The GRA Blog

Recessions bring about all sorts of changes. For example, in the legal beagle world, frequently people stop purchasing houses, so lawyers run out of conveyancing work. Conversely, money starts to get tight so people start to sue each other. This of course means extra litigation work for the lawyers.

Recessions can also bring about some pretty dramatic personal life changes. For instances, people can be made redundant which in turn, creates financial pressure. Frequently, this pressure spills over into their personal relationships.

Sometimes, facing financial pressure can bring a couple closer as they bury down in the trenches together. But often, the strain can lead to a couples’ relationship breaking down. When this occurs, people separate. We know this because in ordinary times about 42% of Kiwis do just that – separate.

When a couple separate they usually divide up their assets. If their assets have been placed in a Trust the inevitable question arises: What happens to the assets in the Trust? This question is of great importance because when a relationship breaks down, there can be a lot of fighting happening and frequently the only thing left standing is “The Trust”.

An Ounce of Prevention is Worth a Pound of Cure

First, before assets are placed in a Trust, all individuals should obtain good legal advice. This is absolutely essential in my view because when assets are moved from an individual to a Trust, an individual’s property rights are affected.

Secondly, the legal advice obtained by the parties will usually include a very strong recommendation for the parties to enter into a legal Property Relationship Agreement. Again, in my view, this is essential because it will set out the basis for future reference. Should a relationship breakdown after the assets have been transferred through to the Trust, this Agreement will become invaluable.

The individuals will be saved a huge legal bill as they will not have to go to Court to argue over the assets. Additionally, and most importantly, those same individuals will not have to suffer the enormous emotional burden going to Court places on a person.

Thirdly, an actual Agreement should be entered into between the parties. This seems almost a moot point considering we have just discussed the absolute need for the Agreement but you would be surprised how many people talk about getting an Agreement but never actually do it.

The Agreement, if prepared and executed, is likely to set out a variety of matters including an acknowledgment of what assets belong to each of the parties before those assets are transferred to a Trust. It may also set out what will happen to those assets when they are transferred through to a Trust should the parties ever separate.

Lastly, if an Agreement has been entered into by the parties and assets have subsequently been transferred to the Trust then the issue is pretty easy. This is of course providing the Agreement stated what was to occur should the parties ever separate. The Agreement is just placed before the Lawyers and hopefully everyone can agree to implement what the Agreement says.

In the normal course of events what this means is the assets of the Trust are sold, loans are repaid and the balance of the sale proceeds are put into the Trust’s bank account, ready for division between the parties.

Often at this point in time the existing Trust is made into one of the individuals own Trust and another Trust is set up for the other remaining party. So in effect, each of the parties ends up with their own Trust.

Then half the sale proceeds are sent to the new Trust and the other half of the sale proceeds simply remains in the existing Trust (which was previously turned into one of the individuals Trust).

two is better than one

It’s no secret that many smart people have two trusts. One each. Each Trust will hold its own assets and frequently a half share in the family home. Why have two Trusts rather than one? Again the answer is simple. If you have two Trusts you have the ability to deal with property that was solely your own before it went to the Trust. This could include family heirlooms.

Also, your own Trust can be the recipient of any inheritances you might receive, such as money from your own Parents. Overall, having your own Trust means you can deal with the assets in the Trust as you and your Trustees wish. You can do this without the consent of your spouse (assuming they are not your Co-Trustee).

Lastly, a very large advantage of having your own Trust is you then have the ability to leave particular assets to specific beneficiaries such as children you had prior to your relationship.

As mentioned above, another great benefit of having two Trusts is that both Trusts can own a half share in the family home. When two Trusts are involved they are also very likely to have entered into a legal Agreement which would have set out the steps to be taken if the parties ever separated.

So overall, a two Trust structure is frequently far superior to one. You do have to be aware that you will have double the set up and running costs of course, but this disadvantage can be far outweighed by the benefits a two Trust structure can confer.

when prevention hasn’t been taken

Here’s where all the trouble begins. The parties don’t ever enter into a legal Agreement and cannot agree on what is to happen with the assets that are in the Trust.

When this occurs only the lawyers win as the battle royale begins and legal fees start to mount. When I see this happening I call both clients. I try to give them a bit of a reality dose. This includes reference to the movie “War of the Roses”. If anyone has ever seen this movie we all know who the winners are and that is the Lawyers. A couple can spend literally thousands of dollars in legal fees as they fight over the assets of the Trust. Let’s face it ... a house worth say $500,000 isn’t worth a couple spending $100,000 on legal fees fighting over.

Often, when you look at what is really going on, the individuals aren’t fighting over the house at all. They are fighting because they are hurt. The trouble is, that fight costs lots and lots of money if it goes on for a long period of time. It is also emotionally draining.

I’m not advocating that an individual shouldn’t engage lawyers when and where they are needed. All I’m saying is a little common sense needs to prevail in these situations. As a Professional Trustee I try hard to calm the parties and seek some form of agreement that I can send through to their Lawyers.

