Chair, Summer Investment Committee
New Zealand has more family trusts per head of population than any other country. Supposedly there are around 450,000 trusts in New Zealand (no-one knows the exact number because they do not have to be registered) and that means that one in ten of every man, woman and child has formed a trust.
We know why there are so many trusts in New Zealand, in the past they have given great benefits with lower taxes and have provided a way around things like death duties, superannuation surcharge and asset testing for residential care subsidies.
Many of these things are now gone (death duties, superannuation surcharge) or the rules surrounding the use of family trusts have changed (residential care subsidies). Changes to the law and how the rules are applied mean that trusts are no longer as beneficial as they were.
Moreover, many trusts have been badly managed. In New Zealand many trust settlors have been left to their own devices and things like minute books and other record keeping have not been kept up to date.
Such poor trust management is often enough to allow someone to have the trust overturned: a disgruntled former spouse, the IRD, WINZ or a business creditor can often go to Court and successfully challenge the trust.
If you put together the changes to the law that we have seen over the last decade with the fact that many trusts are so badly managed that they could be overturned, we find a situation where many trusts will no longer fulfil the purpose for which they were set up.
That means that many people should review their family trust. First they should consider the motive for settling the trust and if that is no longer valid, they should consider winding it up.
Second, if they are going to retain the trust, they should consider the way that they are managing the trust. When you manage a trust you should look after the assets as if they were someone else’s property (which they are – they belong to all the beneficiaries, not solely you). You should keep good records, take professional advice when it is needed and make sure that all of the beneficiaries are considered when making distributions.
If trust management has not been good and if you have treated the assets as if they were your own property, you need to rectify things and start to manage it properly. This will probably require some advice.
A badly managed trust is a bit like insuring the house but then going out and leaving all of the doors unlocked. Unlocked doors probably mean your insurance is void; poorly managed trusts probably mean that they can be overturned.
If you have not thought much about the trust you settled for a long time, then maybe its time to sit down with your lawyer to talk about its purpose, the benefits that you may get from it and the way that you have managed it.
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