By Penny Pryor

The way many New Zealanders manage their assets is set to change dramatically. Reforms to the laws governing trusts in New Zealand, due to come into force on 30 January 2021, are expected to trigger a massive reduction in the number of trusts.

The Ministry of Justice estimates there are currently between 300,000 and 500,000 trusts, also known as express trusts, in New Zealand. That’s the equivalent of one trust for every 6% to 10% of New Zealanders. A lack of transparency around exactly how many Kiwis are currently named as beneficiaries of trusts is part of the reason for the reforms.

New Zealand’s Trusts Act 2019 aims to make trust law easier to understand and replaces the Trustee Act 1956 with “a clear, modern statement of the law relating to trusts”, says New Zealand Justice Minister Andrew Little.

The Act received Royal Assent on 30 July 2018 and will take effect on 30 January 2021.

The new Act’s most important change is it closes a loophole that previously allowed trustees to name someone as a beneficiary of a trust without notifying them – meaning many New Zealanders may be unaware they are not receiving the trust distributions they are entitled to.

The new Act has clearer definitions of trustee roles and responsibilities. It defines an express trust as a fiduciary relationship in which a trustee holds or deals with trust property for the benefit of the beneficiaries or for a permitted purpose. The trustee is accountable for the way the trustee carries out the duties imposed on the trustee by law.

Other changes will increase the amount of documentation trustees are required to distribute and hold.

As trustees assess whether maintaining trusts is worth their time and effort under the new rules, accountants will need to review the services they provide to trustee clients, and their cost schedules for such services. They will also need to prepare to advise and assist those trustees exiting the vehicles.

A new level of disclosure for trustees in NZ

Picture: Vicki Ammundsen.

The new Act brings with it a new level of disclosure. “Up until now, trustees have generally enjoyed a high level of privacy, which will be challenged for many through the enactment of the Trusts Act,” says Vicki Ammundsen, a trust law specialist and director of Vicki Ammundsen Trust Law Limited.

“We are in a different world now, due to greatly increased regulatory requirements, leading to changed attitudes towards trusts in New Zealand, and also internationally.”

The Act states that:

There is a presumption that a trustee must make available to every beneficiary or representative of a beneficiary the basic trust information set out in subsection (3).

That ‘basic trust information’ includes: the fact that a person is a beneficiary; the name and contact details of the trustee; the details of each appointment, removal, and retirement of a trustee as it occurs; and each beneficiary’s right to request a copy of the terms of the trust or trust information.

However, there are also certain factors that a trustee needs to consider before deciding whether that ‘presumption’ to disclose applies.

“From an accountant’s perspective, if you’re a trustee you’re going to be thinking ‘that’s an awful lot more work’,” says Ammundsen. “Financial statements, as well as other information, can be expected to end up in the hand sofa lot more beneficiaries.”

“From an accountant’s perspective, if you’re a trustee you’re going to be thinking ‘that’s an awful lot more work’.”

Trust disputes may rise

In addition, trustees may become much more circumspect about how and why they make income distribution and tax decisions, given that there will be a greater pool of beneficiaries who will be reviewing these decisions, she says.

Ammundsen adds that the rate of trust disputes ending up in court is already increasing.

Given that previously decisions about income distribution to beneficiaries were sometimes made for tax purposes and were not expected to ever be revealed to beneficiaries, there are likely to be a large number of beneficiaries who are presently unaware of the extent of their current account balances, she says.

These beneficiaries can be expected to make demands for the payment of these balances. For this reason, Ammundsen believes it is very likely the trend towards litigation will continue to increase further.

“This could mean that a lot more trustees will bail which, in turn, begs the question: who is going to be providing trustee services?”

Ammundsen – who is a member of the Chartered Accountants Australia New Zealand (CA ANZ) Trusts Special Interest Group – will deliver her “Trusts: What you need to know” presentation at the CA ANZ 2019 New Zealand Tax Conference in Auckland, 21-22 November 2019.

Chartered accountants will have new obligations

Many CAs don’t only advise their clients about trusts but also act as co-trustees – either personally or through a corporate trustee – so their obligations to get on top of the new requirements are twofold.

Bill Patterson, a partner and trust law specialist at Patterson Hopkins in Auckland, notes that trustees, and accountants advising them, will also have added obligations to keep track of documents. One trustee will be required to hold all the ‘core’ documents and records (as specified as ‘core’ under section 45 of the Act) and all trustees will have to hold at least the trust deeds and any variations to that deed.

