The Trusts Act 2019 was passed on 30 July 2019 and replaces the Trustee Act 1956. It comes into effect on 30 January 2021.

The 2019 Act modernizes existing trust law, provides better guidance for trustees and beneficiaries, and makes it easier to resolve disputes.

So what are the key changes?

1. A description of the key features of a trust to help people understand their rights and obligations.

That includes:

  • Defining a trust as: a structure where a trustee holds and deals with trust property for the benefit of people who are described as beneficiaries for a permitted purpose and the trustees are required to act in the best interests of the beneficiaries;
  • Stating that a sole trustee cannot be a sole beneficiary of a trust;
  • Increasing the maximum life of a trust from 80 years to 125 years;
  • Setting the minimum age you have to be in order to hold a formal trust role as 18 years of age.

2. A list of mandatory and default trustee duties to help trustees understand their obligations.

Mandatory duties

Mandatory trustee duties cannot be modified or excluded by the terms of a trust and include:

  •  The duty to know the terms of a trust;
  •  The duty to act in accordance with the terms of a trust;
  •      The duty to act honestly and in good faith;
  •       The duty to act for the benefit of beneficiaries or to further the permitted purpose of a trust;
  •  The duty to exercise powers for a proper purpose;

Default duties

Default trustee duties can be modified or excluded by the terms of a trust and these duties include:

  •  The general duty of care;
  •  The duty to invest prudently;
  •      The duty not to exercise a power for a trustee’s own benefit;
  •      The duty to consider the exercise of a power;
  •      The duty not to bind or commit trustees to future exercise of discretion;
  •      The duty to avoid a conflict of interest;
  •       The duty of impartiality;
  •       The duty not to profit;
  •      The duty of a trustee to act for no reward;
  •      The duty to act unanimously.

3. Requirements for managing trust information and disclosing it to beneficiaries.

Information for Trustees to Keep

The Act sets out what information trustees must keep and how long documents must be kept.

Each trustee must keep the core trust documents which are:

  •  Copies of the trust deed and any variations to it;
  •      Records of the trust property that identify the assets, liabilities, income and expenses of the trust;
  •  Records of decisions made;
  •      Any written contracts entered into;
  •      Any accounting records and financial statements prepared;
  •      Documents of appointment, removal and discharge of trustees;
  •      Any letter or memorandum of wishes from the Settlor of the Trust.

The trust documents need to be kept for the duration of the trusteeship and must be passed on when a trusteeship changes.

Trustees will have to either keep their own copies of ‘core trust documents’ or ensure that at least one of the other trustees holds all of the core trust documents and will make them available on request. If a trustee is not confident in their fellow trustees’ ability with paperwork, they will need to keep these documents personally.

Disclosure

The Act favours keeping beneficiaries informed and clearly outlines that basic trust information is to be provided to every qualifying beneficiary. The basic information is:

  •  The fact that a person is a beneficiary of a trust;
  •      The name and contact details of the trustee;
  •       Details of changes in trustees;
  •      The right of the beneficiary to request a copy of the terms of the trust or trust information.

In addition to the basic information, there is a presumption that a trustee must, within a reasonable period of time, give a beneficiary or their representative the trust information that person has requested, unless there is a good reason to decline such a request. The Act outlines a number of factors trustees have to take into account in deciding whether it is reasonable to decline an information request.

Trustees may only refuse to provide information to beneficiaries after considering a series of factors set out in the legislation and the trustees must consider these factors when deciding whether these apply in the circumstances, including:

  •  The nature and interests of the beneficiary (including whether the beneficiary is likely to receive trust property in the future);
  •      The nature and interests of other beneficiaries;
  •      The intentions of the settlor when the trust was established;
  •      The age and circumstances of the beneficiary in question and the other beneficiaries of the trust;
  •      The effect of giving the beneficiary the information;
  •      The nature and context of any request for further information;
  •      Any other factor a trustee reasonably considers is relevant. Trustees will have to carefully consider any decision not to disclose information.

More Key Changes: 

4. Practical and flexible trustee powers, allowing trustees to manage and invest trust property in the most appropriate way;

5. Provisions to support cost-effective establishment and administration of trusts (such as clear rules on the variation and termination of trusts);

6. Options for removing and appointing trustees without having to go to Court to do so;

7. Modern dispute resolution procedures. In the interest of keeping trust related disputes out of Court where possible, the Act provides for alternatives such mediation or arbitration.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Pat Rotherham at patrotherham@parryfield.com or Luke Hayward at lukehayward@parryfield.com should you require assistance.

