Say hello to the era of trust-busting
A book on family trusts became a surprise bestseller 20 years ago, writes Martin Hawes.
THIS IS the 20th anniversary of the publication of my book Family Trusts – A New Zealand Guide. Right from the start, the book sold like crazy: it was New Zealand’s best-selling book in 1995 and 1996, and spent most of that time at #1 on the bestseller lists. Now in its seventh edition, it still sells quite well. Some years ago, when anybody stopped counting, it had sold more than 120,000 copies.
At the time of writing the book in 1995, it was difficult to find a publisher. I was turned down repeatedly on the basis that a book on trusts would never sell!
Eventually, David Elsworthy and Ros Henry set aside their misgivings and agreed to publish, but those who turned it down did so with some justification. After all, how could a book on such a boring and esoteric topic as family trusts sell more than a few copies?
The answer was that in the midnineties a range of issues came together to conspire to make family trusts very popular.
We had a superannuation surcharge (an additional tax levied on people who received NZ Super); asset testing for residential care and, at various times, relatively high taxes. The effects of all of these could be reduced by holding assets in a family trust.
Twenty years ago family trusts were on everyone’s lips: they were the subject of dinner party conversation and constantly made headlines in the media (much like Auckland house prices do today).
In 1995, a little book on trusts fell into the fertile ground of the times. However, much has now changed.
Twenty years on, many of the old advantages of trusts are gone – legislation, regulation and case law have generally combined to tighten the rules around the use of trusts: the superannuation surcharge was abolished following strident protests; residential care subsidies have much tougher rules; most tax benefits from trusts no longer exist and the Official Assignee has a long, hard look at trusts that have been settled by bankrupts.
There are still benefits that accrue from forming a trust, but not as many nor for as many people as there were.
With perhaps 450,000 trusts in New Zealand, you should expect that new government imposts or other measures are most likely to contain anti-trust provisions. Moreover, there will continue to be a great deal of ‘‘trust-busting’’ as lawyers try to encourage courts to look through trusts and have them overturned.
Many trusts are not giving benefit to the settlors.
Some of these probably gave little benefit right from the beginning (as trusts became popular there were certainly people who formed them because everyone was doing it). Even those that were settled for good reason have seen their benefit eroded by law changes. The growth industry in trusts is no longer in the formation of trusts but is in trustbusting and the disestablishment of them (along with the provision of better management systems).
The management of many trusts in New Zealand is poor. This is largely because so many trusts have been settled by people with little understanding of them and with even less interest in managing the trust for all beneficiaries. In my experience, 75 per cent of trusts are treated as if the assets in them remain the property of the settlors. As such, they could be successfully attacked by interested parties (e.g. IRD, Official Assignee, ex-spouse, Work and Income etc.)
There are still some very good benefits from trusts (e.g. family succession, creditor protection and sometimes for relationship property issues). However, the trust climate is very different from what it was 20 years ago: more legislation, ongoing case law and a demand for better management mean it is time to review any trust you have formed to be sure it still works for you.
Have a good look at any trust that you have formed and consider two things. First, think about the original purpose and see if it is still fulfilling that purpose (or any good purpose). If not, it is time to wind it up. Second, consider whether the trust is being well-managed, and if record-keeping or other administration is not up to scratch, resolve to fix it.
Remember that just like insuring a house and going away leaving all the doors wide open, forming a trust but managing it poorly can undo its very purpose. Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.