Bills ahead as trusts culture winds down
That trust you paid thousands for, and no longer need, will cost thousands to wind up.
It’s going to cost people dearly to shut down now-useless family trusts, author and financial adviser Martin Hawes says.
Hawes’ New Zealand Guide to Family Trusts was the bestselling book in the country in 1995 and 1996 when trusts were at the height of their popularity.
But two decades later, Hawes says family trusts no longer have the tax benefits and asset testdodging benefits people set them up to get, and predicts a wave of trust closures before the new Trusts Act kicks in next year making trusts more expensive, and time-consuming to operate.
‘‘Trusts were useful, easy and popular – now they are none of these things,’’ says Hawes. ‘‘My guess is that in a couple of years there will be a lot less than 450,000 trusts in New Zealand.’’
That 450,000 is the best estimate of how many trusts there are in New Zealand, which Hawes called one of the most ‘‘trusted’’ countries in the world.
‘‘Up to the early 1990s, trusts had mostly been used for tax minimisation. This included protection not just for those paying large amounts of income tax but also those (especially farmers) who were subject to estate duties, popularly referred to as death duties.
‘‘However, through the 1990s, people of more modest means started to realise that they could protect themselves from the asset-testing regime for residential care subsidies, and from the superannuation surcharge, which was an additional 25 per cent tax that was levied on many retirees which was loathed with intensity.’’
But shutting down unnecessary trusts requires legal advice, Hawes says, and he hopes lawyers are being proactive and contacting clients.
‘‘You should expect a letter from your lawyer or accountant suggesting that you review the trust you settled with a view to deciding whether it should be continued or wound up,’’ he says.
‘‘There will be quite a lot that should be wound up.’’
The bills for shutting a family trust could run into the low thousands in lawyers’ fees, especially for trusts involving multiple properties.
People may also need to pay accounting and tax advice, if the trust owns assets like investment properties on which depreciation has been claimed.
One trustee, who would not be named for privacy reasons, says winding up a trust and distributing assets to beneficiaries can result in unexpected consequences.
‘‘A visit to the lawyer last week and subsequent emails to the accountant, convinced my wife and I that we will end our family trust,’’ he says.
‘‘We are certainly not hiding anything from our two adult children but there is now no benefit for us in retaining it.
‘‘It is a modest trust which owns four houses – three rentals and the family home.’’
But he fears the transfers into the names of his wife and himself will reset the clock for the ‘‘bright line test’’ where people who sell residential properties within five years of buying them can face paying tax on capital gains.
Trusts which own mortgaged assets would be harder to shut down, as creditors would have to agree to re-arranging the debt, Hawes says.
Should that involve rearranging bank mortgages, Hawes hopes banks – which often charge ‘‘redocumentation’’ fees – would behave decently and allow a home loan to be transferred without charging a break fee.
‘‘Never make an assumption you can do what you want,’’ says trust lawyer Juliet Moses from TGT Legal.
Like Hawes, Moses says many people who set up trusts behave as if it is ‘‘their trust’’, and the assets in it are their assets.
A lawyer will help trusteesettlors work out the process for winding a trust up, and help document it.
This process will depend on the trust deed, Moses says.
Often these require all trustees – often family trusts had an independent trustee, such as a family lawyer – to make unanimous decisions.
Closing down a family trust often begins with trustees making distributions of assets to
‘‘Trusts were useful, easy and popular – now they are none of these things.’’
Financial adviser Martin Hawes
beneficiaries, before moving to shut down the empty trust later.
Lawyers will help identify risks, says Moses, for example whether there are beneficiaries like adult children who might cause a fuss.
It is often advisable for beneficiaries to be asked to sign a ‘‘deed of winding up’’, she says.
‘‘Often, if it’s a happy family, they will consent to it.’’
This is likely to result in each of them seeking legal advice before doing so, and extra costs, Moses says.
Hawes says the decision on whether to continue with a trust, or pay to wind it up, will come down to a cost-benefit analysis.
‘‘There were quite a few people who established trusts because it was the thing to do. They have paid thousands of dollars. Now they have been told maybe they should disestablish it, and it could cost them thousands of dollars more,’’ Hawes says.