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.

Do you have a current Will? Do you need one?

 

In this past year you may have bought a house, established a business, moved in with your partner, welcomed a baby, booked your big OE or perhaps there are wedding bells on your horizon. Whatever this year has brought you, now is an opportune time to ensure that your Will reflects your current situation. If you don’t have a Will, now is the time to get one.

Death isn’t a pleasant topic, yet it’s an important one that’s often avoided by New Zealanders, particularly those in their 20s, 30s and 40s.

When a young New Zealander passes away they often do so without a Will. Although discussing one’s mortality can feel uncomfortable, knowing that you have a valid Will can provide you and your family with the peace of mind that your final wishes are known and will be adhered to.

When thinking about a Will there are some important questions you need to ask yourself.

Who should be the executor and trustee?

All Will-makers must appoint an executor and a trustee. An executor obtains probate for your Will from the High Court and your trustee carries out your wishes. Although the executor and trustee are separate roles you may appoint the same person to fulfil both.

Quite commonly a Will-maker will appoint a family member to these positions. However, it’s important that you think about whether a person is suitable for such a role in regard to the dynamics of your family.

Keep in mind that in times of grief many people will operate on the periphery of their personalities. Ask yourself whether appointing certain people could cause strain on your family’s relationships. For example, if your parents are separated, will choosing one over the other cause unnecessary friction?

If you choose not to have a family member or if the distribution of your estate is likely to be complicated, you may prefer to appoint your lawyer or a trustee company.

What are my final wishes?

In your Will you instruct your trustee to distribute your estate to whomever you wish, for example you may like to:

  • Leave your property to your partner, children, grandchildren, other family members or friends you    wish to provide for
  • Leave some of your property, money or other assets to a family trust
  • Specifically leave items such as cash, jewellery, artwork or furniture to particular friends or family  members
  • Leave money to a specific charity or organisation
  • Give instructions to your executors if you own a business, and
  • Instruct your executor as to how you would like your body to be handled, whether you’d like to be cremated or buried (and if so, where?) and how you would like your funeral to be conducted.

If you are a young person and have assets, which could include insurance policies, but do not have a Will then on your death your parents would need to apply to the court to administer your estate. This is very difficult for a grieving parent as generally under the law they are the ones to inherit. They are left feeling that they are trying to benefit from your death. If, however, you have left a Will under which your parents benefit then they know that was your wish and are left feeling more comfortable.

When drafting a Will keep in mind that you may be obligated to provide for particular people (such as your spouse or partner, children and so on) under the Family Protection Act 1955, the Property (Relationships) Act 1976 and the Testamentary Promises Act 1949.

How will I pay for a funeral?

Money is the last thing people want to think about when grieving. Therefore it’s practical to give this question some serious thought. Many young New Zealanders are only beginning to build their capital and many have substantial debt. Accordingly you may want to contact your insurance provider about both life and funeral coverage insurance.

Funerals can cost thousands of dollars. If it’s unlikely that your estate could cover your funeral costs, preparing for the future will save your loved ones unnecessary financial strain.

The same can be said if you are servicing a mortgage. You may want to ensure that you have insurance cover for your mortgage and also have income protection insurance for your partner and/ or children.

Who can draft a Will?

In order for your Will to be legally valid:

  • You must be 18 years old or over,
  • It must be in writing,
  • It must be signed by you, and
  • It must be witnessed and signed by two people who are not benefiting under the Will.

It’s very important that anyone who has assets also has a current Will. Make yourself a time in the next few weeks to think about the questions we’ve posed above. If your Will needs updating or you need to make your first-ever Will, do get in touch with us as soon as possible to discuss your wishes. It will give you and your family great peace of mind to have this End of Year Resolution ticked off.

Used by permission, Copyright of NZ Law Limited, 2017

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

The Education (Update) Amendment Act 2017 came into effect on 19 May 2017, introducing significant changes to the Education Act 1989. Some commentators have described the changes as the most significant changes to New Zealand’s education system since the introduction of Tomorrows Schools.

