Do you still need a Trust after February 2021?

Monday 19 October 2020

Do you still need a Trust after February 2021?

The New Trusts Act 2019 is due to come into force on 1 February 2021.

From that date onwards, all Trustees are required to be active in the performance of their duties. There are significant duties and obligations attached to being a Trustee, especially for a professional Trustee.

Most lawyers and accountants are reviewing the Trusts they are acting as Trustee for. To continue to carry out their obligations under the Trusts Act, they will need to have formulated an investment policy and be active in carrying out their Trust duties. There are also obligations of disclosure to beneficiaries as well as the requirement to maintain certain documents and records. Trustees will need to have meetings periodically to ensure that they are able to keep informed of trust affairs.

Many Professional Trustees will be charging for acting as a Trustee. Such costs will make it uneconomical for certain Family Trusts to continue to have the involvement of a professional Trustee. For example, if a Trust only owns the family home, then it may well be appropriate for the independent Trustee to resign and for a family member to replace the independent Trustee. If, say, a Trust is set up for mum and dad, then it may be appropriate for the third Trustee to be one of the children if the children are grown up. If not, then perhaps a sibling could be involved.

While the liability of independent Trustees is often limited to the net assets of the Trust, no limitation of liability is available to any Trustee who is also be a beneficiary of the Trust. If the Trust assets are insufficient to cover the liability of the Trustee, then the Trustee may become personally liable. There are certainly risks for such a family member Trustee.

Ultimately whether it is worthwhile to maintain a Trust depends on the reason why the Trust was set up. If it was largely to protect assets against government asset testing regimes, you should consider the estimated lifetime risk of residential aged care (RAC) use in New Zealand. A 2015 study published in the Australian and New Zealand Journal of Public Health stated that the estimated lifetime risk of RAC use in New Zealand is 47% overall for those aged 65+ (39% of men and 54% of women). For those who are aged 85+, estimated lifetime use of RAC is much higher, being 66% overall (i.e. 58% of men and 70% of women).

These figures make interesting reading. Based on the existing assets testing rules for residential care subsidy, it still seems to be worthwhile to maintain a Trust if one was set up some time ago and gifting was completed some. As rest home fees still cost around at least $50,000-$60,000 a year, being able to qualify for some degree of rest home subsidy still seems worthwhile.

The above may change if the NZ government tightens the criteria for asset testing for rest home subsidies. For example, the government lower the allowable asset threshold under the asset testing regime. Alternatively, they can change the rules to deem Trust assets as an applicant’s assets if the applicant is a discretionary beneficiary of the Trust.

Apart from asset testing for rest home subsidies, there are other reasons for setting up and maintain a Trust. They can include protection from business creditors, relationship property planning, protection against claims from disinherited children, or a Trust for specific beneficiaries such as disabled or under aged beneficiaries.

As usual, we must continue to watch this space for development.

Teresa Chan

12 October 2020

This article is for general use only. Advice should be sought for specific circumstances. Please consult Teresa Chan at Teresa Chan Law Limited, Level 3, Westpac Building, 106 George Street, Dunedin 9016, ph. 477 1069, or email teresa@tchanlaw.co.nz