Unless you have been living under a rock (except during lockdown when that was totally ok) then it would be pretty hard to miss all the headline buzz about Trusts in NZ.
Much of the headline frenzy has been generated by the impending commencement of the Trusts Act 2019 on 30 January 2021. The new Trusts Act both introduces and formalises a number of important trustee duties and obligations. Many of the obligations being codified into law are not new, yet some of them (such as the requirement to share information about the Trust with beneficiaries) are and this is what has many people worried. Some estimates say there are as many as 400,000 Trusts in New Zealand, although without any central register it is hard to be precise. The reality however is that the new laws that are coming into force are fairly prescriptive in terms of what proper trust administration needs to look like. Of course, the penalties for getting it wrong (in terms of exposing oneself to personal liability) are causing many trustees (and also settlors of Trusts) to question whether being involved in a Trust or carrying one on is simply worth all the bother.
This article is aimed at those of you who have a Trust in place and might be grappling with the question of whether you still need a Trust for 2021 and beyond?
The first piece of advice is to breathe through your nose and approach the question in a calm manner looking at the situation dispassionately and objectively. There should, in our view, be a compelling reason to wind up your Trust. Professional advice and guidance is required especially for any ‘sticky’ or complex issues. You should also clearly hold in your mind the time, energy and cost that has been invested to date in your Trust.
So where could one start on this mission? In a recent article published on Stuff by General Counsel at Perpetual Guardian and trust expert, Henry Stokes, he outlined some key questions to ask yourself to help guide your decision-making process. These questions include:
- What was the original reason for establishing your Trust and does that reason still exist?
- What is in the Trust?
- Are you happy to have Trust information shared with beneficiaries?
- Do know what is expected of you under the Trust Deed?
- What options does the Trust give you for the future?
We would add to that list the following further questions:
- Do you have the time and energy to properly administer the Trust?
- Are you prepared to stump up on an annual basis for the ongoing professional fees associated with administering your Trust?
- Does the vehicle of a Trust give you enough flexibility to achieve your future plans?
Why a Trust in the first place?
The starting point is to consider why the Trust was originally established and what it was designed to protect against. The reason for creation of the Trust may have been multifarious and include asset protection, estate planning reasons, rest home asset tests or death duties (if reintroduced).
As with the introduction of the new Trusts Act, the law in respect of Trusts (and taxation of assets) could change again at any time. Many people are worried about the possibility in this post-Covid landscape of the Government introducing a wealth tax or reintroducing death duties.
Whatever the reason for establishing your Trust you need to stand back and question whether that reason (or reasons) still holds true today. It may be for example that you created a Trust when you were a Director or sole trader to protect your assets against creditor attack or business failure but you have subsequently wound up your trading entity and are now retired. If this is the case, then that asset protection (from business creditors) is no longer a relevant consideration for you and this might make your Trust redundant.
In our experience it is fairly rare for Trusts to be set up for one reason only. It is usual for many Trusts to be created for at least two or more reasons. The question is, do any of those reasons still exist. Even if the initial answer to that question is yes then, you need to ask yourself in all seriousness whether you have the appetite to continue on with the Trust, understand and exercise your trustee duties seriously and set aside the time and money to actively administer the Trust. Even if the answer is in the positive to all the above then whether a Trust is still the best vehicle to achieve your end goals (and give you any desired flexibility along the way) needs some serious consideration.
Is a Trust still right for you?
In short, a Trust needs to be right for you (and your beneficiaries!) and your circumstances, not just today but also tomorrow. We are finding that some older Trusts do not provide all the necessary powers and flexibility to be truly useful in the future for your beneficiaries. In many cases this can be remedied but sometimes not and this requires careful handling.
Ideally, before you make any hard and fast decisions about your Trust or continuing involvement as a trustee in a Trust you should work through an assessment of the pros and cons with your professional advisor who can advise you about the law changes, how they might impact you specifically and the options best suited to your own situation. It is tempting to be lured in by all the ‘chatter’ and nay-sayers and simply decide that Trusts are all too much like hard work. Taking that line without undertaking a proper enquiry could undo years of work and financial investment.
You need to get started on this assessment well before the new law comes into effect on 30 January 2021. If you need help reviewing your Trust or asset protection plans contact Godfreys Law on 03 366 7469 today.