 

Key changes that came into force on 19 May 2017 include:

Introduction of National Education and Learning Priorities

The Minister of Education now has authority to issue  a statement of National Education and Learning Priorities (NELP) for the early childhood and compulsory education sectors. School Boards of Trustees must have particular regard to the NELP in their strategic planning.

The announced intention is for the first NELP to be issued in 2018. It will be interesting to see what range of priorities are included in the NELP.

Clarification of Role of Board of Trustees

The role and responsibilities of the Board of Trustees are now set out in detail in Schedule 6 of the Education Act 1989.

Previously, the objectives of the Board of Trustees were summarised in section 75. Prior to 2013, section 75 stated that, subject to the general law of New Zealand, a school’s board had ‘complete discretion to control the management of the school as it thinks fit’. In 2013, this section was amended to state that a school’s board ‘must perform its functions and exercise its powers in such a way as to ensure that every student at the school is able to attain his or her highest possible standard in educational achievement’.

Section 75 has now been completely replaced. The new section 75 does not relate to Boards of Trustees at all. It is now in a part of the Education Act that relates to communities of learning.

The key objectives of the Board of Trustees are now described in clause 5 of Schedule 6. The primary objective is still stated to be ‘to ensure that every student at the school is able to attain his or her highest possible standard in educational achievement’. The statement that the Board of Trustees ‘has complete discretion to control the management of the school as it thinks fit‘ has been removed.

Clause 5 of schedule 6 also sets out a list of things that the Board of Trustees must do to meet its primary objective. These are:

  1. ensure that the school—
    1. is a physically and emotionally safe place for all students and staff; and
    2. is inclusive of and caters for students with differing needs; and
  2. have particular regard to any statement of National Education and Learning Priorities issued under section 1A; and
  3. comply with its obligations under sections 60A (in relation to curriculum statements and national performance measures), 61 (in relation to teaching and learning programmes), and 62 (in relation to monitoring of student performance); and
  4. if the school is a member of a community of learning that has a community of learning agreement under section 72, comply with its obligations under that agreement as a member of that community; and
  5. comply with all of its other obligations under this or any other Act.

Increased Range of intervention options

The Minister and Secretary of Education now have an increased range of options for intervening in schools. New intervention options include case conferences, specialist audits, performance notices and statutory appointees (to Board of Trustees).

Clearer Framework for Communities of Learning (COLs)

The Act clarifies the process for approval of a Community of Learning and for entry into an agreement on the activities the COL will undertaking.

The Community of Learning concept was already in place prior to the passing of these amendments, but it is probably an improvement to have the COL framework clearly set out in the legislation.

Management of Enrolment Schemes

The Secretary of Education can now implement an enrolment scheme for a school if the school fails to put one in place within a reasonable time after being asked to do so.

Previously, the Ministry of Education could ask a school to implement an enrolment scheme, but did not have the authority to implement one itself for a school that was slow in responding.

New Purpose Provision for closure and merger of schools

Closure and merger of schools is nearly always a controversial issue, and is an area where the government is frequently criticised for failing to properly consult with the school community and take its concerns into account.

A new section 145AAA introduces objectives to guide decision making on establishment, closure and merger of schools. The objectives are to:

  • enable the provision of a schooling network that assists parents to meet their obligations to enrol their children at school;
  • assist the efficient and effective use of the Government’s investment in schooling; and
  • recognise the role of diversity in the provision of schooling, including the provision of Māori-medium education.​

Enabling the Minister to combine school boards of trustees in certain circumstances

Before these amendments were made, the Education Act already permitted multiple schools to have combined BoTs and one principal for multiple schools – section 110.

The Minister can now initiate the process to combine BoTs if the Minister has reasonable cause to believe that there are serious problems with the governance of 1 or more of the schools or institutions concerned; and those problems could be addressed by the combined board.

The Minister must first consult the Board of Trustees and Proprietor of the affected schools.

Updating the legislative framework for state integrated schools

One of the biggest changes in the Amendment Act relates to Integrated Schools.