But if you can’t get an agreement, then what happens? Well the matter just has to go to Court. Which means the Courts look at how the Trust was established, how the Trust has been run over the years, who has control of the Trust, what assets have been transferred to the Trust and what loans the Trust owes back to the individuals.

Other matters can also come under scrutiny but in the main, these are the points the Courts will look at. Once the Courts review the matter they may make a variety of Orders. These can include putting an independent person in to run the Trust (act as a Trustee) as well making a monetary award.

I guess there are 3 main points to take from this article.

1. Get great Trust advice when setting up a Trust from a professional who really understands asset protection, estate planning, tax minimization and financial accounting. Get the very best advice you possibly can.

2. Seriously consider a two Trust structure and if you do decide to go down this route, make sure both Trusts have a legally binding Agreement as discussed above.

3. Get good solid legal advice and enter into a legal property relationship agreement.

Remember, if you want your assets to be protected, use a Trust. But do the right thing ... get the right advice, from the right people and chose the right Trust structure to ensure that asset is truly protected.

Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

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P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

Warning To Solicitors, Accountants and Trustees/Trust Advisors...

BEWARE THE APPOINTOR IN NEW ASSOCIATED PERSONS RULES

(11 August 2009)

While the Finance and Expenditure Select Committee managed to weed out much of the over-reach of the new associated persons definition there still appears to be a glaring problem in relation to the Trust to Appointor test in section YB 11.

In the Official’s Report to the Finance and Expenditure Committee on submissions on the bill, the Committee was made aware of the potential for s YB 11, when coupled with the tripartite test, to lead to otherwise unrelated Trusts being associated when professional advisors are nominated as Appointors. This valid concern was raised by Tomlinson Paull and whilst accepted by the Committee, not enough has been done to prevent the undesirable outcome of otherwise unrelated entities from being associated to each other.

As background, this is about association rules between dealers in land, developers or builders and other entities in the business of buying and holding property that are ‘related’ by the associated persons rules. The concern is that if associated, an entity buying property to hold will be taxable on capital gains on properties sold within ten years of acquisition, if at time of acquisition the buy to hold entity was associated to a dealer, developer or builder.

The rules are changing and are much wider than they were, introducing the prospect of:-

Section YB 11 in the new Taxation Remedial bill associates Trustees of a Trust with the person or people who hold the power to appoint and remove Trustees. In short, a Trust is associated with its Appointors. The tripartite test at s YB 14 associates two parties where there is a common associate of both provided that the common associate is not associated to the two parties under the same rule.

For this reason, if a professional holds the Power of Appointorship in respect of a Trust (being Trust “A”) and then holds the Power of Appointorship in a second Trust (Trust “B”), there will not be association between the two Trusts under the tripartite provision as the common associate (being the advisor) is associated to both Trust A and B under the same test.

The Select Committee held this limitation out as being the reason why there would not be unintended Trust to Trust association. Whilst it is true this will prevent an advisor who holds this power in respect of multiple Trusts from creating inadvertent association between the Trusts, the door is still left wide open for there to be association on a far wider scale than surely could have been intended.

To explain further, consider the situation where an advisor accepts a role as Appointor in relation to a Trust that is going to buy an investment property. The Appointor is related to the Trust under s YB 11. The same Appointor might also own shares in a development company, perhaps be Settlor of a second Trust (otherwise unrelated to the first) that is involved in property development or might even be deemed to hold shares in a company involved in development under s YB 3.

What this demonstrates is that there is a raft of other provisions that might associate otherwise unrelated Trusts or companies to the Appointor then leading to association between these other entities and the first Trust under s YB 14. This is obviously not a problem that is fixed by the exclusion of not being able to apply the same rule twice in s YB 14.

Negligence Prospect

Of course reading this you might say that the advisor in that instance would be negligent in accepting the role of Appointor given that they should be aware that they are associated to a development company, and you may be right. What taxes could arise from this on other client’s assets as a result of this oversight?

Thirty percent of capital gains in the next ten years, on assets acquired during the period of association would be an approximation of the answer. However, there might be situations that arise where the advisor has less control over the matter.

Whilst uncommon it is not completely unheard of for an advisor to be a “back up” Appointor in respect of a Trust when the original Appointors die. Or what if a client decides to start trading / developing / building property in their Trust that you are appointor in and does not tell you ? Or what if IRD deem such activity to have existed ?

Summary

It seems clear to us that this is a flaw in the associated persons provisions that was quite rightly raised before the Select Committee but their proposed solution does not work.

The moral of the story clearly is to be careful whom you nominate as an Appointor in respect of your Trusts both now and in the future. It can lead to unwanted consequences. 

A brief background on the new associated persons rule changes (if you are interested) is here.

Remember these blog articles address the general public and are therefore simplified in the blog for the intended reader.

If you would like help with understanding how this affects you, or have a question, we are here to help.  You can Request a Free Interview or use our Ask the Experts service.

Until next time,

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

Warning To Solicitors, Accountants and Trustees/Trust Advisors...

