Trustees will have to tell trust beneficiaries certain basic information. Photo / file
There are estimated to be somewhere between 300,000 and 500,000 family trusts in New Zealand - one of the highest per capita rate for trusts around the world.
But from the end of January there is a major shake-up in New Zealand's trust law which will see the biggest changes in more than 60 years.
The Herald asked family trust law expert Henry Stokes at Perpetual Guardian what trustees and beneficiaries need to know about the changes and what obligations and rights they will have.
I'm a trustee on a family trust and I've heard there are some changes coming in January. What are the changes?
The changes are mainly around two areas, the first being trustee duties and the second around beneficiary disclosure. Trustee duties are not new but the fact that they are recorded in legislation is new. Previously trustee duties arose from a combination of references to requirements in legislation and from case law where judges have outlined what trustees must do. However, there was no one single source that trustees or beneficiaries could reference to see what those duties were.
Now for the first time we have trustee duties recorded in the Trusts Act. It is available online and can be accessed from anywhere around the world for trustees and beneficiaries to be able to see what is expected of a trustee.
The second area is beneficiary disclosure. There are two types of disclosure, the first being basic trust Information and the second being trust information. The basic trust information a beneficiary is entitled to without having to ask for it. Basic trust Information is:
• There is a trust and you are a beneficiary.
• The names and contact details of the trustees.
• Notification of the change of any trustees (i.e. appointment, removal or retirement).
• The right of the beneficiary to request a copy of the terms of the trust (the Trust Deed) and trust information.
Trust information is any information regarding the terms of the trust, the administration of the trust, or the trust property which is reasonably necessary for the beneficiary to have to ensure that the trust is being administered correctly.
As a trustee what do I need to do differently?
As a minimum you will need to provide basic trust Information to the beneficiaries before January 30, 2021 (so that you are compliant by that date).
You should also look at the trustee duties in the new act to ensure that you are both familiar with them and complying with them. You will need to look at these in conjunction with the trust deed due to the fact that some of the duties are mandatory (cannot be changed or taken away by the terms of the trust deed) and some are default duties (the default duties only apply if the trust deed does not alter or modify them, or even remove them altogether).
What happens if I don't make these changes?
From January 30, 2021, beneficiaries have the right to have the basic trust information disclosure. If that does not occur and they find out about the trust, a number of things can flow from that.
A beneficiary can apply to the court to have the trustee or trustees removed and replaced with someone else. As part of that process it is likely the question "Why did the trustees not comply with the provisions of the new act?" will be examined. The consequences which will flow from that will depend upon the exact circumstances of the particular scenario.
However, being involved in any court litigation is never pleasant, is often very costly for all involved and often results in very few true winners. There is also a real risk that a trustee may have to bear their litigation costs personally and even have to pay someone else's costs too. That is a bad outcome and does not always happen but it can, depending upon how things play out.
I'm a beneficiary of a family trust. What are the trustees obligated to tell me under the law change?
Refer to the above information regarding basic trust information and trust information. What is not particularly obvious from the description of trust information is that one of the main things likely to get asked for by a beneficiary who is requesting further trust information is the financial statements for the trust.
The reason for that is one of the whole fundamentals of the new act is that beneficiaries should have sufficient information to ensure that the trustees are doing their job correctly.
One of the most crucial pieces of information to be able to do that is the financial statements. Without seeing those it is difficult to know what is in the trust and how that changes from year to year to be able to know if the trust is being administered correctly.
As a beneficiary of a family trust can I find out what inheritance I'm likely to get?
Trusts can last for a very long time – up to 125 years under the new act – so it depends on the age of the beneficiary and the age of the parents of the beneficiary who would also be beneficiaries of the trust themselves. It would be difficult to predict an exact amount but for some it would certainly give them a ballpark idea.
I'm worried about my kids/grandkids finding out what they will inherit. What can I do to prevent this?
The new act does contain a process for the trustees to work through if it is considered that disclosing information is undesirable. There are a number of factors which can be considered and they would need to be worked through for each request made. They can result in a number of outcomes:
• The information is provided in full.
• Some of the information is provided and some is withheld.
• The information is provided with redactions.
• None of the information is provided.
Examples of the considerations are:
• The interest that the beneficiary has in the trust and the likelihood of that beneficiary actually receiving any of the trust property in the future.
• Whether the information is subject to personal or commercial confidentiality.
• The age and circumstances of the beneficiary.
• The effect on the beneficiary and on others of giving the information.
• The effect on relationships within the family of giving the information.
Can I still use a family trust to stop means-testing for rest home fees?
The position that Perpetual Guardian takes is that this should have never been the sole reason for establishing a trust.
The rules around gifting to trusts and eligibility for a rest home subsidy are very technical and very specific. If you have a trust and believe it is likely you will need rest home care you should obtain professional advice regarding your specific situation.
Can I still use a family trust to stop my ex-partner trying to claim a share of my property?
The situation regarding trusts and protection against relationship property claims has changed and evolved over the past five to 10 years. It is certainly true to say in the relationship property area trusts no longer provide the protection they once did. The set-up of the trust and the timing of when assets go into a trust is crucial from a relationship property perspective.
The best protection that you can get is a trust along with a contracting-out agreement.
What are some reasons still to have a family trust?
When clients approach us now to set up a trust or review an existing one, our advice is that there are effectively now four key reasons for having a family trust:
• Estate planning – as a tool for preventing the likelihood of success of unwanted claims against your estate, providing for children from a previous relationship from particular assets, or providing for beneficiaries with special needs.
• Keeping certain property or assets in the family for future generations, (e.g. a beach property or a farm).
• Relationship property planning alongside a contracting out agreement.
• Creditor protection.
Demand for bonds may well stay strong, but there's a catch.