Early next year, the Trusts Act 2019 comes into force. By some estimate there are up to 500,000 family trusts in NZ, many set up by business owners and operators.
Because of its prevalence, there is a lot of interest in the new Act. Associate at Cooney Lees Morgan, Jeff Stringer, breaks down the new changes and the potential impacts on business owners / operators.
Described as accessible legislation (.i.e. easier to read than its predecessor), the Trusts Act 2019 also aims to increase trustee accountability and transparency for beneficiaries.
Noteworthy features of the new Act include:
- Mandatory trustee duties, which cannot be modified or excluded by the terms of the Trust. These include knowing the terms of the trust and acting in the beneficiaries’ best interests
- Rules relating to disclosure of information to beneficiaries. There is a presumption in favour of disclosure, and trustees must provide basic information to at least some of the beneficiaries. Information may include trust financial statements and documents such as the trust deed.
- A list of default duties, which apply unless the trust deed excludes them.
- Obligations that trustees hold certain documents.
- A process for dealing with trustees who have lost mental capacity and transferring assets from such trustees to new and continuing trustees
- An extension to the maximum term of a trust (from 80 to 125 years).
Although trustees can look forward to more clarity about their roles, and some efficiencies, under the Act they can also expect more administration and greater engagement with beneficiaries. This may mean increased administration cost.
As well as the Act, other recent legislative changes (such as the Anti Money Laundering and Countering Financing of Terrorism Act) have also led to increased time and cost of trust administration. These increases are being reflected in the fees and annual service costs of professional trustees and trust advisors.
Just as it has been fashionable to set up a trust at various times in the past, it can be said that recently it has become fashionable to wind up trusts. Some commentators predict half of all New Zealand trusts are no longer necessary.
Although the Act has encouraged trustees to start asking questions about the ongoing benefits of the trust (often further nudged by the increased costs referred to above), it is fair to say that the advantages of trusts have been narrowing over a number of years. It is also common for people’s personal circumstances to have changed, often to a degree where a trust is no longer applicable in those new circumstances.
Some of the provisions of the Act itself have caused some trustees or settlors to baulk; particularly those relating to beneficiary information disclosure. They may not have settled assets into trust with an expectation that it would be a collaborative exercise. Trustees should be careful not to throw the baby out with the bathwater though. Although there is a presumption in favour of disclosure of information; this presumption is subject to a number of potential caveats which allow trustees to withhold information in some circumstances.
Any decision to wind up a trust should not be taken lightly. The potential protections a trust provides may not be capable of reinstatement. Any such decision should be informed, involve a full discussion of the pros and cons, and include all trustees and advisors (particularly any accountant).
At the other end of the trust lifecycle, if you are contemplating settling a trust then you can be confident that any decision to form a trust is still based on the same general assessments as before.
Business owners and directors will still find trusts useful for the purpose of protecting assets from third party claims. However a trust is not a cure all. Care must be taken in relation to the provisions of the Property Law Act and Insolvency Act, as assets transferred to trust can be clawed back in certain circumstances. Also bank guarantee requirements often mean trust assets are at risk anyway. Further, trustee management and compliance may come under the microscope to determine whether trust assets fall outside a particular claim.
As will be clear from these comments, the decision to settle assets into trust is best worked through with advisors holding a good understanding of trusts. Remember also that a trust is in many respects the last line of defence. The first line of defence should always be good management; robust planning, systems and processes; likely backed up by appropriate insurance policies.
Where there is ongoing benefit in retaining the trust then there may still be work required to get in shape for the Act. The obligations under the Act may cause settlors and trustees to consider modifying the terms of the trust deed.
However, consideration must first be given to whether the deed allows such modifications, and on what terms. Must the original settlor approve such a variation? If the trust cannot be varied in the desired manner; can trust assets be resettled into a new trust that has the desired provisions, and flexibility to make further changes in future? Trustee’s duties in relation to investments, and unnecessarily wide classes of beneficiaries are both areas where modifications may be prudent.
If settlors and trustees have queries about the Act, or trusts in general, they should talk to their solicitor or professional trustee in the first instance. However, given the specialised nature of this work, that may result in a referral to a solicitor experienced in dealing with this subject matter.
Cooney Lees Morgan has an experienced team of trust specialists, including the writer. We would be happy to discuss any Trust queries you may have.
