Setting up a Trust in New Zealand

As part of our commitment to your financial wellbeing when you emigrate to New Zealand, we have commissioned the following article on New Zealand Trusts from noted Christchurch lawyer Annabel Sheppard from Wynn Williams & Co.

If you are interested in setting up a trust before you move to New Zealand to assist with your tax and asset planning, please take a look at our separate article on pre-migration trusts for UK emigrants to New Zealand, which covers the opportunities this offers and the issues involved.

A trust is an obligation on one person to deal with property over which they have control, for the benefit of some other persons.

The persons involved are:

• The settlor who creates the trust and decides what goes into the document setting out the terms of the trust (the trust deed).  The settlor may also be a trustee and/or a beneficiary.

• The trustees who hold title to the trust assets in their own name and deal with them as instructed in the trust deed.

• The beneficiaries who receive the benefits from the trust.

Most trusts are "discretionary trusts" where the trustees decide to what extent, if any, named beneficiaries receive the income and/or capital of the trust.

There are many different types of trusts. The most common trusts are family trusts, where the parents set up a trust to benefit themselves, their children, and grandchildren. A family trust operates during the settlor's life and after his or her death. In contrast, a Will only operates after a person's death.

Another common trust is the trading trust, where you may have a company as the trustee of a business. This allows the trust to pass benefits from the business to beneficiaries who are not involved in the business at all.

Why Should I Consider Setting Up a Trust?

Trusts are created for a variety of reasons. Some of the benefits of a trust structure are as follows:

• Death duties may be reintroduced and it is possible that the transfer of assets to a family trust will achieve potential death duty savings in the future.

• In appropriate circumstances where there has been sufficient forward planning, trusts offer an ability to protect against claims by creditors.  By transferring assets to a trust the legal ownership is held by trustees ensuring the assets are out of reach of personal creditors.

• Assets held in trust are not part of a person's personal assets and are usually not taken into account for government asset testing purposes (e.g. Residential Care asset testing).  The assets are therefore more likely to be left available for children and other family members after the person's death.

• In appropriate circumstances trusts can protect assets from matrimonial property claims in the event of marriage breakdown (either yours or your children's).

• Although most people wish to treat their children equally, for a variety of reasons, some people wish to give preference to the interests of one or more of their children against the others.  Where that preference is included in a Will there is always the possibility of the Will being overturned under Family Protection Act legislation.  Where the preference is arranged during a person's lifetime using the provisions of a family trust, Family Protection Act procedures are not available to the disadvantaged children.

• Sometimes tax savings can be achieved by the Trust paying tax or by allocating income to beneficiaries on lower tax rates. Sometimes if a trust is set up and assets transferred to it from overseas prior to the settlors and trustees becoming resident in New Zealand there may be some asset planning advantages.

A Trust is Not a "Cure all"

A trust should not be regarded as a "cure all" for the potential problems outlined above. Where an immediate advantage is created by a trust the advantage may be lost if current law or circumstances change in the future.

Potential future advantages may never occur because anticipated circumstances do not arise.  e.g. death duty is never reintroduced or it is introduced in a form for which trusts offer no protection.

A trust does, however, create a large number of options and greatly increases the likelihood of assets being protected for the benefit of beneficiaries.

Disadvantages of Trusts

A disadvantage of using a trust is that the same discretion vested in the trustees which could work to the advantage of the beneficiaries may conceivably work to their disadvantage if trustees exercise their discretion in a way which would be contrary to the wishes of the settlor.

Obviously, there must be confidence in a trustee to carry out your wishes if the trust format is used.

Further Considerations with Trusts

1. The Term of the Trust

The usual maximum term for a trust is eighty years.  The Trustees usually have a discretion to wind-up the Trust at an earlier time.

2. The Trust Assets

The trust acquires assets that are given or sold to it, often by the person setting up the trust. Usually the assets are sold to the trust at current market value by the settlor.  The sale creates a debt due to the settlor. The debt is repaid by:

• Gifts made by the settlor to the trust and/or
• Payments made from the trust income or capital.

In New Zealand an individual can make gifts of up to $27,000.00 within one year without incurring gift duty.

3. Settlor Control of the Trust

If the trust structure is used correctly the settlor (or any other named person) can retain some influence through:

• Memorandum of Wishes - The settlor can indicate in writing how the trust is intended to operate and who will benefit.  Although the memorandum is not binding, it can be a useful guide for trustees.  It can be updated to reflect any changes.

• Trusteeship - The settlor is may be one of the trustees, and retain some control accordingly.

4. The Trustees

Anyone with the legal capacity to deal in or hold property, and the mental capacity to make the decisions as a trustee can be appointed as a trustee. Usually at least one trustee is an independent trustee.

The trustees have very wide powers and discretions under the trust deed but generally they must exercise these powers in a sensible manner having regard to the interests of the beneficiaries under the trust. They must at all times comply with the provisions of the trust deed, and keep proper records of their decisions as trustees.

Setting up a Trust

Trusts are not suitable for every situation. There may be more appropriate structures for achieving your aims. Your solicitor can advise you on:

• Whether a trust is a suitable means of achieving your aims.
• Alternative structures for achieving your aims.
• If the most appropriate alternative is a trust, the type of trust and the most appropriate people  to appoint as trustees.
• Any other legal issues that may arise.

Please contact Annabel Sheppard  of Wynn Williams & Co for further advice.