Family Trusts May No Longer Be Worth It

A nation obsessed with trusts may have to move on

Trusts have long been an important part of both New Zealand society and the Kiwi economy. It is estimated there are between 300,000 to 500,000 trusts in New Zealand. In fact, it is thought that New Zealand has the most trusts per capita in the world, with around one trust for every ten to fifteen people.

Our obsession with trusts may stem from the fact that we are a “nation of small business owners” according to Robyn Walker, Deloitte Tax Partner. People create trusts to protect their family’s assets, as TGT Legal partner Aimee Mitchell says “The most common reason to establish a trust is to manage the succession of assets and wealth between different generations of a family.” Trusts act as a legal vehicle to place assets within. They effectively protect assets from personal creditors and ensure the proceeds and ownership of assets are passed on to family members within an established framework.

For instance, parents may have concerns about passing inheritance to children outright in the unfortunate instance of their death. Trusts provide guardrails to the way money is distributed, meaning an eighteen year old won’t find themselves with millions of dollars outright, but they could have access to funds to pay for things such as education, and living expenses until the trust (trustees) deem they are of age to receive their full inheritance.

Yet recent changes to trust tax rates, record keeping and trustee duties have left many people thinking, are trusts still the best way to protect your assets? Let’s take a closer look.

A Hike to the Trust Tax Rate

Funnelling income through trusts has become a lot harder

Trusts have been a recurring topic in news headlines in recent months. First an IRD report showed the uber-wealthy in the country were earning a large majority of their income through trusts. IRD information found the amount of money going through trusts had risen from $11.4 billion in the 2020 tax year, to $17.1 billion in the 2021 tax year. It’s thought this spike was a reaction to the introduction of the 39% personal income tax rate, as people reallocated income through trusts to avoid parting ways with more money.

Unfortunately, this manoeuvre was too good to be true, as soon after the government announced a hike of the trust tax rate from 33% to 39%. When explaining the decision, Revenue Minister David Parker said “The report also shows that a substantial number of the super-wealthy funnel their income through trusts which minimises their tax bill. This change remedies that.”

Yet this news hasn’t been received gladly by many, as Walker notes, it could have significant financial ramifications for many Kiwi families. In fact, she goes so far as to call the families who do not earn significant wealth from trusts, “the collateral damage” of these legal changes.

The fact is many ordinary Kiwis will have a house or rental property in a family trust or a bank account that’s earning some interest. That income will now be taxed at the 39% trust rate, when in fact the personal tax rate of those individuals may be below 33%. Businesses that run income through trusts could also face problems for those who paid tax at the company level.

If you fall into that category, it might be time to talk to your lawyer or trust professional, as well as a good accountant and financial adviser to determine if any trust you’re associated with is still a good idea.

Updates to the Trusts Act

The Introduction of Mandatory Duties

Changes to the Trusts Act 2019 which came into force on January 2021, saw the first major reform to the act in 60 years according to the Ministry of Justice. These changes apply to all trusts in New Zealand, and although the basic rules have remained the same, some changes will have a big impact.

From a high-level perspective, the changes aimed to make trust law more accessible, strengthen the abilities of beneficiaries to hold trustees accountable, and increase the obligations of trustees.

As a result, trustees are required to perform mandatory duties and these cannot be modified or excluded by the terms of the trust deed. The new law differentiates mandatory and default duties.

Mandatory duties include

• Know the terms of the trust – what is set out in the trust deed or other trust documents.
• Act in accordance with the terms of the trust.
• Act honestly and in good faith.
• Act for the benefit of the beneficiaries and hold or deal with the trust property for their benefit. There are limited situations where a trust is set up for a purpose (for instant charitable trusts) other that the benefit of the beneficiaries.
• Exercise powers for a proper purpose.

Default duties also apply but can be modified or excluded by a trust. However, these rules apply unless the trust specifies that they don’t.

Default duties include

• Exercise care and skill that is reasonable in the circumstances. This depends on the knowledge and experience of the trustee and whether the person is acting as a trustee as part of their business or profession, such as a trustee who is a lawyer or an accountant.
• Use appropriate powers to invest trust property with the care and skill expected of a business person dealing with someone else’s property. This will also depend on the knowledge and experience of the trustee and whether they’re acting in a professional capacity.
• Not exercise power directly or indirectly for the trustee’s own benefit. This duty will be limited by implication where the trustee is also a beneficiary.
• Actively and regularly consider whether they should be exercising their powers as a trustee.
• Not bind or commit trustees to a future exercise or non-exercise of a discretion.
• Avoid a conflict between the interests of the trustee and the beneficiaries.
• Act impartially in relation to the beneficiaries, and not be unfairly partial to one beneficiary or group. This doesn’t require all beneficiaries to be treated equally.
• Not make a profit from acting as a trustee.
• Not to take any reward for acting as a trustee, although they may be reimbursed for their legitimate expenses.
• If there is more than one trustee, to act in agreement with each other.

Mandatory Document Holding

Changes to the law state that trustees must hold a copy of the trust deed and any document that contains the terms of the trust, as well as variations made to the deed. These being;

1. Records of the trust property.
2. Any records of trustee decisions made during the trustee’s trusteeship.
3. Any written contracts entered into during the trustee’s trusteeship.
4. Any accounting records and financial statements prepared during the trustee’s trusteeship.
5. Documents appointing, removing or discharging trustees.
6. Any letter or memorandum of wishes from the settlor.
7. Any other documents necessary for the administration of the trust.
8. Any of the above documents held by a former trustee and passed on to the current trustee.

If a trusteeship ends, these documents must be passed on to at least one new or continuing trustee.

Information Trustees Share with Beneficiaries

The Act also determines that basic trust information should be provided to beneficiaries. That being;

• The fact that the person is a beneficiary of the trust.
• The name and contact details of the trustee/s.
• Details of all appointments, removals and retirements of trustees.
• The right of the beneficiary to request a copy of the terms of the trust and other trust information.

The Act also presumes that information should be provided to beneficiaries on request. Yet there is a slight workaround here, if a trustee considers that information should not be made available to every beneficiary they may withhold it. Perhaps an eighteen year old doesn’t need to know they stand to inherit millions and millions of dollars?

The Bottom Line: Trusts Just Got A Whole Lot More Complicated

Although trusts have long been a Kiwi tradition to protect intergenerational wealth and the personal liability of assets from potential claimants, those days may be coming to an end.

• The reality is that running a trust has become a lot more complicated, and the requirement of mandatory duties, and document holding will mean many more appointments with your lawyers and accountant.
• Doubling down on this, the new 39% trust tax bracket might make decisions a lot harder, especially for ‘mum and dad’ trustees, settlors, and beneficiaries.

Yet despite the points raised above, if protecting wealth is a concern, trusts will always have their place. They’ve just become a lot more complex and possibly more heavily taxed, so talking things over with a lawyer or professional trust specialist is a great idea.