The Private Schools Conditional Integration Act 1975 has been repealed, with all relevant provisions being incorporated directly into the Education Act 1989 in a new part 33.

The Ministry of Education has said that the intention was not to change the substance of the Private Schools Conditional Integration Act. The language has been modernised in places, but in substance the PSCI provisions are unchanged except that new provisions have been added:

  • requiring proprietors to provide financial and other information to the Crown to improve decision-making when issues arise.
  • introducing new criteria to guide decision-making by proprietors.
  • creating a bespoke merger process for state-integrated schools.

Establishing a Competence Authority for teachers

The competence authority was initially created under the Education Council’s rules in 2016, but without specific recognition and powers under the Education Act. The role of the competence authority is now specifically recognised in the Act.

 

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source. Contact Kris Morrison at krismorrison@parryfield.com to request this or for any other questions. Copyright © Parry Field Lawyers 2017.

As from 16 March 2017, certain changes are being made to the Protection of Person Property Rights Act 1988 (‘the PPPR Act’), as well as the accompanying Regulations, which will affect Enduring Powers of Attorney (‘EPOA’).

Some of these changes affect the making of an EPOA, while others affect how existing and new EPOA’s will operate.

This article provides a brief overview of the upcoming changes.

 

Different forms

As from the “go-live” date, all new EPOAs will need to be made via new, plain language on-line forms.  Previous standard forms will not be able to be used.  Existing EPOA’s are not however affected by this change.

The forms are designed to be easier to understand and will:

  • Be in PDF style;
  • Have tick box options;
  • Be in an on-line format;
  • Include a notes section and glossary;
  • Have info sections alongside the left hand side; and
  • Include option sections.

Mutual EPOAs

Previous changes to Enduring Powers of Attorney brought confusion as to when one solicitor/legal executive/trustee corporation could witness the signature of two people making mutual EPOAs (i.e. a husband and wife appointing each other as their attorney).

A witness was required to be independent of each attorney so, where they had previously acted for both a husband and a wife, this could prevent them witnessing both signatures.  This often necessitated the involvement of another law firm resulting in additional time and cost or, in smaller centers, difficulty in getting an EPOA completed.

While some further changes were subsequently made to try and address these issues, there was still uncertainty about what the witnessing requirements meant and how they should be carried out in practice.  They were also applied differently across law firms/trustee corporations.

The new changes now mean that one solicitor/legal executive/trustee corporation can witness the signature of both donors (the person making the EPOA) in the case of mutual appointments so long as the witness is satisfied that doing so does not constitute “more than a negligible risk of a conflict of interest”.  In other words, so long as the interests of the parties making the EPOA (or the witness and the parties) do not conflict or there is only an insignificant risk of any conflict, one witness may act for both.

Consultation requirements

Currently an attorney (the person who has the right to make decisions in respect to someone’s property or care and welfare) must consult, if practicable, the donor and any other person specified in the EPOA.

Likewise, if different attorneys are appointed for property and care and welfare, each must consult the other regularly.

Now any Attorney must also consult any other attorney under the EPOA, as well as any other attorney appointed under another EPOA.

This does not include any “successor attorney” which is an attorney who steps in if an earlier attorney can no longer act (i.e. they die, step down).

This change applies to new and existing EPOAs.  If you are currently acting under an EPOA therefore, you will need to ensure that you consult, if practicable, the person who made the EPOA, any person specified by the donor in the EPOA, and all other attorneys, whether they act in respect to the donor’s care and welfare or their property or both.

Medical certificate

An attorney cannot act under an EPOA which only takes effect when a person loses mental capacity until either a relevant health practitioner has certified, or the Court has determined, that the donor is mentally incapable.

Likewise, an Attorney under a Care and Welfare EPOA, cannot act in respect to a “significant matter” until the same has happened.

Currently a certificate as to mental capacity must be in the prescribed form.  As from March 2017, this is changing to a requirement that it must simply contain the prescribed information.  This means a particular form does not have to be used so long as it contains certain required information.