BEWARE THE APPOINTOR IN NEW ASSOCIATED PERSONS RULES

(11 August 2009)

While the Finance and Expenditure Select Committee managed to weed out much of the over-reach of the new associated persons definition there still appears to be a glaring problem in relation to the Trust to Appointor test in section YB 11.

In the Official’s Report to the Finance and Expenditure Committee on submissions on the bill, the Committee was made aware of the potential for s YB 11, when coupled with the tripartite test, to lead to otherwise unrelated Trusts being associated when professional advisors are nominated as Appointors. This valid concern was raised by Tomlinson Paull and whilst accepted by the Committee, not enough has been done to prevent the undesirable outcome of otherwise unrelated entities from being associated to each other.

As background, this is about association rules between dealers in land, developers or builders and other entities in the business of buying and holding property that are ‘related’ by the associated persons rules. The concern is that if associated, an entity buying property to hold will be taxable on capital gains on properties sold within ten years of acquisition, if at time of acquisition the buy to hold entity was associated to a dealer, developer or builder.

The rules are changing and are much wider than they were, introducing the prospect of:-

Section YB 11 in the new Taxation Remedial bill associates Trustees of a Trust with the person or people who hold the power to appoint and remove Trustees. In short, a Trust is associated with its Appointors. The tripartite test at s YB 14 associates two parties where there is a common associate of both provided that the common associate is not associated to the two parties under the same rule.

For this reason, if a professional holds the Power of Appointorship in respect of a Trust (being Trust “A”) and then holds the Power of Appointorship in a second Trust (Trust “B”), there will not be association between the two Trusts under the tripartite provision as the common associate (being the advisor) is associated to both Trust A and B under the same test.

The Select Committee held this limitation out as being the reason why there would not be unintended Trust to Trust association. Whilst it is true this will prevent an advisor who holds this power in respect of multiple Trusts from creating inadvertent association between the Trusts, the door is still left wide open for there to be association on a far wider scale than surely could have been intended.

To explain further, consider the situation where an advisor accepts a role as Appointor in relation to a Trust that is going to buy an investment property. The Appointor is related to the Trust under s YB 11. The same Appointor might also own shares in a development company, perhaps be Settlor of a second Trust (otherwise unrelated to the first) that is involved in property development or might even be deemed to hold shares in a company involved in development under s YB 3.

What this demonstrates is that there is a raft of other provisions that might associate otherwise unrelated Trusts or companies to the Appointor then leading to association between these other entities and the first Trust under s YB 14. This is obviously not a problem that is fixed by the exclusion of not being able to apply the same rule twice in s YB 14.

Negligence Prospect

Of course reading this you might say that the advisor in that instance would be negligent in accepting the role of Appointor given that they should be aware that they are associated to a development company, and you may be right. What taxes could arise from this on other client’s assets as a result of this oversight?

Thirty percent of capital gains in the next ten years, on assets acquired during the period of association would be an approximation of the answer. However, there might be situations that arise where the advisor has less control over the matter.

Whilst uncommon it is not completely unheard of for an advisor to be a “back up” Appointor in respect of a Trust when the original Appointors die. Or what if a client decides to start trading / developing / building property in their Trust that you are appointor in and does not tell you ? Or what if IRD deem such activity to have existed ?

Summary

It seems clear to us that this is a flaw in the associated persons provisions that was quite rightly raised before the Select Committee but their proposed solution does not work.

The moral of the story clearly is to be careful whom you nominate as an Appointor in respect of your Trusts both now and in the future. It can lead to unwanted consequences. 

A brief background on the new associated persons rule changes (if you are interested) is here.

Remember these blog articles address the general public and are therefore simplified in the blog for the intended reader.

If you would like help with understanding how this affects you, or have a question, we are here to help.  You can Request a Free Interview or use our Ask the Experts service.

Until next time,

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

In case you missed it over the weekend, the NZ Herald article on a woman being awarded a share of her husband's 'inherited property' that pre-existed the relationship rewrote some relationship property rules.

What Happened?

The supreme court held that a woman whom helped maintain an inherited farm property (that pre-existed the marriage) was entitled to 40% of the growth on the property that occurred during the relationship.

Why?

Because she contributed to the maintenance of the house by performing domestic chores and by earning income.

Why is this a change ?

It was generally accepted before this case that inherited property that pre-existed a marriage is separate relationship property and not subject to 50/50 split on divorce.

Comment;

• Personally I think the case is fair, - she did contribute to the relationship so why should it not be shared property, given she contributed to the properties upkeep? The plaintiff's counsel noted the farm would have likely been forced to be sold, but for her income being used to support bank payments.

•  If you wish to avoid this happening, - put your property in a Trust and ask your spouse to sign a relationship property agreement. The latter ( relationship property agreement or S21 agreement) makes it very clear that the property is not intended to be joint relationship property. Such agreement is much easier than an expensive fight later on, and perhaps easier to put in place earlier than later.

•  The Trust is a great thing to do before the relationship commences, but is weakened as a defence to a claim if setup during the marriage and the property is transferred during the relationship. If you wish to do this during the marriage, the S21 agreement is essential to stop spouses 'tracing' their potential relationship property interest into the Trust.

Thank you,

 Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.