Trust Management - Parry Field Lawyers

A Memorandum of Wishes, sometimes called a Letter of Wishes or Memorandum of Guidance, is an important document for anyone who has established a trust.

It allows the person who created the trust, known as the settlor, to record their wishes for how they would like the trust to be managed. This guidance can be useful during the settlor’s lifetime, but it can become particularly important after their death.

Trustees have discretion when making decisions about trust assets. A Memorandum of Wishes can help trustees understand what the settlor intended, especially where the Trust Deed gives them broad powers.

In this article we outline why a Memorandum of Wishes is useful, what it can cover, and why it should be reviewed regularly.

Why a Memorandum of Wishes matters

A common question is whether a Memorandum of Wishes is needed if you already have a Will.

In most cases, the answer is yes. A Will generally deals with assets owned personally by you. A Memorandum of Wishes deals with assets owned by your trust.

This distinction is important. After your death, your executors must follow the instructions in your Will when dealing with your personal estate. Trustees, however, usually have discretion about how trust income and capital are used or distributed, subject to the terms of the Trust Deed and their duties as trustees.

Without a Memorandum of Wishes, trustees may have little guidance about how you intended the trust to be managed. This can make decisions more difficult, particularly where there are multiple beneficiaries or family circumstances have changed over time.

Providing guidance to trustees

A Memorandum of Wishes does not replace the Trust Deed. The Trust Deed remains the key document that sets out the trustees’ powers and obligations.

Instead, a Memorandum of Wishes sits alongside the Trust Deed as a guide for trustees. It can help trustees understand your views on matters such as how trust assets should be used, which beneficiaries may need particular support, and whether the trust should continue or be wound up after your death.

For example, you may wish to record whether the trust should continue for a period of time to preserve assets for your children or grandchildren. This may be relevant where asset protection, succession planning, or relationship property considerations are important.

You may also wish to provide guidance about the use of specific trust assets, such as whether a beneficiary should be allowed to live in a property owned by the trust.

What a Memorandum of Wishes can include

The content of a Memorandum of Wishes will depend on your circumstances and the purpose of the trust.

It may include guidance about:

Whether the trust should continue after your death, or whether it should be wound up and the assets distributed.
How income and capital distributions should be approached for children, grandchildren, or other beneficiaries.
Whether any particular beneficiary should receive additional consideration because of their personal or financial circumstances.
Whether the trustees should support particular purposes, such as education, travel, health needs, or the purchase of a first home.
Who you would prefer to act as replacement trustee or trustees, if this has not been dealt with in another document.
How you would like trust assets to be distributed if the trust is eventually wound up.

A clear Memorandum of Wishes can help reduce uncertainty and provide trustees with a practical framework when making decisions.

Is a Memorandum of Wishes legally binding?

A Memorandum of Wishes is not legally binding. Trustees must retain their discretion and cannot be required to simply follow the settlor’s wishes without considering the circumstances at the time.

However, prudent trustees are likely to take a Memorandum of Wishes seriously. It provides valuable insight into the settlor’s intentions and can help trustees make decisions that are consistent with the purpose of the trust.

Because it is not legally binding, a Memorandum of Wishes can usually be updated more easily than other formal trust documents. This makes it useful where family, financial, or personal circumstances change over time.

Who should see the Memorandum of Wishes?

A Memorandum of Wishes is generally a confidential document. It does not need to be provided to all beneficiaries, and it is usually only shared with those people the settlor chooses to involve.

It is often sensible to provide a copy to the trustees, so they are aware of the guidance available to them. A copy should also be kept safely with your lawyer.

As with other trust documents, it is important that a Memorandum of Wishes is reviewed regularly. Outdated guidance may not reflect your current intentions, family circumstances, or the way the trust is now operating.

Our experienced Trust Management team can support you to administer and maintain the effectiveness of your trust, ensuring it is robust and compliant. Reach out to us to arrange a review of your trust, or to discuss our Trust Management service.

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The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations. Before acting, clients should consult their Parry Field Lawyer.

International Tax Legislation

Under FATCA (Foreign Account Tax Compliance Act), adopted by New Zealand in 2014, the United States aims to detect and prevent tax evasion by US citizens and tax residents on their worldwide income from financial assets owned by an offshore entity, which they control e.g. a family trust or company settled/incorporated in New Zealand.

Additionally, from 1 July 2017, New Zealand endorsed the OECD’s standard Automatic Exchange of Financial Information in Tax matters (AEOI), which incorporates the Common Reporting Standard (CRS), a global version of FATCA. New Zealand is one of many OECD nations to have signed a multi-lateral agreement to combat offshore tax evasion on a global scale. All citizens of these countries are subject to the same level of tax scrutiny in New Zealand and the other participating countries, as are Americans under FATCA.

All entities (family trusts, companies and partnerships, but not individuals) have to comply with this legislation. All professionals, such as lawyers, accountants, investment fund managers/advisors etc need to advise their “entity” clients of their obligations under this complex and far-reaching legislation.

Is your trust/company/partnership (“entity”) a Financial Institution under FATCA or CRS?