Cancelling the appointment of one attorney where there are attorneys with “several” authority

A person may make an EPOA which appoints more than one attorney with what is known as “several” or “joint and several” authority.  This means that the attorney can, in theory, act independently of the other attorney(s).

The changes now make it clear that, if the donor cancels the appointment of one of the attorneys while mentally capable of doing so, the EPOA remains in effect  so long as there is at least 1 remaining attorney.

Cancelling an EPOA

To cancel an EPOA it is not enough to simply write or state that an EPOA is cancelled (revoked).

The new changes provide that, if a new EPOA states that it revokes an earlier EPOA and both are “of the same kind”, they both have effect until the earlier is revoked by notice (or cancelled under certain conditions specified in the PPPR Act).

Notice means giving a copy of the later EPOA to the earlier Attorney(s).  That notice however can be given by someone other than the donor, such as a solicitor or a friend, including down the track in the event that the donor becomes mentally incapable.

This section also applies to EPOAs made before March 2017.  If you want to cancel an existing EPOA therefore, you will need to ensure that the new EPOA is given to your previous Attorneys.

“Same kind” means:

  • both EPOAs relate to the donor’s property or donor’s care and welfare; or
  • if the earlier EPA relates to the donor’s property or the donor’s care and welfare or both, the later relates to both.

If you have previously been hesitant to make an EPOA due to time and cost  or you simply haven’t yet got around to it, it is good time to reconsider. The changes we have outlined are aimed at making it easier to make an EPOA.

If you don’t have an EPOA, managing your affairs can be extremely difficult.  Family and friends don’t have an automatic right to make decisions on your behalf.  In most cases, if you want someone else to have authority to handle your affairs you need to arrange that ahead of time. If you become incapacitated without an EPOA in place, your family and/or friends must apply to the Family Court before they can do anything to help with your affairs. This takes time and is considerably more expensive than making an EPOA.  It may also provoke family tensions as family members may not always agree on who should be appointed.  The Court may also appoint someone who you don’t wish to make decisions on your behalf.

If you already have EPOAs, now is also a good time to review them to make sure that they still reflect your wishes.  Likewise, if you have been appointed an attorney and there have been changes in your donor’s capacity, it may be a timely opportunity to consider seeking a medical certificate.

 

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

 

 

What is a Family Trust?

A Trust is a structure through which assets are transferred from one person as owner (“the Settlor”) to others (“the Trustees”) for the benefit of third parties (“the Beneficiaries”). The Trustees legally own the assets (“Trust Fund”) and the Trust Deed tells the Trustees how the Trust Fund is to be dealt with.

What is the best structure?

The Courts have said that although a sole Settlor can also be the sole Trustee, he/she cannot be the sole Beneficiary (see our article on the Clayton case here). This is because there is then no legal split of asset ownership between Trustees as legal owners and Beneficiaries as equitable owners. A Settlor may also be a Trustee and a Beneficiary, but it is best practice he/she is joined by an independent Trustee (ie: non-family).

What are the benefits of using your Lawyer’s Company as an Independent Trustee?

It is harder for others to claim that the Trust is a sham (not a real Trust) from the outset, because all Trustees (including the independent Trustee) must agree on actions taken.

There is a more professional and objective approach to the Trust’s Administration. This reduces bad decisions and risk by ensuring the following issues are addressed at regular Trustee meetings:

  • Whether the investment strategy is being followed
  • The needs and wishes of all Beneficiaries
  • Beneficiaries changing expectations. (This could result in a claim by a beneficiary who has been permitted to increase the value of a property owned by the Trust)
  • If there’s a tax liability that it is satisfied before any assets are distributed to Beneficiaries
  • That the correct powers under the Trust deed are used by Trustees to pass certain       resolutions at their meetings.

What are a Trust’s possible benefits?

From an asset protection perspective it may offer protection from:

  • Estate or death duties if ever reintroduced by the Government or from a future “wealth” tax such as capital gains.
  • Family claims against your personal estate after death, because Trust assets are owned by the Trustees and not by you personally.
  • Claims by creditors upon a business failure.
  • Relationship (formerly “matrimonial”) property claims by a spouse or partner. However, a Section 21 Contracting Out Agreement (“pre-nuptial Agreement”) under the Property Relationships Act with your spouse or partner should usually precede any asset transfer to a new Trust.

