Family Trust / Trusts Article by Quay Law NZ

March 2011

Based on current records, New Zealand has one of the highest numbers of trusts per head of population in comparison to other countries.  It is estimated that there are at least 237,500 trusts in New Zealand but this figure could be as high as 400,000.

The Law Commission has been asked to review the Trustee Act 1956 and trust law generally.  The Commission plans to tackle the review in 3 stages:

• Stage 1 will look at the Trustee Act 1956, the Perpetuities Act 1964 and trust law generally. The first paper was released in November 2010 and focused on the history of trusts.  The second paper was released in December 2010 and focused on the uses of family trusts in New Zealand.  This paper included the potential concerns surrounding the current use of trusts.
• Stage 2 will consider the Charitable Trusts Act 1957.
• Stage 3 will consider the trustee companies legislation.

There is an intention to abolish gift duty with effect from 1 October 2011.  Whilst this legislation is yet to be passed, it seems that from this date gift duty will no longer be a relevant factor for people settling trusts.  The result of this proposed legislation will be an easier movement / transfer of assets into trusts.

So where does this leave Trusts as we focus on 2011?

The proposed abolition of gift duty together with major changes to the qualifying companies regime and the Law Commission’s re-examination of trust law means this will be a momentous year for those with trusts.

Of current concern to the Law Commission is the transferring of assets into trusts to avoid obligations to, for example, creditors and / or spouses or partners under the Relationships (Property) Act 1976.  The Law Commission is considering whether:

• legislation should address the need to look through trusts in certain circumstances in order that trust property can be made available to a creditor, spouse or partner or for government asset testing.
• legislation should address sham trusts and the problem of trusts that are not really trusts.

With specific reference to treating trusts as “look through” entities, the Law Commission is evaluating if it should allow trust assets to be made available to creditors, spouses and partners, and to be considered as a part of the assets of the settlor or a person with control over the trust for assessing eligibility for government assistance.  As an alternative, the law could continue to leave it to individual statutes to address how a disposition of property or income to a trust is to be treated in a context where such a disposition defeats a government policy. Because of the difficulties in creating look-through provisions that meet the needs of the various contexts to which they must be applied, the latter may be the preferred approach.

As a result of the relevant legislation being reviewed, and regardless of the outcome of the proposed law changes, now is the time for New Zealanders to review their trusts.

Relevant considerations during such a trust review might include:

• The intentions of the settlor in establishing the trust;
• The intentions of the trustees;
• Whether the trustees were indifferent as to whether a valid trust was intended to be established;
• How the affairs of the trust have been conducted;
• Whether property of the settlor has been intermingled with trust property;
• Whether the settlor has treated trust property as his or her own;
• The degree of control exercised by the settlor over the affairs of the trust;
• Whether the trustees have acted independently of the settlor in carrying out their duties;
• The real nature of the arrangement irrespective of how it is described;
• The implications of the repeal of gift duty, which may exacerbate some of the problems associated with trust use and may reduce the effectiveness of the existing legislative approaches to trusts.

Whilst the review of trust law is in progress and the Law Commission invites comments, it is recommended that you consult a family trust specialist in order to discuss these proposed law changes and their impact on your existing or proposed trust. A focus for this discussion could be:-

• The role of the independent trustee.
• Ongoing trust administration and reporting.
• Separation of trust affairs from personal affairs.

If you have any further questions regarding your current or proposed trusts, please do not hesitate to contact me.  My name is Ian Mellett and I am the principal of Auckland Law firm, Quay Law.  My contact details are (09) 5232408.