Focus of proposed new trust laws to give beneficiaries a clearer standing and better access to the law when needed

Focus of proposed new trust laws to give beneficiaries a clearer standing and better access to the law when needed

By Gareth Vaughan

Proposed new trust laws won't necessarily make it easier to "bust trusts" and nor are the Law Commission's proposals the result of international pressure to open New Zealand trusts up to greater scrutiny, says a leading trust lawyer.

Chapman Tripp senior partner Arthur Young, whose areas of focus include trust law and private client advisory, told interest.co.nz in a Double Shot interview it wasn't a focus of the proposed new laws to make it easier to trace what people really actually own through trusts they're beneficiaries of.

"The focus of the legislation is more to achieve a regime where beneficiaries have a clearer standing, greater access to process and ready intervention from time to time on the part of the law," said Young.

"Will trust busting so-called via relationship arguments then increase? Perhaps but not greatly. Will it be easier for people to attack trusts than they have been able to in the past where there has been business failure and insolvency? Not obviously. I don't think there's any real change in that area."

International pressure 'not the driver of change'

And nor was any international pressure a driving force behind the changes, Young said. New Zealand's Anti-Money Laundering and Countering Financing of Terrorism Act, which came about after pressure from the Financial Action Task Force which is an inter-governmental body established by the G7, became law on June 30. Trusts are expected to come under greater scrutiny from banks under this Act.

And the Government is currently negotiating a Foreign Account Tax Compliance Act (FATCA) tax information agreement with the United States. FATCA requires overseas financial institutions such as New Zealand banks, life insurers and managed funds, to enter into agreements with the US’s Internal Revenue Service and US Treasury to provide details about the affairs of their US clients.

"I don't believe the international pressures and those originating from the OECD and elsewhere, are actually a feature of the Law Commission's thinking," said Young. "We've made submissions to the Law Commission right throughout on all its introductory papers and these kinds of international fiscal considerations hadn't ever featured in any of their commentary. So I think it's coincidental."

"It is an important consequence though that if the new law comes in it will apply equally to New Zealand foreign trusts, which as we all know are a special animal here because New Zealand happens to be a favourable jurisdiction for a series of unrelated technical reasons," Young added.

One interesting example of New Zealand foreign trusts is Equinor Trust Limited. As interest.co.nz reported in May Equinor claimed to be responsible trustee for almost 150 trusts, on behalf of some of the world's wealthiest individuals and families located in all parts of the world, with assets "conservatively" worth more than €5 billion being boats, planes, real estate, bankable assets and share participations.

Spelling out the core characteristics of a trust

The Law Commission last week said it was recommending a new law to govern trusts that it says would spell out the core characteristics of a trust and requirements for creating a trust.

It says the laws it's proposing would make it clear what was, and what was not, a trust. It would also provide a summary of the basic obligations that trustees owe to beneficiaries.

"Under provisions recommended by the Commission, if a trust has purportedly been established, but the reality is that the person who established it continues to manage the trust assets as if they are their own personal property, the new Act would make it clear that the court could find that a trust has not in fact been established," said Law Commission President Grant Hammond.

Hammond also said the Commission was emphasising its recommendations don't undermine legitimate uses of trusts, with the new Act preserving the flexibility and usefulness of the trust.

If enacted, Hammond said the new Trusts Act would be relevant to tens of thousands of New Zealanders who use trusts to hold and manage property or other assets. The Law Commission estimates New Zealand has up to 500,000 trusts used for a variety of purposes ranging from owning the family home, through to use in business, by charities, and by many, including Māori, to hold land and other assets collectively, added Hammond.

'Archaic law'

Young said the main proposed changes for trust beneficiaries include that the law will be more accessible.

"At the moment the law can be found only in complicated text books or a very archaic or extremely narrow statute, - the 1956 Trustee Act," said Young.

Additionally, beneficiaries will be recognised more clearly in the legislation than in previous law. And they'll have more ready access to the court to challenge decisions by trustees.

"They'll need to put forward a prima facie case and show that there is a substantial, not trivial issue, but then the court will have a wider jurisdiction and, I think, a greater willingness to weigh in and assess the issues between the beneficiaries and the trustees," said Young.

Clarifications are also proposed to trustees duties with distinctions between mandatory duties, presumed to be applicable to all trusts, and default duties that can be varied.

70 years added to the life of a trust

The Law Commission is also proposing to almost double the life of trusts to 150 years from the current 80 years.

"Some jurisdictions abroad have no time limits on new trusts," Young said. "I think the 150 years is a compromise. I think it's a sensible compromise and it's one that I support."

He suggested 80 years, when there can be genuine long-term inter-generational consideration within a family such as farm ownership, was too short and 150 years an appropriate time.

A response from the Government to the Law Commission's proposals is expected by March 31 next year.

"Hopefully that will be positive (and) a new statute or new bill will then come before Parliament," Young said. "As a trust practitioner, I'd be very keen to see the Law Commission's good work brought through to conclusion and hopefully in the life time of this Parliament."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

10 Comments

Comment Filter

Highlight new comments in the last hr(s).

Could someone plaese explain to me in plain english why people have trusts if it's not to hide money.

