In properties we trust — it’s the Kiwi way

New research shows love of trusts for real estate, writes Anne Gibson

About 325,000 New Zealand properties have trusts involved in their ownership structure. And per capita, this country has far more real estate in trusts than comparable nations such as Australia and the United Kingdom.

New Zealand has about 2.4 million properties, and the numbers for trust ownership were calculated by Herald data journalist Keith Ng.

“The total number of properties that involve some kind of trust arrangements stand at 325,000, so around 14 per cent of all properties in New Zealand. We have nearly twice as many trusts per person than Australia, and 16 times as many as the UK. This is quite abnormal,” Ng said.

His interest was initially sparked by a theory that trusts were formed to evade tax, but Ng said one antimoney-laundering expert he spoke to about mapping the data had another hypothesis: that lawyers and accountants recommended clients form trusts for protection “when they don’t really do much”.

However, Joanna Pidgeon, a lawyer and former Auckland District Law Society president, said the reasons were not usually nefarious.

“I think the assertion of them being a scam is incorrect. If they are formed for the right reasons and administered properly, they can be useful but they are not for everyone. Sometimes I may have a client saying they want a trust but we will discuss reasons, benefits and costs and they will decide against forming a trust. Trusts were once very fashionable, but now trusts are only likely to be formed if they are needed,” Pidgeon said.

Trusts began proliferating in this country in the 1990s, when people tried to minimise the chance of losing capital through asset testing for userpays rest home care, she said.

“But that is probably not such a driver of trusts these days,” Pidgeon said, after a crackdown on people trying to avoid paying the residential care subsidy.

Now, she advises clients to form trusts if they are in business and want to protect assets from possible creditors, or from future litigation.

“Another driver is to protect family assets from people marrying or partnering . . . as often, parents are having to assist their children to build up enough for a deposit for a home. If they gift that sum to a child, after three years their spouse or partner would be entitled to half of that whereas if the family trust lends that to the child or couple and the relationship breaks down, the family trust can recall the loan so that the ex-spouse has no entitlement and it can be readvanced to assist with the purchase of a new property for the child,” Pidgeon said.

Trusts protected assets for children

I would say that 80 per cent of trusts — so about 380,000 maybe — serve no genuine purpose. Former IRD manager Adam Hunt

when remarrying, she said.

“There are also limited tax advantages when attributing some income to beneficiaries with lower tax rates.”

With anti-money-laundering and other issues with Inland Revenue, the costs of compliance had grown and some people were reassessing the benefits of trusts, she said, particularly if they were employed and had little creditor risk.

Adam Hunt, a former Inland Revenue manager, said a Law Commission document estimated that New Zealand had one trust for every 15 people, compared to Britain’s one for every 300 people. Trusts were potential warning flags “because they tend to be used to shield wealth and identity”.

The commission document dated back to 2010, but he said New Zealand still had a huge number of trusts. The existence of such vehicles raised antimoney-laundering issues: “Trusts are prevalent vehicles for money laundering. It’s not a fantasy risk. It’s all about concealing beneficial control.

“I would say that 80 per cent of trusts — so about 380,000 maybe — serve no genuine purpose. That’s a huge overhead on our society and a whole bunch of fees to professionals that really do no good. It’s an economic drag, a laziness tax. I suspect it would be the end of a couple of private schools if they all went away as the fee stream would dry up from a lot of lawyers and accountants.”

Terry Baucher, of tax experts Baucher Consulting in Takapuna, said Ng had discovered new information on trusts by identifying the total number in New Zealand and that was highly valuable.

“Ng is probably the first person to do a systematic look into the total number of trusts here because there’s no central record of how many trusts New Zealand has,” Baucher said.

In the year to 2016, IRD records showed 248,655 estates and trusts had filed tax returns, Baucher said. But Ng would have found far more because many trusts would not have had to file or register with IRD because they owned properties on which there was no income, such as a family home.

“There’s a wide range of reasons for establishing a trust. New Zealand is unique because, after the abolition of estate duties in 1991, we allow a person to be a settlor in a trust, a trustee and a beneficiary — previously that wasn’t possible. In the 1990s, there was an explosion in the number of trusts being formed,” he said.

Baucher also has anti-moneylaundering concerns about trusts but there were legitimate reasons to establish them, particularly for incapacitated people or those suffering gambling or drug addictions “to protect them from themselves” and stop them using the value in assets to fund their problems.

He believes some trusts will fold when new legislation comes into force next year. That consolidates years of litigation and court cases and updates the law, he said.

“People will ask ‘do we really need this trust?’,” Baucher predicted, saying trusts were no magic bullet for tax planning.

The Trusts Act 2019 was passed on July 30 last year. It represents the most significant change to trust law in decades and aims to make trust law more accessible for New Zealanders.

The new law is to come into effect next January.

For a map of trust-owned properties, go to nzherald.co.nz