A major change to New Zealand trust law was passed on 30 July 2019. The Trusts Act 2019 will have implications for all trusts in New Zealand, and once it comes into force will probably cause many to ask whether trusts are still worthwhile

Let's take a brief look at what is changing and examine eight reasons why your trust might no longer be worth it.


1. Implications of new trust legislation

The Act will apply to most existing and new trusts. It is expected to come into force in 2021, and will introduce various changes to trust law, which include:

  • Obligation to give certain information to beneficiaries: The aim of this is so that beneficiaries can enforce their rights.
  • Record retention requirements: It specifies what information trustees should keep, and how long they need to keep it for.
  • Mandatory duties: Imposed on trustees.
  • A range of other changes: For example, specifying that a sole trustee cannot be a sole beneficiary.

Naturally, the list above is just a few examples, so anyone interested in learning more about the changes (such as any trustees reading this!) should seek appropriate advice.


2. Previous trust tax benefits

Twenty-or-so years ago, it was common for financial advisers and other professionals to suggest people investigate establishing a trust. This was mainly because trusts were taxed at a lower rate than the top individual tax rate.

Eventually the government wised-up to this and changed the rules to remove this loophole. In some unique cases tax benefits may still exist, but they've generally diminished over the years.


3. Government assistance loopholes have been closed

Another common reason for establishing trusts was for people to rid themselves of assets by gifting to the trust. This would usually make that person eligible for government assistance later in life (such as taxpayer-funded residential care). In this way, instead of meeting potentially expensive residential care costs, wealth could be preserved for a spouse or the next generation while the individual made the most of government support.

Say what you will about the ethics of this approach, but the government wised-up to this too. For most purposes, this loophole was also closed - nowadays any gifts over specified amounts, depending on when gifted and the intention of that gifting, may be considered depriving yourself of income or property.


4. Costs

Family trusts can be complex and time consuming to administer. It costs money to set them up and there are generally ongoing legal and accounting fees. If anything, the recent law change is likely to increase costs.


5. Control

Once we put our assets into a trust, we no longer personally own or control them. Instead, ownership passes to the appointed trustees, who must act under the terms of the trust deed in the best interests of the beneficiaries.

There have been cases of family members suing other family members for a breach of the trust's provisions. The courts treat claims of this sort quite seriously and they will normally be expensive to resolve.


6. Risks

If a trust is not set up or managed well, there can be considerable inconvenience and cost.

There's the risk of having the trust declared a sham, which would mean that the assets are not really the trustees but are in fact still the property of whoever gifted them.

While assets transferred into a family trust prior to entering into a relationship are less likely to be challenged, law changes in this area also mean that trusts are not an absolute protection against relationship property claims.


7. Complexity

Even a seemingly simple family trust can be quite technical. Trusts are usually formed by a lawyer or a professional trustee company.

Recent legal changes regarding trusts reflect what is happening worldwide, where there is increasing attention focussed on anti-money laundering and countering the financing of terrorism.

There is no register of trusts in New Zealand, but it is estimated that there are 300,000 to 500,000 trusts across the country. This makes New Zealand unique, as no other country has such a high number of trusts relative to the population size. Unfortunately, in other countries a typical "mum and dad" family trust is highly uncommon, and trusts have been used for unethical and illegal purposes. This all means that there is international pressure to crack down on trusts. (For example, even as an individual, if you see someone such as a lawyer, financial adviser, or real estate agent you might notice you are asked to prove who you are and where you live). This is only getting more complex for trusts.


8. More legal changes?

Especially noting what is happening worldwide, possible further changes to legislation of trust law may remove or effect some of the original objectives for the trust formation. It may even become more complex for trusts to perform simple actions such as opening a bank account.


Advantages of trusts

Despite the list above, trusts may still be appropriate in some circumstances. For instance:

  • If properly established and managed, trusts can offer protection against creditors and relationship property claims,
  • Possible protection against future tax law changes. For example, if a death or inheritance tax is introduced (as is the case in the USA and UK), then trusts may be exempt, and
  • Confidentiality. For instance, there is no public register of trusts.

The bottom line

Despite the advantages above, let's recap the top eight reasons why your trust may no longer be worth it:

  1. Implications of the new legislation
  2. Previous tax benefits have been wound back
  3. Government assistance loopholes have been closed
  4. Costs
  5. Control
  6. Risks
  7. Complexity
  8. More legal changes?