 

Are you considering joining your first board and not sure where to begin or what you should be thinking about? Below are some key points to be considering (these reflections are a summary that came from an hour long discussion with a group of experienced board members Steven Moe helped facilitate recently – so is the collective wisdom of about 15 people):

  • Be clear on your motivation – if it’s about kudos or prestige then it is unlikely to result in being effective or be sustainable. One way to test your motivation is (for non profit boards) to consider whether or not you would actually give them money if they asked for that? If not, well…
  • Expectations are critical – so clarify what is expected of you (the number of meetings, number of committees, other work contributions) – it is not understanding what is expected of you that usually leads to issues.
  • People are key – talk with the CEO, meet with the other board members, get to know them first before committing.
  • Undertake due diligence – do at least some basic checking and ask to see the finances, understand why the last person left, ask questions about future strategy. If it is appropriate, ask to attend a board meeting just to see how they operate before agreeing to join – and pay particular attention to ‘board only time’ to see what is discussed and the style and approach of the chair.
  • Ask for an induction – make it an expectation that you will receive an induction to learn about the history, ways of decision making, explanation of future etc. Having a manual for new board members can be good too.
  • Mentors – Value and seek out mentors who can give you advice as you start a governance role.
  • Ask questions – don’t be afraid to ask things before you join, in fact that is often what a board is looking for in a new appointee because it shows the style and approach the person brings.
  • Culture rules – make sure you find out about the culture of the board and as part of that learn how the CEO relates to the Board.
  • Resources – Some good resources can be found at Sport New Zealand here as well as IOD resources here and BOMA directors programme courses here. For more information on governance, you can also check out our article “Good Governance” here.

Having posted the points above on Linked In there were a lot of comments added with some insights from others, such as:

  • Dorenda Britten: Listen
  • Sue McCabe: Make sure you are up for what can go wrong – not just business as usual governance – and realise the seriousness of the accountability you take on. My first governance role was for the childcare provider my kids were at. I wanted to ‘give back’ and get experience. We found out that the crèche building had friable, leaking asbestos (so had to consider whether we’d breached health and safety law), needed to manage understandable health worries from staff and parents (no risk in the end), then it led to the centre’s closure and we had to lay off the most wonderful staff and wind up the business. Thankfully the Board was strong and competently led by the Chair Kelvin Wong, so the issues were worked through as well as they could be. Good question Steven Moe – I look forward to more answers.
  • Camille Wrightson: Particularly as a young woman- you might be surprised what you can contribute! Don’t assume everyone in the room is necessarily smarter than you or that they’ve thought of everything.
  • Hannah McKnight: Make sure you truly have the time to commit to a Board role without spreading yourself too thin at mahi, at home, and with other commitments you value. Wellbeing comes first and while an amazing opportunity, you need to ensure you can give your full self to a Board. This is why I’m yet to go ahead with a formal Board position. Timing is everything.
  • Andrew Phillips: Read your rules document / deed very carefully or maybe advise myself of the outcome of the Cricket World Cup this year, a boundary count victory has got to pay out reasonably.
  • Barry Baker: Really good question , research the chair and their back ground. Meet with them and get a feel for them. The chair (and CEO relationship ) is a good indicator of how the board and org operate.
  • Dorenda Britten: Read your briefing/ board papers, learn all you can about the organisation concerned – its history, threats and the context for future opportunities. Listen and observe the characteristics of the existing board members and the leadership team. Figure out how best to use the skills you have been hired to contribute.
  • Phil Johnson: Temper your enthusiasm to “get involved” with your responsibility to govern. Mistake I made in my first role was to assume that operational involvement was an inherent element of governance.

We hope that these tips will be of use to you as you start on the journey of joining a board.  Please feel free to contact Steven Moe at stevenmoe@parryfield.com or 021 761 292 should you require assistance – we have a lot of free resources for start-ups, boards and companies including “Start-ups Legal Toolkit” which covers the key issues we see people face when starting out (it’s a free PDF guide in the resources section of this site).

