Family Trusts - Changes Ahead

31 October 2018

We are often asked “should I set up a family trust?”. In New Zealand, the use of a trust is a popular way to protect assets and to plan for the future but the answer to the question depends on your specific circumstances and goals. 

 At the time of writing, a Bill is before Parliament that proposes to update the Trustee Act. Understanding these changes along with the obligations, benefits and disadvantages of using a trust will be key to ensuring that you are set up in a way that will benefit you and those that you care about – now and in the future.  

Should I Form a Family Trust?

Family trusts have a valuable role to play, but they’re not suitable for everyone. It is important that you understand what you are getting into, how a trust should be administered, and that you a clear on what you seek to achieve. As a starting point, here are some of the pros and cons: 

Benefits of setting up a trust

1. Asset Protection. A trust can help to protect your assets against claims and creditors in the event of business failure or a lawsuit. 
2. Asset Planning.Set aside money for special purposes, such as a child or grandchild’s education.
3. Provision for future generations. For example, ensuring your children, not their partners, keep their inheritances.
4. Stewardship.A trustee can manage finances until beneficiaries have gained sufficient life experience to make sound decisions.
5. Legacy. Trusts have a duration of up to 80 years (or 125 years under the new Bill) unless wound up earlier.

Disadvantages of setting up a trust

1. Less Control. Transferring your personal assets to a trust means you lose personal ownership and it will be the trustees’ responsibility to control them. The trustees’ may not always agree with your point of view. Trustees must act in the interests of beneficiaries and are guided by what is written in the Trust Deed. 
2. Added complexity. It is likely that the time and cost involved in meeting annual accounting, tax, and administrative requirements will increase. 
3. Legal issues. Disgruntled beneficiaries have the power to sue trustees where trustees have acted in breach of trust.

What are my responsibilities as a trustee? 

Whether you’re thinking of becoming a trustee for your own family trust or someone else’s, it’s important to know your obligations before accepting the role.

9 things to understand before becoming a trustee

1. It’s a legal responsibility that will require a time commitment (most often voluntary) and you could end up being liable for losses made by the trust if you don’t do the job properly. 
2. You’re in it for the long haul - some trusts have a set end-point but others can go on for over a century.
3. You must know and understand the trust deed, all associated documentation and the trust’s property, assets and liabilities.
4. You’ve should remain impartial when managing or distributing trust property to beneficiaries - no favourites!
5. You have to ensure all relevant documentation with regard to the trust’s assets are signed by all trustees, not just the ‘Mum and Dad’ of the trust (check the trust deed, though, in case it says otherwise).
6. When making trust decisions, the other trustees must agree (unless the trust deed says otherwise). It is important to be sure that you can work well with the other trustees before taking on the job.
7. You must actively participate and make all the decisions - no delegating or relying on others to do your job. 
8. Keeping accurate and up to date financial statements will make your job easier – and to file the trust tax return on time!
9. Recording all trustee decisions as requested by beneficiaries could keep you out of hot water. 

How will the proposed changes affect my business?

 The proposed changes aim to make the law more efficient, provide better guidance for trustees, and allow greater transparency and easier dispute resolution for beneficiaries. Three points of interest are: 

Clearly outlined trustee duties

A common reason for trusts coming unstuck is that the trustees have been unaware or ignorant of their obligations and responsibilities. Acting as a trustee should not be taken lightly and, helpfully, the trustee’s obligations will be clearly outlined including, for example:

• Knowing the terms of the trust

• Acting according to the terms of the trust

• Acting honestly and in good faith

• Acting for the benefit of the beneficiaries or the permitted purpose of the trust

• Exercising trustee powers for a proper purpose.

 Extending perpetuity laws

At the moment, when you set up a family trust, it has a perpetuity (time limit) of 80 years. After this period of time you have to wind the trust up and distribute the assets. The new legislation proposes extending this time limit to 125 years.  Among other things, this extended time period may involve significant succession planning adjustments. 

More information access for beneficiaries 

The Trusts Bill proposes to give most trust beneficiaries the legal right to financial reports on the state of the family trust – meaning they’ll be able to request more information including ‘who’s getting what’. Whether beneficiaries have the right to request this information under our current law is a bit of a grey area. Because this potentially opens a can of worms for trustees, this proposal has been controversial and has attracted a lot of feedback from trust advisers. We will have to wait until later in the year to see what changes (if any) are made to this proposal.

Our tips

Plan ahead – It is better to have the trust before you need it. 

Seek advice– Make sure you seek advice from a lawyer and from other experienced sources. Setting up a trust is a big decision, so do your homework and make sure it is the right decision.

Communicate – In this modern age, keeping in touch should be easy. Remember to keep everyone in the loop and don’t leave things to the last minute. Finding out a trustee is off the grid when you need their signature today can be an expensive and embarrassing situation. 

Next Steps

This article offers a basic overview of trusts and their benefits and should not be considered as advice. There are good reasons why you should investigate a family trust structure and we look forward to discussing those more broadly with you.