Hiding money/assets from creditors, the IRD and gold digging spouses is the prima facie reason for most trusts . Their main purpose is a juicy revenue stream for the legal and accounting professions.

Ngakonui G....um...yes I can, .... (1)People have trusts to hide money .
                                                          (2) Hide money from whom.
                                                          (3) hide money because.
 There are more reasons than just tax evasion to make access to collected wealth difficult  or convoluted from wayward family members to disgruntled business partners.
 Many wills are disbursed through trusts, again in an effort to minimise tax through technicality.
Any number of crack loving rich kids are doled out their allowance through trusts, for fear of what tey would do with the lump sum ammount.
But overall people use trusts and the loopholes built into them to avoid paying something they themselves might be liable for under normal circumstances.

Christov: whenever this subject comes up I have wondered how you would handle the following
 
You want to enter into a business deal with say a builder .. get a house built .. or you are a subcontractor to him .. he is a sole trader .. (for example) and you want to do due dilligence to find out how much trust you can put in him/them .. because builders are good at doing a phoenix .. you find out his address, where he lives .. how long he has been there .. and then you go to QV and search the title and you find he doesnt own the property but the property is in the name of a family trust .. the details of the family trust are not in the public domain .. the question is .. do you do business with him .. a personal guarantee is useless .. what do you do?

If he is prepared to sign it, iconoclast you form a contract  (LEGAL)with penalties for (what have you) that have access to any trust he may nominate or hold at the time acting as a debenture for breech of the contract.
Difficult but doable...scale dependent......will he sign...?
Alternatively you may form a contract based on what he does own (unencumbered) and draught yourself in as first and only lender to..precluding him from taking any borrowings for the course of the contract.
Go rip a copy of Blackbird Finance terms and conditions...prolly one of the better ones I've seen ....but then it is Ritchwhite./..Faye putting a caveat on your first born....  
The contract though covers much of what your looking to. 

A Trust is put in place to hold assets, for the benefit of beneficairies.  Any asset (money, property, registered instruments)  but the asset does not belong to the beneficairies and they don't get a say in how it is managed or benefits are given.     The Trustee makes those decisions.  Very useful if the beneficaries are minors or people whom aren't the good at handling assets.    Trusts do not have to seek to return a profit, nor do they have to pay anyone.  
  Also the asset isn't supposed to belong to the Trustee (ie Rights of Ownership).  However current laws have been continuously tested and slightly bend so it has become difficult to ensure that the asset (put forward by the _settlor_) does not become identified as property of the trustees (Eg if the trustee is sued, ensuring the asset isn't at risk of being lost)

Also a Trust is only setup to hold its own profits if this is deemed the better option for the beneficairies.
A company, is a legally recognised individual that can own it's own property.  Part of the rules for formation and recognition of the corporate body is to give profit to it's shareholders.  It is illegal to setup a company with the ultimate aim to lose value - although what was LAQC used to be the recognised exception for this and frequently used as asset holding companies.  However an LAQC passes risk of legal responsibility as was as allowing losses to be allocated to shareholders, and was change to a complete bureaucratic bs known as a look-through company.   The point is that company must operate in it's own interests, and ultimately that of its owners.  Whereas a Trust need not profit and operates for benefit of third parties.   The law changes are _supposed_ to reflect that, however the actual changes that are being put in seem to do the opposite (as usual)

RELEASE OF OFFSHORE RECORDS DRAWS WORLDWIDE RESPONSE
 
http://www.icij.org/blog/2013/04/release-offshore-records-draws-worldwide-response
 
 

Good link thanks A.J.....although it amazes me how Key and English did not make the list on scale. 

I am assuming that the reason that no significant liabilty has been pinned on the people in the collapsed finance companies is because all their wealth is out of reach in trusts.  This is wrong and if the money paths can be traced from the proceeds of the failed enterprise to the trusts then that cash should be available to the creditors.

Justice Minister Judith Collins has said this about trusts today;
The law governing private trusts in New Zealand will be updated and made more accessible, Justice Minister Judith Collins says.
Ms Collins tabled the Government's response to the Law Commission's review of trust law in Parliament today. The Commission is conducting a three-stage review of trust law. It released its first report – focused on express private trusts, which benefit individuals – in September.
“The Government agrees with the Commission’s core recommendation to replace the Trustee Act 1956 with a new Trusts Act,” Ms Collins says.
“Trust law is a key part of New Zealand’s legal infrastructure that governs an important component of our economy. The use of trusts ranges from high finance through to the family home, with an estimated 300,000 to 500,000 trusts currently operating in New Zealand.
“Introducing a new Trusts Act will make the law clearer and more accessible. This is a sensible and practical move, especially given that the current Act is more than 50 years old, and the importance of ensuring trust law meets the needs of those involved.”
The Government will undertake a more detailed analysis of the potential scope of the new Act, as well as the Commission’s 50 other recommendations, before developing new legislation. 
“I thank the Law Commission for this in-depth review, as well as its ongoing consideration of other aspects of trust law,” Ms Collins says.
Stages two and three of the Commission’s work on trusts will cover charitable and purpose trusts and company trustees.