Is your Trust Operating in Alignment with its Purposes?

In recent years, the evolving landscape of Trust Law in New Zealand has led to increased compliance and reporting obligations.

The introduction of the Trusts Act 2019 (the Act) gives pause for clients to evaluate the purpose and function of trusts.

Reasons for Forming a Trust
When evaluating whether a trust is still suitable, it’s helpful to revisit the original reasons for its creation and whether those reasons remain relevant today.

Despite changes in the law, a trust can still offer advantages in certain situations, such as:

• Protecting family assets from business risks and creditor claims.
• Facilitating the transfer of significant family assets (e.g., a business, farm, or holiday home) to the next generation without being included in a deceased’s estate.
• Historically, trusts were used to avoid Estate Duties (often referred to as “inheritance tax”). Although Estate Duty has not been in effect since 1992, future governments may consider reintroducing it.
• Providing for specific family needs, such as a child with a disability, where direct inheritance might not be suitable.
• Serving as an estate planning tool that is not subject to the Family Protection Act 1955 and the Law Reform (Testamentary Promises) Act 1949 (though this area of law may change following a review by the Te Aka Matua o te Ture Law Commission).
• Setting aside assets for children from a previous relationship to inherit before entering a new marriage or relationship.
• In limited cases, potentially enhancing eligibility for a Residential Care Subsidy, although recent rule changes have made this less likely for most clients.

Are the Original Reasons Still Relevant?
For instance, if a family business has been sold, the need for creditor protection may no longer be as significant. In such cases, it’s essential to weigh the ongoing administrative costs and compliance requirements of maintaining the trust against any expected benefits.

Cross-jurisdictional tax issues can also complicate matters, particularly for offshore beneficiaries, such as children living abroad. These tax implications can be much greater than those faced by someone inheriting assets from an individual via a Will instead of a trust.

If the benefits of the trust have diminished, consideration is needed to whether it is appropriate to dissolve the trust.

Trusts and Creditor Protection
The strength of a trust lies in the notion that its assets are not personal but are legally owned by the trustees for multiple beneficiaries (as outlined in the Trust Deed). This is particularly important for creditor protection, although this protection can be compromised under certain circumstances, such as incomplete gifting or timing of asset transfers.

To benefit from this protection, trustees must demonstrate a clear change in legal ownership, active involvement in decision-making, and adherence to the Trust Deed for the benefit of all beneficiaries.

While there’s no legal requirement for an “independent trustee” (one who is not a beneficiary), having one can provide an impartial perspective and help ensure trustees are fulfilling their responsibilities effectively.

Engaging a professional independent trustee, like an accountant or lawyer, incurs additional costs but often leads to improved record-keeping, decision documentation, and overall trust administration.

A well-maintained trust is more capable of defending against creditors attempting to challenge it. Conversely, if a settlor acts as trustee and retains too much control, makes self-interested decisions, and lacks proper record-keeping, the legitimacy of the trust may be questioned, risking the loss of its protective benefits.

Trusts Act 2019 Considerations
The Act introduced significant changes aimed at enhancing transparency and accountability. One of its key provisions requires trustees to proactively provide beneficiaries with information about the trust, including the fact that they are beneficiaries and their rights to request further information.

This marks a departure from past practices where the existence of the trust and its assets were often kept secret from beneficiaries.

With improved transparency, beneficiaries should be those expected to benefit from the trust. Many modern trust deeds allow for the addition and removal of beneficiaries, enabling adjustments where necessary (although such powers must be exercised for proper purposes).

Conclusion
If you are a settlor or trustee and:

• Have not assessed the ongoing need for the Trust,
• Have not reviewed the Trust Deed or your administration practices under the new Act, or
• Are uncertain about your obligations under the new legislation,

we recommend reaching out to one of our trust specialists for guidance.