Are you a beneficiary wondering what trust information you are entitled to, or a trustee concerned with what information you may be required to provide to a beneficiary?  This article considers the current New Zealand legal position on the rights that beneficiaries have to trust information, and the changes that will result from the new Trusts Act, which was passed into law this year (2019).

In the past, it has often been the case that only the trustees knew about the family trust “secret”. The new Trusts Act dramatically changes this from 30 January 2021 by developing further the current legal principles established in the following 2 cases:

Erceg v Erceg

This 2016 Supreme Court case involved the estate of Michael Erceg, a beer magnate who died in a helicopter accident. The Court said that the trustees of a trust must give beneficiaries certain basic trust documents on request to ensure that a trust is administered properly and the trustees are held accountable for their actions. Ultimately, the ability to see trust information is based on the status and motives of the beneficiary applying to the Court. In this case, the Court refused to grant Ivan Erceg’s request for trust information because his conduct toward the other beneficiaries was confrontational and “he was on a fishing expedition”. However, as a primary beneficiary of the Accorn Foundation Trust, he would otherwise have had a good case for receiving basic trust documents, comprising:

  • The trust deed;
  • Any variations to the trust deed;
  • Financial statements; and
  • Potentially minutes of meetings/resolutions, but with reasons deleted.

Addleman v Lambie Trustee Limited

In this 2019 Court of Appeal case, Mrs Addleman was both a discretionary and a final beneficiary of her father’s Lambie Trust, along with her estranged sister, whose company Lambie Trustee Limited was the Trust’s sole trustee.  Mrs Addleman only became aware of the Trust’s existence when she received 4.25 million as a “full distribution of funds” from the Trust.  Wanting to know more, she initially requested comprehensive information about the Trust from its inception 12 years earlier.

Applying the principles established in Erceg above, the Court said that as a close beneficiary of the Trust Mrs Addleman was entitled to see trust documents, albeit within a narrower category than those she initially requested, and that she should receive the following:

  • Financial Statements;
  • Minutes of meetings, but without reasons for trustee decisions; and
  • Any legal opinions and other advice obtained by the trustees which was funded by the Trust.

New Trusts Act Changes

The new Trusts Act significantly changes the rights of beneficiaries to trust information.    While trusts were once allowed to more easily remain a secret, under the new Trusts Act trustees must disclose basic information to at least one beneficiary without a request being made.  This is the Presumption of Notification.

It is important to note that there is a second presumption created by the new Trusts Act, which requires a trustee to provide additional information within a reasonable time to a beneficiary who requests it.  This is the Presumption of Disclosure.

What is “basic trust information” under the new Trusts Act?

Basic trust information is the information that tells you about the trust – what its purpose is, who the parties to the trust are, etc. It includes:

  • The fact that you are a beneficiary;
  • The names and contact details of trustees;
  • Details of each appointment, removal and retirement of a trustee as it occurs; and
  • The right to request a copy of the trust deed and additional information about the trust’s administration and its assets (but not reasons for trustees’ decisions).

However, as can be seen from the following, these two presumptions may be totally or partially ignored.  Trustees can rely on numerous factors to deny beneficiaries this basic trust information, such as:

  • The nature and interests in the trust held by both the beneficiary applying for information and the other beneficiaries of the trust;
  • Confidentiality;
  • The age and circumstances of the applicant and the other beneficiaries;
  • The effect of giving the information on all related parties;
  • The practicality of giving the information;
  • The nature and context of the request;
  • Any other factor that the trustee reasonably considers.

Differences between the current Erceg Approach and the new Trusts Act

In the Erceg case, the Court said that although a primary or close beneficiary can ask for, and expect to receive, basic trust information on request, they’re not automatically entitled to it. Disclosure will depend on the wider interests of all beneficiaries as a whole. So currently, there is no Presumption of Disclosure.

However, the Trusts Act goes further than the Erceg case and ensures that at least one beneficiary must receive basic trust information on request (Presumption of Disclosure), but also, even if none has been requested (Presumption of Notification).  This is to ensure that the trustees are kept accountable and are discharging their obligations to the beneficiaries properly.

If the trustees believe that one or more of the above factors justifies their denying such information from all beneficiaries for more than 12 months, then they must apply to the High Court for directions.  The Court then decides if the trustees’ decision is reasonable and if so, how they can otherwise be held accountable for their actions if none of the beneficiaries are advised of their status or informed of basic trust information. Applying to the Court can be avoided if such information is disclosed to at least one beneficiary.

