationship split; to look out for the financial welfare of children, grandchildren or other beneficiaries; or potentially to avoid death duties, which do not currently apply in New Zealand but could be reintroduced by any government at any time. Remember that whatever your reason/s, trust law is changing and new case law is constantly being made, so that original reason may no longer apply.
It is likely that policymakers and the courts will continue to focus on the issue of trusts being used by some people to prevent assets being touched where a person would have a rightful claim against them. We are also seeing the courts change their approach to reflect what society’s views are, as judges are prepared to make decisions that are aligned with changes in society’s views.
For example many years ago property ownership completely favoured men, and often relationship property separation was the same. This is no longer the case and the Courts will no longer accept one partner from a relationship of long duration being left with very little while the other retains the majority of the assets. Times are changing and the law along with it. Your reason for needing a trust now may be completely different from what it was when you set your trust up.
- Does that reason still exist?
It may not be legislation or case law that has changed but your own circumstances. If you have had a trust in place for two or three decades, is it still serving a purpose in your life? As tempting as it may be to be guided by family, friends, neighbours or colleagues who have trusts and are offering advice, the important thing to note is that from a legal point of view, two situations are rarely identical.
The same goes for trusts, which are only concerned about what is right for you – and this will depend on your circumstances and those of the beneficiaries of the trust. To make an informed decision about what is right for you and for the trust needs to be worked through with a professional who can advise you regarding the changes in the law, how they will affect you and the trust, and the options which best suit your situation.
- What is in the trust?
This goes to a cost-benefit analysis of running a trust, which under the Trustee Act 1956, is different from what it will be from January next year, under the new Trusts Act 2019. The work – and therefore the cost of maintaining a trust will increase, and if you have the family home in the trust and nothing else, the cost could outweigh the benefits of having the trust.
- Are you happy to have trust information shared with beneficiaries?
From January, the trustees of a trust are required by law to share information about the trust with beneficiaries. Interestingly, over the years trusts have been formed with a big variation in the approach to beneficiaries: at times, the popular advice has been to make the group as small and confined as possible, and at other times settlors have been encouraged to include as many people as possible as beneficiaries. This means some trustees may be sharing information with a wide group of people.
Are you comfortable with the beneficiaries of the trust having all that information, and with the effect releasing it might have on the family? A lot of people have a vague idea of how much their parents are worth, and under the new law those with family trusts will go from a vague idea to a spot-on idea – with the risk, in some cases, of family conflict over money and issues of fairness, pressure, obligation and possibly resentment arising. Some people are also concerned that if children have a full idea of a projected inheritance, they may not work hard to get themselves established, and will instead wait to come into ‘family money’.
You should make sure the group of beneficiaries comprise only those who it is intended will actually benefit from the trust. If the list of beneficiaries is wider than that, you may be able to amend the group to make it smaller if the power to do that exists in the trust deed.
If you want to know how you can place some control around confidentiality around trust-held assets, seek advice from a professional services provider with expertise in family trusts and deep understanding of the Trusts Act 2019.
- If you’re a trustee, do you know what is expected of you?
The Trusts Act 2019 also changes matters for trustees. You need to become fully aware of your obligations and duties under the law. While that in itself is not a new requirement, duties and obligations are now set out plainly in the Trusts Act 2019 for all to see.
Trustees have no excuse for not knowing what their obligations are. Once you are fully aware, are you still comfortable with your role? Only you can decide whether you are comfortable remaining a trustee, but you need to have a good think about it, your capacity to fill the role and your comfort level with your legal duties.
- What are your options for the future of your trust?
Once you have worked through questions 1 to 6, this is the most interesting of all:
Option One – having looked at the family trust and the reasons for setting it up and determined that it is still relevant and everything is fine – is simply to make sure that everything is compliant. You may wish to seek expert advice to ensure you are doing everything by the book under the new law, but this is the easiest case.
Option Two – having looked at the trust and the reason for setting it up and determined that:
a) the reason doesn’t apply anymore and there is no alternative reason and/or
b) the cost of keeping it outweighs the benefits
– then winding up the trust may be the best decision. Again, this can be a straightforward process but will require expert input to ensure assets are distributed from the trust and the trust is closed following a full and proper process without imposing unnecessary risk or costs.
Option Three – having reviewed the trust, you determine that retaining it is desirable but the trust deed includes nearly everyone under the sun as a beneficiary, and you want to provide information to a much smaller pool of people who will actually be receiving (or are intended to in the future) benefit from the trust. As long as the trust deed gives powers to do so, it is possible to do a variation which changes the list of beneficiaries. Alternatively, if the correct powers exist in the current trust, resettlement may be an option. To do this, a new trust is set up to transfer the assets of the current trust to, change trustees if desired, and so on.
Where an existing trust does not contain the required powers to vary or resettle it may be an option to wind up the trust, transfer out the assets and then transfer them again into a new trust. This can be more complicated because of the requirement to re-gift assets, and other consequences can arise from this method which would need to be worked through – but it is all part of a framework of possibility.
- I don’t know what to do! Who can I talk to?
Coming to terms with the changes, and ascertaining the options and what is best for you, the beneficiaries and the trust can be confusing and complex, to say the least. The best idea is to seek expert professional advice.
The clients we are speaking to at Perpetual Guardian have a real desire to do the right thing – some want guidance as to the options for the trust, and others simply want to make sure they are compliant in their trustee role and are running the trust properly. If you have a trust, depending on your circumstances and objectives you may have multiple options or there may be one obvious option to set you up well for the world beyond 30 January 2021.
Author Bio –
Henry Stokes is General Counsel at Perpetual Guardian, New Zealand’s largest trustee company. He has over 20 years’ experience in the trustee industry and is an expert in the field.