Estate Planning: Family Trusts are getting a shakeup.
19 Jun 2020
A new Trust Act comes into force in seven months’ time on 30 January 2021 and existing trust deeds should be reviewed by your lawyer before then.
I recently recorded an interview with Dunedin lawyer, Michael Win, on the new Trust Act and you can watch the video and/or read a transcript below.
Rhodes: Family Trusts used to be flavour of the month and with a new Trust Act coming into force on 30 January 2021 Michael Win, lawyer and partner at Wilkinson Rodgers in Dunedin, updates us on the changes and what you must do to update your trust deed so you don't get caught out when the new provisions come into force. Act now is the message Michael gives us.
Michael: In June last year the government passed a new act called the Trust Act 2019 which comes into force on 30 January next year. This replaces the 1956 Act which we are still currently working under which is well due for a revamp.
The new act when it comes in will make a small number of changes, most of which are mechanical things which would not worry anyone. One or two things are reasonably controversial.
For example, a trust can now run for 125 years, previously it was 80 years maximum. That takes in to account that people are living longer, clearly now it is 2 generations whereas previously 80 years was never 2 full generations as was the original intention. This is handy for the farming community as it is common to have the farmland in a trust that covers more than one generation.
To make the change to extend to 125 years you will have to vary your trust deed. To do that you need a power within the trust deed to vary the terms. There is no ability under the current trustee act to do that, so the ability to vary the terms must be in the Trust deed already.
Power to amend the trust deed.
Before January next year, as long as there is a power to amend the deed, you could review the trust deed to make other changes as well at the same time in a similar way to how you would review and amend a will to bring it up to date. If there is no power to amend the deed you will have to look for another solution.
You would want to make this change before the act comes in and make it effective from 30 January 2021. From now on, people should be reviewing their trust deed with their lawyers.
Lowering of the age of majority to 18
Another issue raised is lowering the age at which someone can inherit, receive distributions, or hold a position in the trust such as trustee from 21 to 18.
Trustees must write to beneficiaries telling them they are beneficiaries
As mentioned before, most of the changes are minor, mostly governance issues. However, one of the biggies is that the trustees will be required to write to all beneficiaries of the trust informing them that they are beneficiaries, and that they are entitled to ask for information on the trust.
Beneficiaries can request a copy of the trust deed, who the current trustees are and their contact details, and a copy of any changes made to the trust. They can also request ‘trust information’, but the trustees have a right to refuse this.
The new act sets out some of the parameters for refusal by the trustees. For example, if the trust owns shares in a family owned company, the trustees can refuse to give company accounts as it is commercially sensitive. A trustee could refuse to give a younger beneficiary financial information if they want to encourage independence and feel it would be harmful. There are about 12 things listed in the new Act that may be refused if the trustees consider it appropriate. The trustees do not have to give a reason for their decisions.
If you have the power to vary a trust, you can contract out of that provision. For example, changing the trust deed so that beneficiaries, other than Mum and Dad, would only be entitled to a copy of the trust deed and the knowledge that they were beneficiaries. Mum and Dad would have access to all the trust information including financial information, but not the kids.
A lot of the changes came about because of the Panama Papers incident. The world said that our Trust regime was not transparent and that foreign nationals were using our Trusts to hide money. A lot of the changes were made to create that transparency.
Rhodes: Are there any other changes to be aware of?
Michael: Use the opportunity to bring your trust deed up to date. How long the trust can run can be a personal decision. We expect most will not change to the 125 years.
In a trust review you might want to water down some of the investment provisions. If someone wants to put some of their existing investments into a trust and retain them, they may not meet some of the diversification requirements of the Trust Act.
Rhodes: Is it any more likely that people will want a trust if they have not already got one? What is the trend in terms of uptake of family trusts?
Michael: Once upon a time it used to be that everyone had a trust. They were useful for getting rest home subsidies but that ability to protect your assets from being counted in the rest home subsidies applications has now gone. A lot of those trusts that just had the one asset, the house, are being wound up now as they are really of no use and are just a bit of pain for people to administer. Some people that had a valid reason for a trust, such as the self-employed in business who wanted asset protection but have now sold the business and retired, may not want the hassle of administering a trust as it does become a bit more arduous from next year.
There is still a demand for family trusts, and we are still getting a lot of enquiries, particularly through the Covid-19 lockdown as people become aware of their own mortality and questioned how protected their business was. Anyone who is self-employed should seriously consider having a trust.
Another common use is where people have children with special needs that need financial support once mum and dad have died. You are providing a nest egg inheritance to be managed for their benefit.
Another common use of a family trust is where families become estranged, for example in a divorce where a parent does not see the child again. You have an obligation in your will to provide for that child or they can claim against your estate. If you don’t feel you have a moral obligation, even though the law says you do, you can put your assets in the trust and make sure that those children are not beneficiaries and they cannot make a claim against the trust.
Rhodes: Why would a self-employed person want a Trust?
Michael: To protect your personal assets, such as a family home, from the risk of a creditor you might have. As long as the trust has been drawn up correctly, and you haven’t offered the trust as a guarantor, the personal assets should be safe if the business has a claim against it or if the person is sued.
Rhodes: Final thoughts?
Michael: There has been a lot of scaremongering out there to say that it is the end of trusts and it will be so onerous that no one will want one. That is not right. Many of the changes were already having to be abided by, it is just bringing it all into focus.
If you have valid reasons for wanting a trust, don’t be scared off. Go and see your lawyer, make sure your deed is up to date. If you are not sure you can talk to them and consider your options.
Thank you, Michael. Time to review those trust deeds. There are seven months till the new Act comes into force and Christmas will get in the way.
Time to act.
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