In summary, under the New Trusts Act, as a beneficiary, you can expect to see the trust deed, names of the current trustees and some financial information unless the trustees consider otherwise under the above list of factors.

When the new Act is fully operative, be aware that the obligations of trustees, and in particular the rights of beneficiaries, are set to dramatically change, as may the dynamics of some family relationships.

Every situation is unique, so please discuss your particular case with a professional advisor who can provide a tailored solution to you.

Pat Rotherham – patrotherham@parryfield.com

Trustee Duties

The Trustees have certain duties and liabilities placed on them under the relevant Trust Deed, New Zealand Legislation and Common Law (decisions of the Courts in New Zealand and Overseas). These duties include:

– to know the trust deed, the trust assets and liabilities;
– to advance charitable purposes;
– fiduciary duties of honesty and loyalty and acting in the best interests of the trust;
– exercise care, skill and prudent diligence;
– act impartially amongst beneficiaries;
– to sell wasting property;
– to exercise reasonable care;
– to insure assets and keep property safe;
– to keep inventories;
– to invest within a reasonable time;
– to repair trust property;
– to invest prudently;
– to not delegate;
– to act jointly where there is more than one trustee;
– to not profit from trust property;
– to be accountable; and
– to be honest, loyal, diligent and prudent in carrying out the terms of the trust.

If you would like further explanation of any of these duties, please get in touch with us.

Generally a charitable trust will have between 3 to 7 trustees. Usually trustees are a mix of professional executives and non-executives. They will be held to the same standard of care in their actions as applies to directors of a business (there is not a lower standard due to it being a charitable trust).

Trustee Liability

Trustees are representatives of the Trust. As noted above when discussing duties, they act as fiduciaries who hold the trust property for the benefit of the charitable purpose set out in the deed. It is important that trustees clearly understand what those purposes are and do not overreach and act in a way that is further than what was set out in the deed. If trustees fail to perform their duties then they may be subject to proceedings taken out by interested persons. Ultimately the New Zealand Attorney General has certain rights as the ultimate power ensuring accountability. It is common for trust deeds to include some limits on trustee liability. However, as mentioned before it is possible that trustees will be jointly and severally liable where a trust fails to account for GST, ACC levies or PAYE payments.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. We offer advice on all aspects of charitable trusts and are happy to answer any questions that you might have. Contact Steven Moe at stevenmoe@parryfield.com or 03-348-8480 for more information.

This article is the second in a series on charitable trusts. To have a look at our first article which sets out the advantages and disadvantages of charitable trusts, click here.

 

1. Govern don’t manage: Avoid getting into too much of the detail of how the trust operates. You shouldn’t be talking about minor issues at the Board level.
Yes! What is our strategic plan for the next 5 years?
No! Can we save $7 per month by purchasing paper in bulk?

Your rating out of 10?______

2. Have clear agendas: Don’t let meetings turn into a conversation that starts “what are we talking about again”? Have a clear defined standing agenda that then has key points added.
Yes! Circulate agenda in advance along with relevant pre-reading. Read it.
No! Show up late and try to remember what was discussed last time, with no agenda to guide the meeting (and ensure it finishes on time).

Your rating out of 10?______

3. Board Charters: This is a document that can provide overall guidance – set out role, relationships, how decisions made, procedures, inductions, committees.
Yes! Consider having a Board Charter and clearly set guidance out.
No! Continue without clear thinking and strategy behind what you are doing.

Your rating out of 10?______

4. Know your Trust purpose: It is surprising how many Trustees are unclear on the actual purpose and maybe have never even read the Trust Deed to see the original purposes.
Yes! Be clear on what the purpose is and let it guide decisions.
No! Put the Trust Deed in a drawer and not look at it for 10 years.

Your rating out of 10?______

5. Know the purpose behind the purpose: Think about and understand how the day to day and month to month work is of value – know your “why”. In many cases there are deep needs which are being met by each trust
Yes! Know your why (if you have not seen the Simon Sinek video, google it)
No! Don’t forget the real reason behind the activity and work being done.

