In trusts we trust?

Posted on July 29, 2015 in Private Client , Trusts (Tags: Private Client, Trusts) In-Trusts-We-Trust.jpg

Kiwis love trusts. The New Zealand Law Commission has recently completed a comprehensive review of the Law of Trusts and it believes that there are between 300,000 and 500,000 trusts in New Zealand. There is no public register of trusts so these figures are only an estimate. However, if they are correct, the Law Commission’s research suggests that trusts are used in New Zealand far more than they are used in other comparable countries.

Despite their popularity however, trusts are widely misunderstood. With trusts increasingly coming under attack in the courts and also coming under much greater scrutiny by government departments, what we are seeing in practice is that many people who have trusts are realising that their trusts offer little or no benefit to them.

Take the many working class kiwis who transferred their home into a family trust in the 1990s with the sole intention of protecting it from asset testing if they ever needed a rest home care subsidy. Many of them are now finding that despite having a trust, they are still ineligible for a subsidy. This is because WINZ, (the government department responsible for rest home care subsidies), has wide-reaching legislative powers and discretions to look into trust structures. The current policy of WINZ is to look at all gifting that an individual has ever completed, whether to a family trust or otherwise. (This is a change from previous policies). Many people who formed trusts and gifted assets into them as part of a gifting programme over a number of years are now finding that much of that gifting is “clawed back” by WINZ and counted as part of their financial means assessment when they apply for a rest home care subsidy. Many of these people are asking whether it was worth them forming a trust in the first place. This is a valid question to ask.

Trusts are currently providing a great source of work for court lawyers, particularly in insolvency and relationship property cases. There have been a number of cases in recent years where one party (the Official Assignee in the case of insolvency, or an aggrieved ex-partner in the case of relationship property) has claimed successfully that certain assets held in a trust should be treated as part of the personal property of the settlor of the trust for the purposes of either repaying creditors or settling relationship property disputes. Much of this case law has developed around the concept of “sham” trusts, which exist when a trust is a pretence and the documents creating the trust do not evidence the true intention of the parties to that document. When a Court finds that a trust is a sham, it is able to effectively undo the trust for the purposes of accessing its assets.

If you have a trust and you want it to protect you against the legitimate risks of doing business or against a relationship property claim, then you need to be prepared to invest in your trust to ensure that it would not be perceived as a sham if it were ever challenged. This investment should include appointing an independent trustee (someone who is not a beneficiary of the trust), ensuring that your trust has the correct number of trustees (in accordance with the trust deed), recording trustee resolutions, keeping proper accounts for the trust, recording that beneficiaries have been considered in all trustee decisions, signing and dating documents properly and having a good understanding of what property is trust property and what is not. Doing all of these things may still not prevent an aggrieved party bringing a claim against your trust. However, it would go a long way to providing evidence that your intentions in forming the trust and maintaining it have been legitimate.

The Law Commission’s review has found that there is a lot of uncertainty around trusts in New Zealand. This is costing people money through expensive legal structures that may not actually suit their needs and through litigation. The Commission has recommended to Parliament that a new Trusts Act be created to replace the existing outdated trusts legislation and to codify some of the recent court decisions. The Government has agreed with the Law Commission’s recommendation and a Trusts Reference Group has been created to advise Amy Adams, the Minister of Justice on the proposed reforms. Lawyers and trust advisors are hopeful that a new Trusts Act will bring some much needed certainty to the many New Zealanders who have placed their trust in trusts.

Stephanie Pettigrew