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New Zealanders have long held an infatuation with trusts, having one of the highest number of trusts per capita and with many families electing for their family homes to be held on trust, with the broad goal of protecting their assets. However, following the introduction of the Trusts Act 2019 in 2020, a common question now being asked is whether trusts still have a purpose.
For many who have established a trust, the trust has been pushed to the back of the mind without further review. The introduction of the Act provided a reminder that for a trust to achieve its desired purpose and protect the assets it holds, it must be robust, and the trustees have obligations they must attend to. This renewed focus on trusts led to an increase in people considering whether their trust is needed.
In some situations, the answer may be that the trust offers little advantage for the family but instead creates impracticalities. In that situation, the best approach is often to terminate the trust. However, for many, a trust does continue to offer important benefits for those who set up the trust and/or their children. A careful analysis is needed as to whether those benefits justify any remedial work that may be necessary to ensure that trust is being operated correctly and effectively. Often, the benefits of keeping the trust outweigh any downsides.
Some of the key reasons why trusts remain useful, in the right circumstances, are set out below.
Internationally, one of the key reasons trusts are set up is to provide protection for family assets against business or professional risk. Family assets are placed into a trust while business assets are maintained separately.
Provided a trust is set up and administered properly, trusts have many advantages that stem from the separation of ownership of the assets held by the trust and the settlor. When the settlor transfers these assets to the trustees, the settlor is no longer the legal owner of the assets. Rather, the assets are owned by the trustees who hold them for the benefit of the beneficiaries.
This separation of ownership creates useful advantages for asset protection. A trust can protect trust assets from claims and attacks that might be made against the settlor or beneficiaries in the future, such as creditor or business claims and relationship claims.
Any individual who is exposed to an element of risk in their professional lives, such as company directors, doctors, accountants, lawyers, school principals, school boards of trustees, builders and property developers, may benefit from the risk protection offered by a trust. If any claims are made against them personally, then provided the trust has been setup correctly and administered properly, the assets held in that trust are unlikely to be at risk.
While their use has become more limited in recent years, trusts still offer some relationship risk protection in certain circumstances. Where a trust is set up before a relationship, has little connection to a subsequent relationship and remains fairly inactive during a subsequent relationship, the assets will likely be shielded from claims made on the breakdown of relationships.
While parents who set up a trust together will not be offered significant relationship protection from the trust, their trust may nonetheless offer protection for their children’s relationship risk. Provided the trust has been set up correctly, the trust can be structured as a means to protect children from future risk by defining and limiting the manner in which they receive assets from the trust and excluding anyone who is not intended to benefit.
That said, trusts do not offer complete protection and should be supplemented with a relationship property agreement to provide robust protection from relationship risk. Without a relationship property agreement, challenges may be made against trusts that are set up during the relationship, trusts used to benefit the relationship or even a trust set up before a relationship if it receives continued settlements from one partner during the relationship.
A trust is a useful inheritance vehicle. As trust-held assets are no longer owned by the settlor, on the settlor’s death they will not automatically be inherited by the settlor’s family. Instead the assets can pass to the settlor’s family at a time and in a manner that is appropriate in the future. This helps to avoid the next generation inadvertently receiving any inheritance at a time when it may not be appropriate for them to – for example, if they are young, bankrupt, will have tax consequences, or are in a relationship that is at risk of ending. Trusts can also be used to set aside money for a particular purpose, such as a child or grandchild’s future education.
Trusts are also a useful way of passing significant assets, such as businesses or farms, to future generations. The use of the trust can ensure the asset remains in the family for future generations. For businesses, trusts are particularly helpful in ensuring family members can benefit from the business but without, necessarily, those members controlling the business. The oversight of the business can instead be left to appropriate trustees, as the legal owners of the business.
While trusts do not generally provide tax advantages, when considering terminating a trust it is important for trustees to obtain tax advice on whether the termination would result in tax consequences. Where a trust termination could lead to an unintended tax liability, it may be wise to mitigate this impact by delaying the terminationof the trust.
Regular reviews of trusts should be carried out to ensure the trust continues to fulfil its objectives and that trustees are fulfilling their duties and obligations.