Your rating out of 10?______

6. Plan ahead: Think long term not short term – discuss finances, properties, succession for your board, strategy, growth, is this Trust relevant …
Yes! In 5 years I think our landscape will have changed so here is what we need to do to prepare…
No! Where shall we hold our next meeting?

Your rating out of 10?______

7. Trust board size: I think optimum size is 4 to 6 Trustees. Many Trust Boards are more, but once you get above 8 the opportunity for participation drops. This results in a drop of enjoyment (less sense of contribution) and also reduces the quality of decision making because discussion is more limited.
Yes! Keep boards efficient by not growing them too large.
No! Don’t get too big – boards that have crept up above 10 are like a parliament and are also far more difficult to chair.

Your rating out of 10?______

8. Increasing need for professionalism as a Trustee: There is a growing need to create a culture of continuous improvement or learning within the Trusteeship itself. Have a view that you can never stop learning. Governance is a high calling.
Yes! Trustees ought to be encouraged to read material that takes them a bit further in their journey of understanding what it is to a Trustee and how to contribute.
No! Just wing it.

Your rating out of 10?______

9. Who should be on a Trust Board? In a small charity this may be a luxury but the ideal answer is someone who has both a strong belief in the vision and purpose of the Trust as well as a particular skill set that the Trust most needs.
Yes! Consider skill sets around tangible matters e.g. finances, property matters, operational issues but also the soft issues – the ability to think strategically, a high EQ and focus on building a great team.
No! Don’t focus on one set of skills instead aim for a diversity of thought.

Your rating out of 10?______

10. The right Chair? Good outcomes are largely the result of effective meetings and effective meetings are not possible if the Chair is not suited to the task. A good Chair creates an environment of respect, fair opportunity to speak, but without restricting candor and ensuring discussions do not go on any longer than necessary and a clear conclusion is reached. Also, if the organisation is large enough to have employed staff then the relationship between the Chair and the Chief Executive is a critical one.
Yes! Have those awkward conversations to ensure that the person most suitable to facilitate good meetings is the Chair.
No! Like all of these points, don’t continue on if change is needed.

Your rating out of 10?______

Some resources:

Simon Sinek, “The Power of Why – YouTube Video

“Joan Garry’s Guide to Non-profit Leadership (because non-profits are messy)”.

“Good to Great and the Social Sectors” – Jim Collins (speaker on commercial/corporate leadership, but has good things to say for charity leadership as well).

“Boards that Lead” – Charan, Carey and Useem.

In terms of podcasts there a number of great leaders who speak to the leadership area including Andy Stanley and Carey Nieuwhof.

Seeds is a podcast I have been doing each Tuesday interviewing people for an hour on what they do and why – often this includes people who have started or run charities www.seeds.libsyn.com

 

Should you need any assistance with these, or with any other Trust and Asset matters, please contact Steven Moe at stevenmoe@parryfield.com  (+64 3 348 8480).

KiwiSaver is a superannuation scheme in New Zealand that is popular with many Kiwis not only for saving for retirement, but also for first home buyers saving for a deposit. But have you ever considered what happens if you pass away before you have withdrawn your KiwiSaver funds? What happens to the money in your KiwiSaver account when you die?

Where you have signed a Will, upon your death the full balance of your KiwiSaver will be paid to your estate. If the balance in your account is less than $15,000.00, it will be able to be paid automatically. If the balance is more than $15,000.00, however, probate (an order from the court allowing the distribution of your account funds) will need to be issued.

What happens if you don’t have a Will?

It is important to note that if you pass away without a Will (this is called “intestate”), the process will be more complicated and expensive. You should also be aware that without a Will, you cannot be assured that your assets will be distributed to those whom you intend. For more information on the importance of having a Will and what happens if you pass away intestate, see our article here.

Example:

Jane is in her early twenties and is saving up for a deposit for her first home. Jane currently has $16,000.00 in her KiwiSaver. She also has $12,000.00 in a savings account. She has never really considered signing a Will, and is planning to look into it once she has purchased her home and is all settled in. However, Jane is in a tragic car accident and is killed instantly. Because she passed away intestate, her assets were distributed in accordance with the Administration Act 1969. Several issues arose from Jane passing away without a Will that could have been avoided:

1. Jane had intended for her assets to be distributed to her niece upon her death. Because she had not expressly stated those wishes in a Will, her assets were instead distributed equally to her parents.