Picture: Bill Patterson.

“One of the first things accountants are going to need to do is to make sure the trustees have actually got all the trust documents,” Patterson says.

“One of the first things accountants are going to need to do is to make sure the trustees have actually got all the trust documents.”

Even if accountants (or their trust companies) are not trustees, but hold the trust documents, they would be well advised to keep a complete set of documents to be able to provide to trustees, he suggests.

“It will need updating each year and a loose-leaf ‘bible’ for the trustee who has to hold records would be prudent.”

Patterson says past legal cases where trust documents have been difficult to locate, and the government’s desire that trustees know their responsibilities, are key reasons why these new requirements are being introduced.

Extra trust obligations will see fees increase

Given the extra work they will now be expected to perform, financial service professionals that advise trusts will need to review their cost schedules. As a result, fees for trust services are likely to increase.

The take-home message is to value the services you are providing as a CA,” Ammundsen says. “Accountants offering trustee services should charge reasonable fees that reflect both the time and the obligations that are associated with the office of trustee.

She points to an extension of the ‘general duty of care’ outlined in the Act that highlights the extra obligations on accountants and other professionals acting as trustees.

Under the new rules, accountants and advisers are obliged to alert initial settlors (the person or persons who create a trust) to key provisions of the terms of the trust, including any modification of their duties and the effect of any indemnity or limitation of liability clauses.

Ammundsen predicts the obvious response for many trustees will be to seek to retire or be removed as a trustee. This is not as straightforward as it first appears, although the new Act may provide more assistance than was previously the case.

Exiting clients from trusts to alternative

Bernard Mazur CA, the managing director of Auckland-based accounting and advisory firm Acudio, says he has been trying to exit clients from trusts for a long time as the usefulness of the structure has declined.

Picture: Bernard Mazur CA

Mazur, who is a current member and former chair of the CA ANZ Trust Special Interest Group, sees the new laws as an opportunity to restart the conversation with clients about the utility of their trusts.

We are at the coalface with smaller clients among whom these trusts are typically administered very poorly… but it has been possible to get away with it,” he says. “Now that the trust duties are set up [in the Act], it’s going to be easier for beneficiaries to start pointing the finger and pulling it apart.

“We are at the coalface with smaller clients among whom these trusts are typically administered very poorly… but [previously] it has been possible to get away with it.”

With the new requirements, Mazur anticipates fees for trusts services to increase significantly and for accountants to become increasingly reluctant to act as trustees for clients. The changes provide an opportunity to open up new discussions with clients about alternative estate planning solutions, he says.

Ammundsen agrees, noting that while trusts may still be suitable for purposes such as creditor protection or for long-term asset and estate planning, it’s important to know that well-drafted wills, relationship property agreements and appropriate insurance cover can also provide suitable estate planning solutions.

The next 16 months will provide an opportunity for CAs and other industry professionals to discuss the changes introduced by the new Act and how they will respond to them.

In addition to the expected winding up of many trusts, Ammundsen is quite sure that there will be a number of CAs exiting trusts and ceasing to advise on trusts.

Raising awareness and collaborative discussion across the industry during this time is key.

“It’s going to be a time of real industry introspection and it’s a whole new world. For a lot of professionals that’s a real challenge, but it’s important not to lose sight of the fact that there will still be a place for many well-structured and well-managed trusts for the types of appropriate purposes trusts have filled before,” she says.

Trusts may have been many New Zealanders’ favourite dinner table conversation starter for decades. Perhaps the new dinner party question will be not ‘How many trusts do you have?’ but ‘How many trusts are you shutting down?’

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What will change?

The New Zealand Trusts Act 2019 comes into force from 30 January 2021. These are the major changes.

Trustees must inform all beneficiaries of the trust that they are beneficiaries and that they can request information about the trust.

At least one trustee needs to hold all the core documents and records of a trust and keep them updated.

The maximum duration of a trust (the perpetuity period) has been extended from 80 years to 125 years.

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Trustee duties

MANDATORY DUTIES

Know the terms of the trust

Act in accordance with the terms of the trust

Act honestly and in good faith

Act for the benefit of beneficiaries or to further the permitted purpose of the trust

Exercise powers for proper purpose

 

DEFAULT DUTIES

General duty of care

Invest prudently

Not to exercise power for own benefit

Consider exercise of power

Not to bind or commit trustees to future exercise of discretion

Avoid conflict of interest

Duty to be impartial

Duty not to profit

Trustee must act for no reward

Trustee must act unanimously

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