Articles by Matthew Gilligan
“Trust busting” is the term often used to describe instances where a court finds in favour of a claimant trying to access trust assets. Here, though, I do not want to talk about “trust busting”. Instead I want to bust some trust myths. There has been a lot of media coverage recently as a result of the new Trusts Act passing. Much of this coverage has suggested that trusts are now ineffective. This approach is regrettable and founded on a number of myths.
Myth One – Trusts don’t provide effective asset protection
While it is true there have been some notable relationship property cases where claimants successfully accessed trust property, you have to look “under the hood” of those cases to truly understand their impact. Often the trust deed or the trust admin (or both) are a shambles. Sometimes the court is seeking to redress a huge relationship property imbalance.
None of this means that a properly constituted and administered trust will not stand up to challenge. The bottom line is there is great value in having the insurance policy of a trust owning valuable assets.
Myth Two – There are no benefits in employing a trust
Trusts are often employed for estate planning purposes, which is a point often overlooked in the alarmist media commentary. Where assets are owned personally, they form part of your personal estate on death. Your personal estate can be subject to challenge. It can be subject to challenge by creditors, by an ex-spouse, by aggrieved family members or caregivers. On the other hand, where assets are held by a trust they are insulated from exposure to these types of claims.
While few people employ trusts for tax reasons, they can be effective in splitting income amongst beneficiaries to reach an efficient tax outcome.
Another point often made by media experts is that trusts provide no benefit when it comes to eligibility for the residential care subsidy. In my experience very few people set up a trust in the expectation it will help them qualify for the subsidy. That said, it generally places you in no worse position and if, for example, you receive an inheritance directly into a trust then that falls outside of your asset base as far as asset means testing is concerned for the residential care subsidy.
Myth Three – Beneficiary demands
One of the most notable aspects of the new law is a default requirement to contact beneficiaries of the trust and advise them of their standing as a beneficiary. From there, beneficiaries can seek information from trustees. However, they do not have a right to demand distributions from the trust. Furthermore, there can be reasons for trustees to not disclose information to beneficiaries. For example, if there is an expectation that disclosure will have a negative impact on the beneficiary or relationships within the family, trustees can elect not to make such disclosure.
While it is true that new rules are designed to make trustees more accountable to beneficiaries – which is as things should be – they do give scope for trustees to take into consideration a wide range of factors before deciding what information will be disclosed and to whom.
Myth Four – Onerous new law
While the new law includes some new duties, such as this default duty to contact beneficiaries and a duty to retain trust information, for the most part these are actions that a prudent trustee should be undertaking anyway. If anything, complying with the Act will ensure that trusts are more robust moving forward, enforcing good practice by trustees.
There are also positive aspects of the new law including some flexibility to alter aspects of the deed, in circumstances where previously you may have had to go to court to be able to do this. The maximum lifespan of a trust can also potentially be extended.
In summary, we still see significant value in employing trusts as part of a robust asset protection and estate planning structure. I find much of the media commentary to be alarmist and skin deep, ignoring many of the advantageous aspects of accumulating your hard earned capital in trust ownership over time.
GRA director, John Rowe, recently ran a webinar on the new trust rules, which you can view here if you would like to know more: https://www.gra.co.nz/resources/seminar-downloads
This letter is to express my appreciation for the assistance and encouragement of both Anthony Lipscombe and particularly John Heaslip over the last financial year. The period since activating my trading trust has been one of considerable stress, as well as personal development, as I embarked on this as a relative business neophyte with virtually no awareness of the contemporary requirements of running a business, particularly the financial records aspect. During much of this period I have therefore felt considerable out of my depth. However I have been lucky enough to have had the benefit of the advice and support of John Heaslip in rationalizing what was a fairly chaotic set of records of the first year property trading. I am able to say that John in particular, has been unstinting in his attention to my needs and has done so in a manner which has never alluded to my extremely rudimentary grasp of managing a business, or even of being unable to set out a spread sheet properly. The result of the above guidance is that now, although my trading trust would still not be able to operate without the advice of GRA, I do least feel a sense of satisfaction that I have got to my present point without major disaster and that my property trust does now have some kind of firmer basis for any future activities - Name withheld by request
Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
We help new, small and medium property investors become long-term successful investors through our education programmes and property portfolio planning advice. With our deep knowledge and experience, we have assisted hundreds of clients build wealth through property investment.Learn More