- Changes to NZ trust legislation from 30 January 2021 mean trustees will need to actively disclose trust information to all beneficiaries.
- CAs may want to separate the roles of trustee and adviser.
- Trusts remain useful tools for estate planning but are not as useful as they once were for tax planning.
By Sam McKeith
Trusts in New Zealand – and self-managed superannuation funds (SMSFs) in Australia – have long been considered smart and effective ways to increase wealth. However, both appear to be losing some of their lustre.
One in five SMSF trustees is considering ditching their DIY super and moving to a superannuation fund instead, recent Australian research revealed. Reasons for the trend away from SMSFs, according to the 2019 Vanguard/Investment Trends SMSF Report, include high fees and trustee concerns about the level of service they get from SMSF professionals.
In New Zealand, where servicing trusts is a part of the business of many CAs, law reform is set to radically to change the way assets are managed from 30 January 2021.
While New Zealand’s Ministry of Justice puts the number of trusts at between 300,000 and 500,000, that’s expected to fall sharply once the reforms – partly aimed at making trusts more accessible to both lawyers and the public – kick in.
The biggest change in the new laws is that beneficiaries of a trust must now be notified. Before, you could be nominated without your knowledge.
Telling the truth about trusts
For trustees who may have been making decisions about trusts and income distributions for tax purposes, this means more people reviewing their actions and possibly disagreeing. In addition, it’s likely some beneficiaries may demand payment of their current account balance. The potential for those disagreements to end up in court is obvious.
Christopher Jardine CA, financial adviser at Openly Investing Limited in Auckland, says the new legislation has prompted many people to consider the purpose of a trust, particularly in light of trust structures prompted by externalities such as managing means testing or tax planning that are no longer applicable or increasingly untenable.
Instead, inheritance trusts for grandchildren or more remote family and trusts for charitable purposes are increasingly common, he says, adding that in many respects, the new Trust Act has raised the bar for those who have a professional involvement in trusts, either as trustees or a service provider to trusts. He says the new laws will mean changes for CAs.
“CAs have had to question their involvement in trusts as trustees, given the increased obligations the new act imposes on trustees,” says Jardine. “CAs are certainly needing to reassess issues such as indemnity insurance and coverage for trust matters, either for those continuing as professional trustees or advisers.”
“CAs are certainly needing to reassess issues such as indemnity insurance and coverage for trust matters.”
An accountant involved in charitable trusts both as trustee and professional adviser will need to assess the increased obligations and potential risks of their trusteeship in areas such as the mechanics of distribution policy, the management of the trust assets and the accountability to a potentially remote set of beneficiaries, Jardine adds.
“As advisers to trusts, CAs who have made themselves and their practice aware of the changes will need to have spent considerable time enhancing their abilities to provide information to beneficiaries, a significant change under the new legislation.”
Trusts are still a useful tool for estate planning
Justin Fox, general manager of private wealth at Trustees Executors Limited in Auckland, says that despite the new laws, fundamentally, the reasons people should set up a trust have not changed.
“Although trusts do not offer the same tax advantages as they may have done in previous years, they are and remain a useful tool for estate planning,” he says. “This is particularly true if an estate may be challenged; to provide for blended families; if a settlor wishes to provide for dependants with special needs; if there is a property or business that a settlor wishes to retain within the family; or to facilitate charitable endeavours,” he explains.
Fox hopes the legislation ultimately will clarify the duties imposed on trustees. “The emphasis on transparency is manifested in a number of ways,” he explains. “Firstly, trustees will also have a clear obligation to retain and store records. Secondly, trustees will need to actively disclose information to trust beneficiaries. With this greater transparency, beneficiaries will have access to sufficient information to ensure trusts are being run correctly and trustees are doing their jobs.”
Henry Stokes, general counsel at Perpetual Guardian, says the new legislation targets people that have established trusts “for reasons they shouldn’t have been set up for... The changes are clarifying and give certainty to having really good reasons for a trust.”
The problem is, with many accountants focused on helping clients navigate the economic fallout from COVID-19, it’s easy to overlook the looming changes. That could lead to potential problems down the track.
“Now is definitely the time for action. Even if you’re going to keep your trust, you still need to be reviewing it now. The moment 30 January kicks in, you need to have already complied with the new requirements,” says Waikato-based Stokes.
“The message that we and the trustee industry have been giving is that it’s prime time to have a look at your trust. Do you really need it? Do the reasons why you set it up still exist due to the changes in law?”
“Do you really need [your trust]? Do the reasons why you set it up still exist due to the changes in law?”
Jardine says the experience of COVID-19 has provoked some blunt thinking about mortality. “It has made many think about their wider family circumstances in relation to inheritance matters, providing for family members or the disposition of accumulated wealth.
“These thoughts bring trusts into the spotlight for anyone seeking professional advice,” he says.
Fox agrees: “I think the pandemic has highlighted the need to prepare for the unexpected. Not only the health aspect, but the volatility of the markets has also resulted in the consideration of financial planning and asset protection. The vulnerability of many businesses may have caused business owners to consider the structure of their affairs.”
The rise in risk for trustees
Fox says the revised trust legislation has added risk to trustees – leaving many wondering if they are able to perform the role. “That’s where a professional trustee company such as Trustees Executors can help,” he says.
He’s seen a rise in the set up of charitable trusts, particularly over the COVID-19 pandemic, he says.
“Many people are recognising that charities have been doing it tough and want to help provide long-term support though structured giving,” he says. “[However] professional trustees such as chartered accountants and lawyers are becoming increasingly reluctant to take on trusteeships due to the increased risks involved and the ongoing requirements, in light of the new Trust Act changes.”
Where CAs and lawyers do take on trusteeships, it’s now more common to see a separate company formed to be a trustee, according to Fox.
“There is an increasing desire to separate different roles, for example trustee, appointor, settlor, and professional adviser,” Fox says. “Overall we are having more and more conversations about how we can help chartered accountants and lawyers by taking on the role of a specialist trustee leaving them to focus on their core offering to clients.”
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. This ‘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.
- 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.
The great NZ trust crackdown
New trust legislation in New Zealand will affect accountants as well as trustee clients, so it’s time to weigh the options.Read more on trusts