2. Secondly, because Jane’s assets exceeded the $15,000.00 threshold, her family had to apply to the court for probate. Because she had not signed a Will appointing an executor, her family also had to apply to the court for the appointment of an administrator – someone who is given authority by the court in the absence of a Will to deal with the estate. This was a costly process (both financially and time-wise) and caused a lot of stress for her family that could have been avoided if she had signed a Will.

How can we help you?

We would advise that you sign a Will if you are over 18 years old, even if you only have a few assets.

If you would like any assistance with drafting and signing a Will, reviewing your existing Will, or if you have any questions in relation the issues raised in this article, please feel free to get in touch. We have teams in our Riccarton, Rolleston and Hokitika offices that would be happy to assist you.

For more information, please feel free to contact Paul Owenspaulowens@parryfield.com or Luke Haywardlukehayward@parryfield.com or give us a ring on 03 348 848

Can it be fair for everyone?

Making sure everyone you care about gets a fair share of your property after you die is an issue most of us grapple with. This may also have additional complications when you have a blended family. It’s not always as easy as just writing your Will and specifying who gets what. There are several statutes that give family members and/or your new partner’s family, a right to contest your Will. The two main statutes are the Family Protection Act 1955 (FPA) and the Property (Relationships) Act 1976 (PRA).

Leaving it all to your partner?

A common way of structuring your affairs is to leave everything to your partner or spouse, knowing they will provide for your children as well as their own in their Will. These are often called ‘mirror Wills’. Unfortunately, this structure doesn’t always satisfy all the children involved, as we have seen in several recent court cases. You also run the risk of your partner or spouse changing their Will at a later date after you have died.

• Claims from the children: The FPA allows family members to make a claim against your estate if they believe they have not been properly provided for. This can happen even if your spouse has a ‘mirror Will’ which will leave the whole estate to your children as well as their own when they die. An example of this blended family situation is the Chambers case, which has recently received media attention. Lady Deborah Chambers QC was left everything by her husband, Sir Robert Chambers, on the understanding that when she died, her estate would be split into four parts, going equally to Sir Robert’s two sons and to Lady Deborah’s two daughters. One of Sir Robert’s sons successfully brought a claim against his father’s estate under the FPA, despite having his own lucrative income and not being in any financial need.

• Your spouse could change their Will: If your partner or spouse outlives you by some time, there is the possibility that they may change their Will as their circumstances change. They may remarry, have a new relationship, or more children may be brought into the family. This could mean that the portion of your estate that you envisioned being left to your biological children is now eroded by your partner leaving more to new partners or children than you had never anticipated.

Leaving it all to your children?

In light of these two options, it may be tempting to consider leaving your estate entirely to your children. Unfortunately, doing this can bring similar problems. Your partner could bring the same claim that your children could under the FPA or they could make an application under the PRA.

Property (Relationships) Act 1976

The PRA allows your partner to make an application to have your estate divided as relationship property, rather than in accordance with your Will. Under current law, you have a duty to provide for the partner you leave behind. If an application is made under the PRA, any relationship property is divided accordingly and the balance of the estate is distributed according to your wishes. Again, this may leave your loved ones with a different portion than you envisaged. You also need to know that jointly-owned property is automatically transferred to the survivor and does not form part of your estate.

Possible solutions

To find a solution that works best for your family and fits your wishes, do discuss this with us as one size definitely doesn’t fit all. Some options are:

• Contracting out agreements: you come to an agreement with your partner which overrides the PRA;

• Setting up trusts in your Will or before you die: if established correctly, trusts can be effective in defeating claims through the FPA and the PRA; and

• Life interest Wills: leaving your spouse an interest in your property during their lifetime, but that interest will expire on their death and the property will be distributed to your children. The above points merely brush over some issues in what is an incredibly murky and complex area of law. If you are in a blended family situation, let’s discuss the options in order to structure your affairs in a way that works best for you and your family.

How can we help?

We have dedicated teams based in our Riccarton, Hokitika and Rolleston offices who give advice on a variety of different asset protection, succession planning, family and relationship property matters. If you have any questions arising out of the issues raised in this article, please feel free to contact Lois Flanaganloisflanagan@parryfield.com or Nicole Murphynicolemurphy@parryfield.com or give us a call on (03) 348 8480.

