Anthony Grant sees the updated trust law ending a cavalier era that largely ignored legitimate beneficiary concerns and ignored trustee obligations. The standards of trust design and management will need to improve

Anthony Grant sees the updated trust law ending a cavalier era that largely ignored legitimate beneficiary concerns and ignored trustee obligations. The standards of trust design and management will need to improve

Some family trusts are being wound up in anticipation of difficulties with the disclosure regime in the Trusts Act 2019, and possibly because of concerns about other changes with the law of trusts.

This raises an important question: are the changes that will come into effect with the Trusts Act in January next year, along with other developments, making trusts a less-effective means of managing risks and wealth succession?

New Zealand has been a fruitful place for family trusts. There is no system of registration and the tax regime for trusts has been relatively benign.

In practice, many trusts exist without the IRD, the government and the courts having any knowledge or involvement with them. Settlors have been able to manage and control them without any state supervision.

Those days are coming to an end. With the need for compulsory disclosure of trust information to beneficiaries, there is bound to be a significant increase in the level of scrutiny.

I have written about the need to disclose trust information to beneficiaries and how I do not consider this should create difficulties with beneficiaries. I remain of that opinion. It is possible to inform people that they are beneficiaries without raising their expectations of entitlement to trust distributions and causing them to become demotivated by the expectation of future wealth.

I have also written about the way trustees are increasingly being ordered to pay not only their own costs of involvement with litigation but also the costs of beneficiaries. This development does not diminish my belief in the many benefits of well-structured and well-managed trusts as I believe greater scrutiny will lead to the better management of them.

In essence, I think the era of trust informality is coming to an end. The ease with which trusts can be created and the lack of any regulatory control has resulted in some poor practices.

From a barristerial perspective, I see many cases in my practice where trustees behave unlawfully and unwisely. There are several reasons for this. One is that trusts were widely promoted with radio and press advertising but were often poorly understood by the people to whom they were sold. Promoters of trusts have established them for people who have a minimal knowledge of the law of trusts and of the responsibilities and obligations of trustees.

Many trusts have also been structured to allow settlor control, despite the law’s disapproval of this. I recall a conference of trust practitioners that I attended some years ago. There were perhaps 200 people who were asked if they considered the trusts with which they were involved to be genuine. Only about six hands were raised. I believe all the other practitioners had doubts about the legitimacy of most of the trusts because the settlors had full control of them and could do with them as they liked. They knew this cast a pall of legal uncertainty over trusts that were created in that way.

I also recall a discussion with a senior trust practitioner several years ago where I said that trust powers would need to be shared in future to diminish the risk of trusts getting into trouble with too much settlor control. I was scoffed at for making such a suggestion.

But the wheel is turning and trusts that are badly structured and badly managed, will face continued troubles.

I believe the greater scrutiny the courts are soon to have will be beneficial. It is becoming too expensive for trustees to act in a cavalier manner, ignoring legitimate beneficiary concerns and ignoring trustee obligations.

The new developments will lead to a greater maturity in the way trusts are structured and managed.

When I think of all the hundreds of thousands of family trusts that have been created in recent times and how poorly so many of them have been structured and/or managed, I am reminded of Sir Geoffrey Palmer’s comment after the 1987 sharemarket crash – that New Zealand had been like the last outpost of the Wild West.

About 50 companies had listed on the stock exchange in the year before the crash and about 50 were destroyed and delisted in the following year. The sharemarket was a shambles.

Parliament enacted the Securities Amendment Act and started to bring the sharemarket under proper control.

In a not dissimilar way, Parliament has passed the Trusts Act and this will help to raise the standard of trust design and management.

The Securities Amendment Act did not harm the sharemarket. It assisted the market to mature and provide a much better service for investors.

So too with the Trusts Act. I believe it will assist people who need trusts for the genuine benefits that they can provide to operate in a more effective manner.


Anthony Grant is an Auckland barrister specialising in trusts and estates law.  This article originally appeared in LawNews (ADLS) and is here with permission.

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15 Comments

interesting that many trusts exist without the knowledge of the IRD,you would think that would be getting harder to do now with the legal requirements of buying property.most of us see trusts as just a lot of expensive legal jiggery pokery used by richer folks to avoid paying their share of tax.

You are correct. Trusts now must have an IRD number to transfer land. Many previously didn't but any time the trusts goes to buy or sell, they will need to apply for a number. Eventually most trusts will be captured as most own land.

Good article. "Some family trusts are being wound up in anticipation of difficulties with the disclosure regime in the Trusts Act 2019, and possibly because of concerns about other changes with the law of trusts."
That first line encapsulates "Trusts" fairly well.

