Trust: Facts, Fiction And Fallacies

It’s commonly thought the humble trust, as we know it today, originated during the Crusades. A meander down history lane, however, reveals trusts’ tentacles extend further back in time. As far back as Aristotle, concepts like epiekeia and aequitas, which underpin trusts, existed. It wasn’t until the late Roman Republic period, however, under Cicero’s hand, that trust-type arrangements in respect to Rome’s laws of succession became well recognised. Trust law grew further during the reign of Augustus and the rest is history so to speak as found in my new book Trust 123.

The fact trusts have dominated our landscape for so long is a testament to their ability to adapt to and satisfy evolving socio-economic needs, attitudes, and norms of our population. Despite their endurance, trusts are often perceived to be used for dishonest, dubious purposes. In New Zealand at least, nothing could be further from the truth. Kiwis use trusts to conduct business through and to hold assets such as family homes and baches. The choice of the trust for these legitimate purposes is due to its asset protection qualities and inheritance transference abilities. Indeed, protecting assets against creditor and relationship claims and safely transferring assets to loved ones are predominantly the benefits trusts bestow. Sometimes, an incidental tax advantage may be had, but that is by no means the main reason New Zealanders settle trusts.

Benefits Of Trusts

That trusts are prevalent in Aotearoa is not surprising, given Kiwis epitomise the spirit of entrepreneurship, reflected in the high number of small and medium-sized businesses dotting our economic landscape. Whilst all business owners dream of success, failure can and does darken their doorsteps, sometimes through no fault of the business proprietor. When this occurs, a Trust can offer protection against business creditors, preserving the assets of the business owner. In much the same vein, assets placed into trust before a relationship commences can be protected against estranged partner claims. This is especially so in cases where individuals enter into property relationship agreements. Given the high number of divorces and de facto demises these days, prudence in the form of trust asset ring-fencing seems a sensible course to adopt.

A fact of life is that life changes over time. Consequently, the reasons a person establishes a trust can change. For example, as discussed, an individual may be in business and need asset protection. When they sell the business, however, the need may be negated. That doesn’t mean the need for the trust is eliminated. The trust may prove beneficial upon death, ensuring assets are safely passed to an heir. Loved ones can also be subject to risks. Having trustees transfer an asset to a trust created for an heir, will mean the asset doesn’t pass into the recipients’ hands in the first instance. Thus, if an heir is facing a creditor or relationship claim, the asset they receive will be protected.

Another certainty in life is that of paying tax. In New Zealand, every dollar we earn is subject to income tax. Whilst trusts these days are mostly established for asset protection and inheritance transference purposes, trusts can also bestow incidental tax benefits. This is despite the trustee tax rate being 39%. Assuming they are permitted by the trust terms, trustees may choose to allocate income received to beneficiaries. Upon receipt, recipients would return the income in their personal income tax returns and pay tax at their personal marginal tax rates. Depending on circumstances, this may result in quite a bit of tax being saved, given that income tax rates currently range from 10.5% up to 39% when the $180,000 threshold is reached.

Benefits Aren’t Free

Whilst trusts undoubtedly bestow benefits, those benefits only prevail if a trust is run correctly by its trustees. Trustees must adhere to the law. In particular, trustees must follow the terms of the trust and comply with the Trusts Act 2019 (Act) and amendments made to the Tax Administration Act 1994 and the Income Tax Act 2007.

Failure on a trustee’s part to carry out their role can result in that person being held personally liable, exposing their own assets to claims. Inactive passive trusteeship comes with a risk of personal liability. Perhaps this is why many independent trustees are choosing to retire. Non-compliance will undoubtedly come to light as trustees now have to annually report certain details to Inland Revenue. Additionally, disclosures to beneficiaries as required by the Act means beneficiaries rights have been strengthened and trustees’ actions and omissions are subject to a greater level of scrutiny than ever before.

Adhering to the law and being a proactive trustee does, of course, mean more compliance has to be done. That can come at a cost especially if a trust has an independent trustee as their time must be paid for. Possibly this is one of the reasons why New Zealand Family Trust Services Limited is the trustee of choice, as it offers trust services at reasonable prices.

Despite recent law changes, people are still setting up and continuing to use trusts, principally due to the benefits they offer. Should you however wish to close your trust, a word of caution – don’t rush into territory which angels would fear to tread. Seek professional advice so you are aware of any disadvantages the early vesting of the trust may bring about.

For those that are needing an independent trustee or wanting their trust administered correctly, consider contacting me at New Zealand Family Trust Services Limited and picking up a copy of my new book, Trusts 123. It would be my pleasure to assist you.