Used by permission, Copyright of NZ Law Limited, 2018

Have you ever wondered what happens to your affairs when you lose the capacity to handle them yourself? We live in a world of uncertainty, and it is important that you are prepared for whatever challenges might come your way. One way you can be prepared is by appointing an Attorney for your property or personal care and welfare by way of Enduring Power of Attorney.

 

 

What is an Enduring Power of Attorney?

 

There are two types of Enduring Powers of Attorney – an Enduring Power of Attorney in relation to Personal Care and Welfare, and an Enduring Power of Attorney in relation to Property. An Enduring Power of Attorney grants a person (or people) of your choice powers over your personal care and welfare or your property. This can be the same person for either personal and property matters, or separate people, depending on what you want. In exercising their powers, they have a fiduciary duty to act in your best interest always and are required to encourage you to act on your own behalf as much as you can.

Unlike an ordinary power of attorney, an enduring power of attorney does not cease to have effect once the ‘donor’ suffers from mental incapacity.

While a property power of attorney can be activated while you still hold mental capacity, a personal care and welfare power of attorney cannot be activated until you have lost mental capacity, and there is a higher threshold for incapacity.

 

So why have Enduring Powers of Attorney?

 

It is a good idea to have Enduring Powers of Attorney because you never know what life is to going to throw your way. A time may come where you can no longer speak for yourself or make crucial decisions on your own behalf, and having Enduring Powers of Attorney is a way of protecting yourself and your affairs.

It grants powers to a person you trust to ensure that your personal care or property affairs are properly looked after. It is really important that the attorney to whom you grant powers is trustworthy and someone who you are confident will manage your affairs in your best interest.

When you appoint an attorney for property or personal care, you can choose how specific their powers are, and you can also choose to have successor (ie back-up) attorneys or you can specify the names of people who you want either or both your attorney and successor attorney to consult when making any decisions. You can also even specify who you want to assess your mental capacity, as long as their scope of practice includes assessing mental capacity.

Everyone, regardless of age, should make an Enduring Power of Attorney while they still hold the capacity to do so.

 

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation.  Please contact Pat Rotherhampatrotherham@parryfield.com or Ken Lordkenlord@parryfield.com at Parry Field Lawyers (348-8480).

New 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 1 of 101 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 member or participating countries, as are Americans under FATCA.

All entities (family trusts, companies and partnerships, but not individuals) have to comply with this legislation. Al professionals, such as ourselves, accountants, investment fund managers/advisors etc. needs 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 when the IRD site is up and running next year, your entity will have to disclose to IRD all financial information and personal details for those trustees and beneficiaries who are residing overseas in one of the 100 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 urgently.

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:

(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 proceeding 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, but may have reporting obligations to other FFI’s/FI’s such as a bank with which your entity has funds or an investment house/advisor with whom your entity has a share portfolio. Such institutions are in the process of sending, and will continue to send, to their customers/clients Self-Certification forms similar to those we are sending to our client trusts. 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 etc., which report to IRD. If however, less than 50% of your entity’s gross income for the past 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 query regarding these matters and how they may affect your trust, company or partnership, then please consult with us because to ignore this legislation is clearly, 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 Pat Rotherham at Parry Field Lawyers (348-8480) patrotherham@parryfield.com

Why do people form Family Trusts?

 

People form family trusts for a wide variety of reasons – most commonly these tend to be for the purposes of:

  • protecting personal assets against business risk;
  • maintaining control over the distribution of assets within a family after death; or
  • safeguarding against relationship property claims.

We also receive enquiries from clients from time to time asking whether a family trust can assist in preserving their eligibility for rest home subsidies should they need care in the future.  We have always stressed that this has never been a particularly good “primary” reason for forming a family trust – though trusts have on occasion proved useful for this purpose.

However, the policy approach to trusts taken more recently by the Ministry of Social Development (MSD) – backed by a decision of the New Zealand Court of Appeal – means that trusts are becoming less and less effective when it comes to rest home subsidies.

Background

Before gift duty was abolished in 2011, it was common for people to sell their home to a family trust in exchange for a “debt” back to them for its market value.  While the debt remained a personal asset, this was then forgiven (or “gifted”) in annual increments of $27,000 per person (or $54,000 per couple), being the maximum amount a couple could gift without incurring gift duty.

