It is estimated that there are up to 500,000 trusts in New Zealand. We have more trusts than most countries, but they enjoy better management of their trusts than we do. It’s a classic case of a lot of trusts, but little expert knowledge of how to manage them.
Under proposed new legislation, the first significant changes to our trust laws for decades, this lack of proper management could be a bit of a problem. And yes, “bit of a problem” is a bit of an understatement.
Most trusts are set up for asset protection from creditors, spouses, families, and the Government. The new legislation will quickly undo this protection if proper management is not in place. In this article we’ll cover what the changes look like. “Business as usual” will no longer be “business as usual”.
The following case study stars the creatively-named John and Sally Smith. It will illustrate the perils of poor management, now and in the future.
The Smith’s Family Trust
John and Sally Smith set up a trust 15 years ago. John was a builder, and Sally worked as a contractor. They set the trust up for asset protection if anything went wrong in John’s building company, or if Sally was sued for her work.
The Smiths originally placed their family home into the trust. Then, over time, they built up some savings in the trust bank account. Later, they purchased a rental property. It wasn’t until they bought the rental property that they started to keep records and file their own tax returns.
The tax side of things presented no problems. However, it wasn’t all beer and skittles as there were other problems surrounding asset protection. In short, there was none.
When the Smiths put the home into the trust, gifting wasn’t done. Put another way, the house was legally owned by the trust but the purchase price was still owed by the trust to the Smiths. This meant if they were sued personally, the trust would have to front with the purchase price…hardly ideal asset protection by any definition.
But wait! There’s more! Problems that is. The savings put into the trust weren’t gifted, nor were the ongoing mortgage repayments. This further compromised the already feeble asset protection, originally intended to guard against risks. For example, health and safety fines, John losing money on jobs as a builder, or Sally being sued for negligent work as a contractor.
So, under the old law things weren’t working properly. The Smith family couldn’t keep up with, or were ignorant of, their responsibilities.
Things could be even worse under the new rules. There is so much more to consider. Take a read and you’ll see how proper management, so important under the old regime, will be even MORE important under the new one…
Proposed Key Changes
The Trust Bill aims to make trust law more accessible to New Zealanders. It clarifies existing Trust Principles and includes some new ones. Key changes include:
- Mandatory duties for trustees including knowing the terms of the trust; acting in accordance with the terms of the trust; acting for the benefit of beneficiaries or to further the trust’s purpose; and exercising their powers for a proper purpose
- Presumption that Trustees will be required to disclose information about the trust to beneficiaries
- More flexible trustee powers, so trustees can manage and invest property appropriately
- Provisions to support cost-effective establishment and administration of trusts
- Options for removing and appointing trustees without going to court
- The maximum duration of trusts will be extended from 80 years to 125 years
- Certain trust disputes may be referred to alternative dispute resolution such as arbitration or mediation
How will people like John and Sally Smith cope in this new environment? How will YOU cope?!
What should you do now?
While these proposed changes are still some way off, now is a great time to revisit your trust to check that it is operating how you intended it to. We recommend all trusts have a ‘health check’ before the Bill comes in force.
Convex’s trust health check helps you to:
- Identify and rectify any gaps in the historic documentation of the trust
- Ensure that your wills and letter of wishes are (a) complete and (b) relevant
- Complete any gifting documentation for wealth accumulated since you formed the trust
- Confirm which assets are in the trust’s name, and transfer the ownership of specific assets as needed
- Check all accounting and tax obligations have been met, and financials are up to date
- Ensure the trust operates for the benefit of the right people
Under the proposed new laws, proper management of your trust will be more vital than ever before. As you saw in our case study, it’s easy to lose control without knowledge and guidance.
At Convex Accounting, we’re happy to guide, and advise you in regards to your trust.