Do you really need your trust?
Will and Kate have been married for 25 years and have two children together — their son Harry, who they are very close to, and their daughter Meghan, who they are estranged from.
Will and Kate settled a trust many years ago while they were dairy farmers. At the time, they owned a large farm and had many workers working for them.
About 10 years ago, they sold the farm and have since retired to a small lifestyle block, which is still owned by their trust. They have heard about the Trusts Act that came into force on January 30, 2021 and want to know if this will affect their trust.
The act brings about many changes to trust law, including:
1. Imposing greater responsibilities on trustees to understand the terms of the trust deed, and the obligations that go along with being a trustee of a trust;
2. A presumption that beneficiaries of a trust will be provided with certain basic trust information. They are also entitled to request other, more detailed trust information, which could include financial statements, valuations of trust assets and trustee resolutions.
These changes have got Will and Kate thinking! They have come to us with the following questions:
Why do we have a trust?
1. Trusts are a great way to protect your personal assets (such as the farm) from business creditors or fines/ penalties imposed by WorkSafe.
2. Trusts were often settled for residential care purposes. Given the changes in the Ministry of Social Development’s policies, however, in some cases, having a family home in a trust can actually make it less likely someone will receive a residential care subsidy in the future.
3. Trusts were also settled for tax purposes. Many of the tax benefits that were available to trusts are no longer available. However, it is important the trust’s tax position first be checked with the trust accountant.
4. Trusts were settled to protect from relationship property claims. While a trust that was settled before a new relationship may offer some protection, this protection is greatly eroded if income earned during the relationship has been advanced to the trust.
Do we still need a trust? Although the likelihood of a claim by a creditor or WorkSafe penalty has greatly reduced with the sale of the farm, the relationship Will and Kate have with their daughter may mean a trust is still useful, particularly if Will and Kate want to exclude Meghan from benefiting from their estates.
Under the Family Protection Act 1955, a person has a “moral duty” to provide for their children (and other family members such as spouses and grandchildren) at death. A failure to do this may enable Meghan to make a claim against Will or Kate’s estate.
However, if all assets are owned by a trust, where there is no such moral duty to provide for children.
What do we need to do with our trust now?
If, like Will and Kate, you are wondering how the new act may affect your trust, we recommend you seek legal advice to ensure:
1. That the trust will be consistent with the new act and sufficiently protect the trustees;
2. That you narrow the classes of beneficiaries to only those who you intend to benefit from the trust;
3. That the person who has the power to appoint or remove trustees upon your death or if you become mentally incapable is actually the person that you trust to take on this role.