We all know they're used as dodgy tax avoidance vehicles, not to mention allowing foreign buyers to invest in NZ property under the radar, etc... You only have to look at the amount of empty homes around Auckland and websites that like to promote how widely used Family Trusts are for property investment. Take "OneRoof" for example, here's a random summery of their Suburb ownership info for Auckland regarding properties owned by Family Trusts:-

Coatesville 41% of properties held in Family Trusts.
Whitford 43%
Remuera 34%
Mellons Bay 33%
Saint Heliers 31%
Herne Bay 31%
Mission Bay 28%
Kumeu 25%
Takapuna 24%
Silverdale 19%
Devonport 25%
Orakei 24%
Ponsonby 23%
Maraetai 25%
And the list goes on.... https://www.oneroof.co.nz/suburb/

CJ099
Keep the conspiracy theory going about trusts.
“Dodgy tax avoidance”???????
Trust tax rate is flat 33% - the top marginal rate.
Please explain how that favours tax avoidance.

It's all in the article P8 right there in front of you! :)

CJ099
Please give a specific example of how a trust can be used as a vehicle for “dodgy tax avoidance”.
The trust tax rate is set at the highest tax rate purposely to avoid income off-setting and tax avoidance.
So please provide an example of how you see this working otherwise your comment has no basis.
Many trusts are not known to IRD as they are not income generating but are simply for protection of assets such as in new relationship or joint/multi contribution and ownership. This includes homes but are settlor or beneficiary occupied and not generating income. The vast number of trusts you quote would be of this type.

Beneficiary income isn't necessarily 33% if trust income is distributed so not always top tax rate.

IO
I agree. Income and tax can be allocated and is commonly done to avoid the 33% flat tax rate.
However the trust is not a vehicle for dodgy (illegal) tax avoidance as suggested by CJ.
To allocate income and tax supports the notion that the trust in itself is not tax advantaged.

Depends on what you mean by dodgy. Is applying all the income to the non working beneficiary in the family on paper only and changing this around each year whilst each one has a year or to off dodgy?

CJ099
How do yo connect empty homes with Trusts?

Yvil
Agree with your sentiment.
As for unoccupied houses in Auckland there are those who - such as my brother - have been appointed to a position in Australia. He has chosen to keep his Auckland home for a variety of reasons - he is wary of property price increases and difficulty in repurchasing; uses it for when he returns on holiday; for family occasions such as Christmas.
I question CJ comments as they seem to be based on conspiracy theories. Last year both the upturn in the Auckland market and an Auckland house selling above RV his argument was these were simply due to FB - it was part of a national trend! Has there really been a great buy-up by FB in Gisborne - the centre with 29% (from memory) increase in prices over the past year.
Although I am not a settlor for a trust, I have experience with a couple of trusts such as managing them as a trustee and preparing financial statements and tax returns.
I know from experience that the FB and anti-money laundry legislation for family trusts it has become particularly cumbersome regarding these requirements. For this reason one of the trusts - established for relationship property reasons - has all but ceased operating (e.g. making a personal loan to buy property as the requirements to buy as a trust property was so cumbersome due to the new legislation.
There is absolutely nothing sinister about the two trusts.
The figures CJ099 quotes for trust ownership does not surprise me given the number of second marriages and those wanting to protect assets including property in a new relationship.
I have no doubt that there are a number of trusts that have foreign trustees; however the recent multilayered requirements will significantly reduce the number of these. That was the intent of the legislation.

yes,the tax working group chaired by michael cullen in 2018 gives examples how trusts can be used to avoid tax.

Years ago I was roped in by a cousin of my mother, whom I'd only met a couple of times, to be a trustee, along with her solicitor and a male friend of her daughter. The daughter was to be the sole beneficiary of the trust and the sole asset held by the trust was the mother's house which was sited close to the beach in a nice coastal town up north. I contacted the daughter only once after I heard the mother had dementia and had been moved into a rest home. I had found out the property wasn't insured and so I phoned her local solicitor and told him to arrange insurance. I heard nothing for a few years and then out of the blue the 'male friend' trustee phoned me to say that the mother had died and the daughter had legally taken possession of the house and therefore our function as trustees had been performed and our trusteeship had come to an end.
Some years later the daughter phoned me to say that my name as trustee was still registered on the title; I consulted my friend who was a retired senior assistant land registrar and he said it was a simple conveyancing matter to just remove my name from the property's title. I told the daughter of this and she said she no longer used that solicitor and so I gave her the contact details of my solicitor in Auckland. She never contacted my solicitor so I have just left things. I presume my name is still on the title. What I would like the author of this article, or anyone else expert in the field of trusts, to tell me is do I still have any liability in respect of the property e.g. to ensure it remains insured if it burned down or was subjected to any form of damage or destruction?

The answer is 'yes'. You are still a trustee and as such have continuing liability for ensuring the trust's activities are carried out in accordance with the law including the Income Tax Act (if there is no income earning activity then the trustees can notify the IRD of the trust's 'inactive'status). If the home is uninsured the trustees could face legal action from beneficiaries if the house is destroyed by fire or whatever.

More fees for lawyers, too. Must be good, I'd advocate for it if I was a lawyer.