Lawbrief December 2024

Current Suitability of a Trust

Trusts can be a useful planning and protection tool for your family’s long-term interests.

However, over time your circumstances and your family’s circumstances may change.

What are the disadvantages of winding up a Trust?

If you have a Family Trust that you think no longer serves your family’s purposes, or you want to revisit the management of a Family Trust with a view to simplifying matters, then we recommend you contact us to assess whether the Trust should be wound up, resettled onto a more suitable new Trust, or other steps taken to simplify the management of the Trust.

There are several potential disadvantages to winding up a Trust.

  • The assets of the Trust would no longer have the protection of the Trust structure against the following potential categories of claimants:
    • Claimants under relationship property law against yourself, your children, grandchildren or future grandchildren. (This protection remains important despite becoming less effective in recent years for yourself and remains effective for your children and grandchildren. However, the most effective protection in relationship property matters is through putting in place a Contracting Out Agreement.)
    • Claimants under the Family Protection Act 1955 against your Estate. (This can be made where no provision or insufficient provision has been made for your children / grandchildren / spouse /parents from your Estate.) There are a range of issues with using a Trust for protection under this heading.
    • Creditor claimants in respect of any business activities of you, your children, grandchildren or future grandchildren, especially if you or your children, grandchildren or future grandchildren provide or have provided or subsequently should provide personal guarantees in the course of these activities.
    • Government in respect of certain possible taxes.
  • There are tax implications that you will need to consider:
    • You may lose any tax benefits that the Trust currently offers if income is allocated to beneficiaries on a lower tax rate – income can either be retained in the Trust and taxed as Trustee income at 39% (or 33% if the Trust earns income below $10,000) or be allocated to beneficiaries on a lower tax rate.
    • There may be bright-line property tax implications for any properties that the Trust holds. However, if the Trust owns any property which is used as the main home of a Beneficiary of the Trust, the main home exemption may apply to that property, subject to certain rules. Further, transfers from family Trusts now qualify for “rollover relief”, meaning that if a transfer out of the Trust and into the recipient Beneficiary’s personal name would be caught by the bright line test, ‘relief’ will be provided to avoid that.
  • You may lose control and flexibility in granting benefits and distributions to selected beneficiaries:
    • Retaining the Trust structure allows for flexibility in catering for different beneficiaries’ needs and circumstances at different times. If your Trust has an independent Trustee (which is strongly recommended) and relationships within your beneficiaries are or should become strained, the Trust structure can provide some distance between you and the use of the Trust’s assets for one or more Beneficiary’s needs in accordance with the Trustees’ directions.
    • In Estate planning, a Trust can also provide you with more control and discretion over how your assets are made available to your children (or other beneficiaries of your Will) once you have passed away.
  • You would lose the benefit of the involvement of an independent (non-Beneficiary) trustee in all decision making for the Trust. This becomes particularly important if you should have diminished capacity or involvement to make appropriate and prudent decisions about dealing with the Trust’s assets.
  • Holding your assets in a Trust can assist your eligibility for a residential care subsidy through gifting funds to the Trust should that ever be applicable to you. Winding up the Trust and distributing the assets to a Beneficiary means those assets will be included in that Beneficiary’s Subsidy assessment if or when it takes place.
    • However, we note that Work and Income, who manage the Residential Care Subsidy, have wide reaching powers to review gifts made to Trusts and other individuals/entities and, in accordance with certain rules, to consider those gifts should not have been made and are to be included in the Subsidy assessment anyway. However capital gains which have accrued in the Trust’s assets cannot be included as a personal asset.
    • In addition, if you are receiving income distributions from the Trust generated through the Trust’s investment portfolio, this may already affect your eligibility for the subsidy.
    • This is a complex area, and we recommend you contact us for advice before taking any steps.

What are the benefits of winding up a Trust?

The potential benefits to winding up a Trust and distributing its assets to a beneficiary are:

  • It would simplify your affairs and enable you to avoid the various obligations and compliance costs associated with Trust administration.
    • The new Trusts Act 2019 introduced strengthened obligations on Trustees, such as obligations to consider on a regular basis whether or not to disclose certain information to Beneficiaries.
    • Winding up your Trust is likely to save you accounting fees if the Trust earns income and legal fees required for Trust administration.
    • If the Trust holds mortgaged assets or assets with other security registered against them, refinancing those assets into the sole name of a Beneficiary or Beneficiaries may avoid additional paperwork required with the Bank in future (for example, personal guarantees).
  • You would no longer require the involvement of an independent Trustee in decision-making about the use or transfer of assets owned by the Trust and allocation of any income from it.
    • Instead, if you wind up your Trust, the recipient of the Trust’s assets would have direct control over those assets.

What is the process for winding up a Trust?

Winding up a Trust involves distributing all the Trust’s assets to Beneficiaries of the Trust, after either repaying all Trust debt or refinancing it into the names of Beneficiaries or resettling all or part of the Trust’s assets to a new Trust.

Based on the terms of the relevant Trust Deed, there are typically 3 different courses of action that can be taken to transfer the Trust’s assets and liabilities:

(i) The Trustees can distribute all of the remaining assets of the Trust to all or any of the Discretionary Beneficiaries in the Trustees’ discretion and then wind up the “empty shell”. This enables the Trustees to retain more control over the distribution process and be selective about who gets what. Trustees are nevertheless bound to give serious consideration to the Settlor’s/s’ wishes.

(ii) Alternatively, the vesting day can be brought forward, and the Trustees can distribute the Trust assets to the Final Beneficiaries in accordance with the terms of the Trust Deed. This can be a more restrictive approach but may reflect the Settlor’s/s’ wishes.

(iii) Transferring all or part of the Trust’s assets to another Trust or Trusts. By way of resettlement.

The process is documented by Trustees Resolutions and in a Deed of Distribution and Winding Up for options (i) and (ii) and by a Deed of Resettlement for option (iii). If your current Wills leave your residuary Estates to the Trust, then new Wills will also need to be put in place.

Seeking Legal Advice

There are various benefits and disadvantages that come with continuing with or winding up a Trust. These will need to be carefully considered and weighed up in your individual circumstances.

If you are considering reviewing the suitability of your Trust or simply revisiting the management of your affairs, please reach out to one of our team and we would be happy to help you navigate this process.

Confirmation of Payee by New Zealand Banks

The New Zealand banking industry is launching a Confirmation of Payee service from December 2024. When making an online payment it will ensure you take a second to check whether the account owner name and number match.

This way, you’ll have greater confidence that you’re paying the right person. It’s another tool to help reduce the risk of paying the wrong person so you can stay one step ahead of scammers and fraudsters.

When you make a payment to a new payee this new check will show if the bank account number and name are a match, partial match or not a match.

You will be prompted to check whether you have entered the number correctly. If it doesn’t match then you should contact the person to confirm their details.

Please note that this match check will only apply to domestic payments. International payments, open banking or ATM payments will not be checked.