From a succession planning perspective:

  • Different Beneficiaries may receive tax paid income.
  • Tax-free distributions may be made to different Beneficiaries following asset sales.
  • Which Beneficiaries receive what, and when, is decided solely by the Trustees.
  • Your Trust could own shares in a Company, which owns a Business, and so limit the Trust’s risk and liability to the Company’s creditors.
  • Your Trust could provide for the special needs of a disabled family member both before and after your death.
  • Your Trust is the best device to facilitate the growth, protection and transfer of assets (wealth) for the benefit of your family and of future generations. (Wills are currently more open to challenge under present laws.)

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

Pat Rotherhampatrotherham@parryfield.com

Is your Trust at risk?

 Do you have a trust that was set up years ago and think it is still protecting your assets?  In the recent case of Clayton v Clayton the traditional view of trusts and their ability to be challenged was turned on its head.  It may pay to check the wording used that grants powers in your own trust because if it is too wide then that could result in the ownership of the trust property itself being called into question.  Recent estimates have suggested up to 100,000 trusts could be at risk of challenge in New Zealand. 

 The key issue which was the subject of the case was the power that Mr Clayton had over the future of the trust.  Effectively he could control who received the trust’s assets because he was the only trustee and held all the significant powers.  After 17 years of marriage Mr Clayton and Mrs Clayton separated and she effectively argued that the powers Mr Clayton had in the Trust meant that the Trust assets were “property” for the purpose of the Property Relationships Act.  This meant that those assets would be split 50/50.  This was very important because the business Mr Clayton ran had grown significantly during their 17 years of marriage and the Trust property was significant.

 That situation may seem extreme – most trusts will have more than one trustee or at least a sharing or separation of powers – but it does highlight the ability of the court to call into question how trust property will be treated.  Would the situation be so different if the original Settlor of the Trust retains the power to appoint and remove trustees whenever they want and thereby exercises control over who the trustees decide should benefit from the Trust assets?  We don’t yet know but it seems likely that this point will be tested soon enough in the courts. 

 The implication for those who have a trust is clear.  Pull out that old trust document and have a look at the powers.  If one person has a great deal of control then it might be worth discussing with your lawyer to see if the wording should be tightened up to make it less likely for the courts to call it into question.  At the same time it is also worth considering if the Trust needs other changes or confirm that it is still as you originally intended.  Also, have you prepared a Memorandum of Wishes for your Trust which will provide guidance about how its assets are to be distributed?  Finally, this may also be a timely reminder to check other documents that are kept somewhere in a cupboard or drawer, like your will. 

 The old saying goes, “you cannot have your cake and eat it too” and this, surprisingly, might now be a point that is relevant to Trust law.  Perhaps the case of Clayton will result in a much needed dusting off of Trust and other documents and a refreshing of them to reflect current situations.  We are already seeing many of our clients express a desire to know more about what the implications of Clayton will be and we are happy to discuss your specific situation in detail. 

Many people do not realise that a Will, even if signed correctly, can still be challenged after a person dies.

It is important, therefore, to give careful consideration as to how to distribute your property on death, to limit the risk of a bitter (and potentially expensive) dispute between family members or loved ones after you die.

Who do I need to provide for in my Will?

Under the Family Protection Act you owe a duty to provide “adequate provision” for the proper maintenance and support of your:

  • Spouse, civil union partner or de facto partner (this duty is paramount).
  • Your children;

In some circumstances, you may also owe a duty to:

  • your grandchildren (especially if their parents are deceased or if their parent is unable to provide for them),
  • your stepchildren (if you were maintaining them or were eligible to maintain them immediately prior to your death) or
  • your parents (if you had been maintaining them immediately prior to your death or you have no surviving spouse/partner or children).

What is adequate provision?