It is important to know whether or not your entity (trust, company, partnership) is either a Foreign Financial Institution (FFI) under FATCA or a Financial Institution (FI) under CRS, both or neither. If your entity is a FFI then it needs to register on the United States Internal Revenue Services (IRS) site. If your entity is a FI under CRS then your entity will have to disclose to IRD in New Zealand all financial information and personal details for those trustees and beneficiaries who are residing overseas in one of the other participating jurisdictions combating offshore tax evasion.

We are in the process of corresponding with all of our trust clients and providing them with a form to assist the trustees decide whether or not their trust has to register on the US site and ultimately, report to our IRD under CRS. If you are a trust client of ours, and you have not yet received this form, please contact us.

Can this legislation be ignored?

Unfortunately, registration on the IRS site under FATCA is compulsory, even if your trust is not “controlled” by any US tax resident or citizen, provided that:

(a) It has some financial assets (shares, bonds, term deposits) managed by an investment advisor/fund manager; OR an FFI, such as one of our corporate trustees is one of the trustees of your trust; AND

(b) More than 50% of the trust’s gross income for the preceding calendar year comes from financial assets (excluding rental from property).

Unfortunately, (b) above will be satisfied even if the only income producing asset of the trust is a bank account which earns minimal interest. However, if the trust or other entity earns the majority of its income from residential rentals, it will not satisfy (b) above.
Once registered, no further personal information disclosure is needed, if there is no such “control” by a US tax resident or citizen. By contrast, registration on the IRD site under CRS is required only if your entity is “controlled” by anyone who resides overseas (but not the US).

What if my entity is not a FFI or FI?

If your entity is neither a FFI or FI then it will, by default, be a NFFE (Not a Foreign Financial Entity) or a NFE (Not a Financial Entity). As such, your entity will not have registration requirements, however it may have reporting obligations to other FFI’s/FI’s such as a bank with which your entity has funds or an investment advisor with whom your entity has a share portfolio. Such institutions will send to their customers/clients Self-Certification Forms, similar to those we are sending to our trust clients. If the completion of these forms conclude that your entity is a passive NFFE/NFE then it must, on request, disclose details of US and other overseas controlling persons to the entity’s bank or investment advisor which then report to IRD. If however, less than 50% of your entity’s gross income for the preceding calendar year is from passive income (including rental from property) then it will be deemed an active NFFE and will have no reporting obligations, even if it is “controlled” by a US or other overseas resident person.

These are complex matters, but compliance is mandatory with not unsubstantial fines able to be imposed on those who breach their obligations under this legislation.

Should you have any queries regarding these matters and how they may affect your trust, company or partnership, then please consult with us because to ignore this legislation is not an option.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Should you need any assistance, please contact us.

It has now been more than five years since the Trusts Act 2019 came into force. During the early stages, much of the focus was on understanding the new rules and helping trustees adjust to their responsibilities. The emphasis has now moved to ensuring trusts are being administered well in practice.

Trustees should not treat a trust as something that can simply be set up and left alone. It is important for trusts to be actively managed. If a trust is not administered correctly, it could cause considerable implications for trustees in the future.

In this article we outline some of the key issues trustees should continue to keep in mind.

Why active trust management matters

The Act requires trust to be actively managed. A useful way for trustees to do this is by holding regular trustee meetings, ideally at least annually. These meetings provide an opportunity to review the trust, consider any decisions that need to be made, and ensure the trustees are continuing to meet their duties and obligations under the Act.

They also provide an opportunity to document the meeting and any decisions made by the trustees, which can be important if those decisions are later challenged or questioned. Trustees must be prepared to justify their decisions which makes it all the more important for them to be engaged and actively managing the trust.

Trustees need to know the terms of the Trust Deed

A recurring issue we see is that trustees are sometimes unclear about what the Trust Deed actually says. This can create problems, because the Trust Deed sets out the framework for how the trust must operate.

Trustees should understand their powers, the purpose of the trust, who the beneficiaries are, and any restrictions or processes contained in the deed. Decisions should be made collectively and in accordance with the deed and the Act.

Keeping written records is a key part of this. Minutes, resolutions, and notes of discussions can help show that trustees turned their minds to the relevant issues and acted appropriately.

Beneficiary information

The Trusts Act introduced important expectations around the provision of information to beneficiaries. In general, there is a presumption that basic trust information will be made available to beneficiaries, unless there is a valid reason not to provide it.

Trustees also need to consider requests from beneficiaries for further information. This does not mean every document must be disclosed, but it does mean trustees need to approach requests carefully and record the reasons for their decisions.

This can be particularly sensitive in family trusts, where disclosure may affect personal relationships. A careful and considered approach is important.

Trusts still have an important role

Although trust compliance has become more structured, trusts continue to be a valuable option for asset protection and succession planning.

The key is proper administration. A trust that is not regularly reviewed or managed in line with its Trust Deed and the Act may not achieve the outcomes intended when it was established.

Practical questions for trustees

Trustees may wish to ask themselves:

Do we understand the terms of the Trust Deed?
Have we held a trustee meeting in the last year?
Are our decisions properly recorded?
Have we considered what information should be provided to beneficiaries?
Does the trust still serve the purpose for which it was created?
Should we obtain legal or accounting advice?

Please note that this article is not a substitute for legal advice and you should contact your lawyer about your specific situation.