Trusts – do you still need them?

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Back in the ‘old days’, it was common practice to purchase a family property and put it into the trust. Perceived advantages were:

  • Protecting the family home from legal matters
  • Potentially changing the outcome when applying for residential care subsidies
  • Keeping a ‘family’ asset for succession planning
  • Placing restrictions on which beneficiary can receive benefits and/or the timing of this (for example, a beneficiary turns 21)

With recent changes in legislation for trusts and improved electronic communication within government departments, it’s not so clear cut any longer.

Trusts Act 2019
Who owns a trust?
Trusts and ‘means-testing’
Protection of assets
Succession planning
Property transactions
So – should you have a trust?

Trusts Act 2019

The Trusts Act was substantially overhauled during 2019 and came into effect on 30 January 2019.

The Ministry of Justice website has a good summary. In short – trustees’ duties and obligations are more clearly defined and will probably increase their current level of involvement in the trust.

With multiple trusts, administration could become a burden, particularly if there are different trustees for each trust. Have a chat with your solicitor and see if any can be considered inactive, or even dissolve them.

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Who owns a trust?

A trust is a separate entity in itself, much in the way companies are. It will have its own IRD number and be subject to tax legislation in its own right.

Beneficiaries?

No. Beneficiaries can include individuals, organisations, charities, and schools. They have no automatic rights to trust assets – it’s up to the trustee as to who receives what, and when.

Settlor?

No. A settlor creates the trust, usually with a nominal amount of money (even with only $1). They prepare the Trust Deed with the input from a solicitor and the proposed trustees. A settlor has no rights over trust assets.

Trustees?

Yes – technically owns the assets, but only on behalf of the beneficiaries. Trustees are responsible for overseeing how the trust assets are used and has a duty of care to its beneficiaries. The trustee must act in the best interests of the trust and its beneficiaries at all times.

So – the trust’s assets are owned by the trustee. However, unless trustees are also beneficiaries, they have no automatic right to use those assets for their own benefit. 

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Trusts and ‘means-testing’

‘Means-testing’ is where the government assesses your ability to pay for residential care. If you can’t pay for care, the government will subsidise it in part or in full.

The ‘means-testing’ is placed on an individual, not a company or trust. So, what is being tested? The individual’s personal assets and income.

As already noted, the individual no longer controls the assets placed in trust, and so, technically, it appears that these cannot be included in the asset test. However, if it’s clear that assets were transferred into a trust to avoid paying for residential care, the transactions(s) could become void in the eyes of the Ministry of Social Development (but not legally voided).

As an extreme example, you can’t transfer your assets to a trust, go into care a week later, and expect the government to pay for your care.

Means-testing income depends on the type of income. What’s important is that by placing assets into a trust, the individual should not be deprived of income.  An example is that once an investment portfolio is transferred into a trust, the income (dividends, interest) goes to the trust. The individual is deprived from that income unless they receive a similar sum from their role as a beneficiary.

There’s no fixed figure in the mind of MSD – ‘deprivation’ for one individual may not be considered deprivation for another.

Means-testing is a process undertaken by the Ministry of Social Development. It doesn’t necessarily take into consideration the individual’s current legal assets and income. It can look into past transactions and any entities associated with an individual (partner, family, company, trust). 

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Protection of assets

Business owners could be subject to litigation. Examples are:

  • Providing incorrect advice
  • Penalties and fines from operating an unsafe workplace
  • Court cases
  • Malpractice
  • Employment matters

A negative outcome could require an individual to sell assets to pay for damages. But if the individual doesn’t own any significant assets (because the trust does), there is nothing to sell.

Not necessarily.

Large and/or recent transfers of assets will be scrutinised to determine the underlying reason. Ultimately, the transaction could be ‘clawed-back’ (effectively reversed), resulting in the assets being owned by the individual and therefore available to pay damages.

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Succession planning

Using a trust to keep family assets as family assets, is not uncommon. The settlor can specify how the asset is to be treated and who benefits from it.

  • A beneficiary known to be careless with money may have an age or monetary restriction
  • Keeping the asset in the family should matrimonial issues arise (separation and/or a new partner)
  • Ensuring a business continues (for example, farming)

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Property transactions

You may have heard about changes in the Brightline test, regarding potentially taxing profit on the sale of residential property.

A transfer of a property into a trust could be considered a sale under Brightline – you may not necessarily be taxed, but the Brightline ‘clock’ is likely to reset to nil. The settlor’s own home could also end up being subject to Brightline testing.

The rules are many, and consequences financial significant. Please discuss with your accountant and/or tax advisor before entering into any property transactions.

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So – should you have a trust?

It depends.

If you have one already set up with the family home, it’s probably OK where it is. If you have multiple trusts with no assets, consider closing some of them.

If you’re thinking of forming a trust, seek legal advice. Your solicitor will know the best course of action for your specific situation and wishes.

You can do all the research in the world and find differing opinions. Speaking or meeting with a solicitor is vital, as they will ask questions on topics you hadn’t considered. It’s a case of not knowing what you don’t know.

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