Small bites nibble away at legacy cake

By MARY HOLM

Q: I would like to warn other grandparents of this situation.

My mother died just over four years ago, and when she wrote her will I'm sure she expected to live to see her grandchildren reach 20. However that wasn't to be.

She left $2000 to each of her six grandchildren as a way of showing them that they were special to her.

Our eldest daughter has just reached 20 and has received her inheritance.

The Public Trust invested the $2000 from 28 August 1997 to 2 November last year, during which time interest accumulated.

When she received her inheritance it had increased to only $2107.

It appears that because the other children are on different plans they might end up with more revenue. However, because of the short time they chose this plan for her.

The charges incurred during this time were $251. This was made up of $76 for administration, $160 for furnishing tax returns, and $15 for postage.

All six children have been charged the same amount for postage and tax returns on this one account ($1050 on $12,000).

Is this a normal amount of charges that one could expect any solicitor or person dealing with a trust such as this?

In cases like this where withholding tax is taken at source, maybe the need for a tax return to the Inland Revenue should be looked at, as individuals now do not need to furnish one.

The growth of your daughter's inheritance must have been disappointing.

And, as you say, there's a lesson or two for others in what happened to the money.

First, let's look at the specifics of your daughter's situation.

According to figures from the Public Trust (which I got with your permission), the investment return on the $2000 was 4.2 per cent a year, after tax.

That return is "very reasonable, given that this trust fund was invested conservatively because of the short time frame", says the Public Trust's Dennis Cook.

And I agree. That's equivalent to a taxable return of 5 or 6 per cent or more, depending on the tax bracket - pretty good, as trustees are obliged to invest prudently.

If your daughter had received the full after-tax return, she would have about $2375.

But, as you point out, various charges were taken out.

Cook's summary of those charges includes investment charges of $28. But his total, of $259, is much the same as yours.

That is a fair bit on an investment of $2000 over four years.

But the Public Trust, like any other trustee, must follow the law.

Trusts "all require the same standard of care and attention and place the trustee under the same responsibility, irrespective of their size", says Cook.

On tax filing, Cook says, "Although Public Trust files one estate tax return, information for all six trust accounts needs to be collated, separated out in the tax return and tax advices sent to each of the grandchildren or their parent."

Despite your children's relatively small legacies, somebody still has to do the accounting and paperwork.

Are the Public Trust's charges what you would expect from a solicitor or other professional trustee?

"On the face of it the charges as a monetary amount are very modest," says Cook. "But I appreciate that when viewed against the legacy capital of $2000 and the income earned on the legacy over the four-year period, they could seem disproportionate."

But, he says, "they are very reasonable given the time and responsibility incurred by Public Trust in managing the legacy moneys, reporting annually to the beneficiary and preparing and filing annual tax returns, dealing with tax assessments etc."

Again, I have to agree with him.

There's slightly better news about the other children.

Because there was more time, their money has been invested in somewhat riskier funds, suitable for the longer term. Chances are that their returns will be higher.

And Cook doesn't expect charges on the other kids' account to rise because your daughter is no longer invested, as there will now be less work to do.

Even so, your other children probably won't do as well as if the money had been invested in a less legally complex way.

But there's not much that can be done about that now.

When people are writing wills, says Cook, "our staff tend to try and discourage gifts or legacies of small amounts (for example up to $2000), if the money is not to go to the recipients straight away".

"But in many cases people making wills see their will as the appropriate place for this sort of provision.

"Our staff explain the difficulties regarding administration charges and costs that will arise on small amounts, but a lot of people making wills don't see this as important", although the recipient probably will.

Cook has come up with the following suggestions to provide for small legacies for children or grandchildren:

* Set up an education trust for the child's schooling, tertiary education or other training and related expenses, such as living costs.

The money is protected from family or business problems.

"Any money not used is paid to the child when they reach 30, or the trust can be wound up earlier if it is clear it is not needed for their education," says Cook.

The Public Trust will set up education trusts for $250 for the first one and $100 for each extra child's trust. Ongoing costs depend on how the money is invested, he says.

A point from me: Because of these costs, this option might not be much better than what is described above for smallish amounts.

* Put a clause in your will that a small gift or legacy could be paid into a bank account for the benefit of the recipient, or paid directly to a parent or other caregiver.

The obvious difficulties, says Cook, "are that the money could be spent inappropriately", or the recipient might get access to the money earlier than the will-maker intended.

* Put the money in a bank account or other investment in the recipient's name, while you're still alive. The problems are the same as above.

My suggestion: One way to make it harder for sticky fingers to get the money would be to put it into a term deposit or other term investment that matures near the intended date.

* Ask your bank if you can open an account in the recipient's name, but with you acting as trustee.

If you die before the intended date for the money to go to the recipient, you might arrange for the executor of your will to handle the money.

Most banks have accounts that run along these lines, says Cook. But take care that what you want will happen if you die early.

Finally, you raise a good point about the need for tax returns. But that is not the Public Trust's fault.

Perhaps the Government should look into it - although, given the tax shenanigans that go on in some trusts, I don't think it hurts to have the IRD keeping a close eye on trust taxes.

* Got a question about money?

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