Each case depends on its own facts. The Court looks at a range of factors including:

  • The size of your estate (the property you own/have an interest in);
  • The age of the person(s) claiming;
  • The financial need of the person(s) claiming;
  • The closeness of the relationship;
  • Whether the person(s) claiming has already been provided for during his/her lifetime;
  • Whether there are other competing claims;
  • Your reasons for why you have structured your Will as you have.

For example, the amount that you will need to provide for your young children differs to that of adult children. Your duty to provide for children who have regularly assisted you in your senior years may differ to a child who you have been estranged from for the last 30 years.

Where you have a duty to provide for more than 1 person, thought will need to be given as to how you can provide for them all.

 What can the Court do if I have not made adequate provision?

The Court can adjust what provision is made for the person claiming under your Will. If the Court does this, this will mean that the share of others under your Will will be reduced.

Will the Court always make changes?

No, not necessarily. The Courts recognise a person’s right to distribute their assets as they see fit. They will only intervene to the extent necessary to provide the person claiming with adequate provision, taking into account the factors set out above.

What about my spouse or partner? Are there any other ways they can claim against my property?

On your death, your spouse/partner is entitled to choose to either:

  • Take what is provided for them in your Will (if anything); or
  • Choose to make an application under the Property (Relationships) Act for division. If this is done, it is presumed that all “relationship property”, which includes items such as the family home, family chattels and all property acquired by either spouse/partner after the commencement of your relationship, will be shared equally.

If, in your Will, you give your spouse/partner less than half of what they would be entitled to under the Property (Relationships) Act, there is a significant risk that they will choose to make a claim under that Act, rather than elect to take under your Will.

To limit the risk, you and your partner/spouse would need to enter into a Contracting Out Agreement limiting your partner/spouse’s right to claim half your relationship property on death.

Are there any other ways my will can be attacked?

Your Will could also be attacked if you made a promise during your lifetime to provide for someone in your Will who carried out services or work for you. The Court could declare that that person has a right to be provided for from your estate.

Services can include not only things done for you during your lifetime, but also companionship, affection and emotional support (if it exceeds what would be normally expected of that person).

The amount of payment will not necessarily be what you promised them. The Court will consider:

  • The circumstances in which the promise was made, the services were provided or the work was performed;
  • The value of the services or work;
  • The value of the promise;
  • The size of your property; and
  • The nature and amounts of other competing claims.

What can I do to prevent claims against my estate?

The most important thing you can do is to discuss your wishes, your personal circumstances and your property with your lawyer at the time you are making your Will. This is especially important if you have children from a previous relationship to your current one or if you do not want to equally provide for your children.

Other things you can do include:

  • Keeping written notes of why you have made your Will as you have (especially if you suspect that there may be future issues). These notes often sit alongside the original of your Will and will assist the Court if a claim is ever made.
  • If your personal circumstances change, then consider reviewing your Will (e.g. if you have children, or if you marry/enter a de facto relationship, separation or divorce). Marriage automatically ends a Will, unless the Will was made in contemplation of your marriage. Divorce automatically ends any provision for your spouse/partner under the Will unless the Will states that the provision will continue on divorce.
  • Talk to your solicitor about protecting separate assets of yours which you do not want your spouse/partner to share in. A contracting out agreement (also known as a prenuptial agreement) might be appropriate as noted above.
  • Be careful about making promises to people to provide for them in your will.

Should you need any assistance with this, or with any other matter, please contact Paul Cowey at Parry Field Lawyers (348-8480).

You may have heard that trusts are a good protector of homes against relationship property claims. Indeed they may be – but they are not watertight protection. There are various ways that a trust can be attacked. It is therefore important to be aware of these situations so that you are less likely to fall victim to one of them.

Transfers of relationship property to a trust

If you have:

  1. Transferred “relationship property” to a trust since the beginning of your marriage or de facto relationship; and
  2. That transfer has defeated the claim of your partner i.e. they cannot claim an interest in it because it is now owned by a trust rather than their partner

then the Court can require you to compensate your partner or order the trust to pay income to him/her.