This proved a reasonably effective method of transferring assets from personal ownership to trust ownership.   Once a debt was forgiven in full, the home could be excluded as a personal asset when an application for a rest home subsidy was made – with the effect that some people then met the asset thresholds for obtaining a rest home subsidy (currently $224,654).

The annual “cap” on gifting meant that it still took considerable time for the trust to obtain outright ownership of the assets – for example if, including property and business interests, a couple owned $1 million of assets, it would take nearly 20 years to forgive this debt in full.

Once gift duty was abolished, while larger gifts were now permitted, the $27,000 per annum gifting restriction remained in force under the Social Security Act 1964.  Hence for those couples wishing to preserve their future eligibility for a subsidy, it was business as usual.  Or so many thought…

Bridgford v MSD

In 2013, the Court of Appeal in the case of Bridgford v MSD* determined that the maximum amount a couple could gift in any year was in fact $27,000 per couple, and not $54,000.  This has effectively doubled the length of time it would take a couple to transfer their personal assets to a trust.

For those who had up until Bridgford been gifting an annual amount of $54,000, the “excess gifting” over and above $27,000 would be considered a “deprivation” of the couple’s assets at the time an application for a rest home subsidy was submitted – these amounts would then be added back to the couple’s personal assets, and if the asset threshold was now breached, they would be denied a subsidy.

On top of this, allowable gifting carried out within the five-year period prior to a person or their spouse going into rest home care is capped at $6,000 per annum.  So if you happened to still be gifting $27,000 per year at any time within those five years (and bearing in mind that calculating when you might require care is not something you can generally predict in advance!), $48,000 in each of those 5 years (so $105,000 in total) would be added back to your personal assets.

Effect of the Bridgford decision and MSD policy

The Bridgford decision issued around the same time as MSD were increasing the rigour applied to applicants who had transferred assets to a family trust.  It would be fair to say that vigilance has continued unabated since Bridgford, the effects of which now include:

  • Even where clients’ assets are largely comprised of their family home, the length of time now required to effectively divest themselves of assets has in many cases proved a disincentive for clients forming a family trust for this purpose.
  • Established trusts with a long history of gifting at $54,000 per annum (pre-Bridgford) may discover the process has been ineffective for the purposes of qualifying for a rest home subsidy, such that it may even be advisable to wind up the trust.
  • Where clients own few assets over and above the trust property, having a trust can even put you in a worse position than if you did not. This is most commonly seen where one client goes into rest home care and their spouse is still living in the trust property.  In these circumstances, one of the asset threshold options – which allows the “family home” to be disregarded in assessing the couple’s assets – is not available, because the home is owned by a trust, and is no longer their “home”.  We have seen this cause major distress to clients, particularly where they have few other savings to fund their rest home care.
  • There are other “tools” open to MSD in denying clients who have a family trust a rest home subsidy. So in addition to asset-testing, MSD may also determine whether the applicants have, by placing assets into a trust, denied themselves of any “income” they could have derived from those assets.  This again has implications as to the extent to which clients are required to pay for their own rest home care.

MSD have a clear policy directive to ensure that where people have recourse to assets or income (whatever the source), they use those assets to pay for their own rest home care.  In light of this policy – now backed by the New Zealand Courts – MSD’s approach to trusts is likely to become increasingly “combative” – and those relying on family trusts to obtain a subsidy could well end up disappointed.

Family trusts may of course still prove useful for purposes unrelated to rest home subsidies.  Indeed, the abolition of gift duty has in many circumstances allowed much larger gifts to be made to family trusts than had previously been the case.  In addition, depending on the level of gifting/potential deprivation, in some circumstances trusts may still prove effective in preserving a person’s eligibility to a subsidy.

The application of the Social Security Act and its Regulations is a complex matter.  If you have a family member who has transferred assets to a family trust and that family member might shortly require rest home care, or are considering forming a family trust because of concerns over your future eligibility to a rest home subsidy, we would encourage you to contact our office to discuss.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. Please contact Tim Rankin timrankin@parryfield.com or Kris Morrison krismorrison@parryfield.com at Parry Field Lawyers (03 348 8480)

 

*Bridgford vs Chief Executive of the Ministry of Social Development [2013] NZCA 410.