Trusts lawyer Tammy McLeod says the new Trusts Act has been focusing minds on updating trusts, even reviewing whether they are still needed. And the brightline test changes adds another key consideration

By Tammy McLeod*

The new Trusts Act has now been in force for just over three months.  This has been a good catalyst for many New Zealanders with trusts to consider why they set the trust up and if it is still actually needed. 

Trusts are a bit like life insurance in that there are times when you may need more protection.  For example with life insurance you need more when you have young children and large debt, but as the debt decreases and the children grow older you may need less.  In the same way, the reasons why a trust may have been set up ten of fifteen years ago may no longer exist.  Further, the extra requirements of the new Trusts Act may mean that on balance there is no real need for the trust anymore.

On the flip side, there are still many good reasons for people to have trusts, and there is no one size fit all flow chart where you can decide whether you need a trust or not.  It will always depend on your circumstances.  Yesterday I reviewed a trust for someone who I would have thought didn’t need it anymore, but as we talked more about her son and what she wanted for his future, it became apparent that she needed to retain the trust.

When deciding to wind up a trust, extra care must now be taken around the implications of the brightline test, and winding up a trust and putting assets back into personal names does re-start the ownership cycle for brightline.  Now that that has been extended to ten years, many people are choosing to retain trusts that they may otherwise have wound up, waiting to wind up when they sell the property which could be caught.  Other considerations relate to depreciation recovered for property that has been in trust some time, GST and potential loss of imputation credits or losses for companies held by a trust.  It is important to get tax advice. 

Many people are also reviewing the terms of their trust, ensuring that it is fit for purpose in 2021.  A big driver here is looking at who the beneficiaries are and ensuring that they are actually people who you want to benefit from the trust. This is particularly in light of the changes to the law which gives beneficiaries greater rights to trust information.  It is important to review also who has the power to appoint and remove beneficiaries – if it is the trustees, this means that people can be appointed as beneficiaries after you die and they may not be the people who you want to benefit from the trust. This can be an unintended consequence of the way the trust deed has been drafted. 

Those with trusts have also been reviewing other elements of their trust – eg any restrictions around how the trustees can invest trust assets, whether trustee decisions need to be unanimous and whether professional trustees can be paid for their involvement in the trust.  It is very important to review the terms of the trust deed to determine whether these sorts of provisions comply with the new Act, and if not, what if anything can be done to resolve this.  This may include looking to see if there is a power to vary the trust, or perhaps a new trust needs to be set up and the assets of your existing trust resettled onto this new trust?  It may even be that the assets are distributed back to you and you gift them to a new trust.  It will depend on the terms of your existing trust deed. 

Those with trusts are also reviewing their practices and processes ensuring that their record keeping is adequate, that they understand the terms of the trust and that they have processes in place for retention of trust documents.  Under the new Act, there is specific provisions around at least one of the trustees having to retain all documents pertaining to the trust.  Trusts should consider whether they have a plan around this.  Also, all trustees must hold all core documents.  Trustees should be checking what these documents are for their particular trust and ensuring that all trustees have copies. This should be reviewed on an annual basis and having an annual meeting is best practice for all trusts regardless of what assets it owns.  Having a professional trustee can greatly assist with this administration side of having a trust.

If you have any concerns with how your trust operates in this new environment it is important to get specialist advice.  Trusts are so important for many, but only if they are managed properly.    

Tammy McLeod is the managing director at Davenports Law, specialising in the areas of personal asset planning, trust law and Property (Relationships) Act.