One of the key pitfalls to be aware of is that a family home is always classified as relationship property. So, if you decide to protect your home and transfer it to a trust after you are already living together with your partner in the property, this may be too late. The home has already become the family home and your partner may have an entitlement under this scenario.

Transferring property in order to defeat your partner’s claim

This is a broader test than the previous one. If there has been a transfer of property made (it is not restricted to trusts) in order to defeat any person’s relationship property claim, then the Court can overturn this transfer.

The property need not be relationship property at the time it is transferred to the trust. What is needed is:

  • That the home would have been relationship property on separation if it had not been transferred into a trust. Therefore, a transfer shortly prior to the beginning of a de facto relationship or marriage may even satisfy the test, as long as the intention requirement (below) is met; and
  • When you transferred your home to a trust, you must have had knowledge of the consequences of that transfer i.e. that you might be depriving your partner (or soon to be partner) of a share of an asset which they may have an entitlement to. You do not need to have a conscious desire to remove that asset from the Court or your partner.

Your trust is declared a “sham”

The Court can declare a trust to be a sham if there is evidence that the settlor (the person who effectively set up the trust) never really intended the trust to take effect.

This is a hard test to prove as most people do not set out with this intention. However, the following factors could assist with a sham trust argument:

  • The home has been transferred to the trust at less than full market value;
  • The settlor continues to treat the trust property as his own;
  • There are no trustee meetings;
  • The other trustees are rarely consulted;
  • No occupational rent is paid to the trust if the home is used by the settlor (though the trust might receive occupational rent by way of the settlor meeting trust debts, such as a mortgage);
  • The trust bank account is rarely used; or
  • The settlor does not ever turn his/her mind to the interests of other beneficiaries.

If the Court declares the trust to be a sham, it does not exist. The property in the trust will be treated as the settlor’s own property, which in turn can potentially be categorised as relationship property.

Illusory trust

An illusory trust is when a trust is declared to not exist because the settlor is able to control the trust entirely for his/her benefit. In particular, there is no way for the beneficiaries to hold the trustees accountable. Under the trust deed, the trustee (who in this case will also be a settlor and beneficiary) may have unrestricted powers, even though this may be contrary to the interests of other beneficiaries.

If the Court declares that the trust is illusory, it will have the same effect as a sham trust. The property will return to the ownership of the person who settled the trust.
The way to ensure that this argument is never raised is to consult with your lawyer about trustee powers at the time when the trust is being formed to ensure that they are balanced and reasonable.

Constructive trust

Finally, a Court can declare a “constructive trust” over a trust asset if:

  1. Your partner has made a contribution (in more than a minor way) to maintaining and enhancing the property;
  2.  At the time, you both expected that your partner would share in the property and this expectation is reasonable; and
  3. The contribution must greatly outweigh the benefits received. i.e. the contributions your partner made (money, time, labour etc) need to exceed the benefit of occupying the property.

This argument is more likely to be raised where the parties have lived in the trust property on a long term basis and the partner has made significant contributions during this period.
If a constructive trust is declared, the Court may grant the applicant an ownership interest by declaring that the trust holds the property on trust for the applicant in such shares as it determines. When assessing what share of the property your partner may be entitled to, the nature and value of the contributions will need to be considered.

What can you do to prevent the likelihood of any of these grounds of attack being successful?

The best protection that you can have against attack is to enter into a property agreement within the first 3 years of your relationship, declaring that your interest in the trust and its assets are your separate property.

Other measures include:

  • Consulting with your lawyer about the desired purposes of the trust, trustees, beneficiaries and terms of the trust prior to formation;
  • Ensuring that your home is transferred to a trust prior to commencing a relationship (if at all possible);
  • Understanding and carrying out your trustee duties with diligence – e.g. ensure that meetings are had and minutes taken, use the trust bank account for the payment of outgoings, have financial accounts prepared;
  • Consider whether you and your partner should be paying occupational rent to the trust when occupying trust property;
  • Do not allow your partner to make any major contributions to the property e.g. provide finance or labour for extensive renovations, unless there is legal documentation in place to record the arrangement;
  • Consider renting out the property to someone else rather than living in it together.

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

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