On Accounts

To trust or not to trust
Debbie Haddon examines the background to Trusts and highlights their obligations and responsibilities. Are they still relevant in the 21st century?

Although this sounds like relationship advice, I’m nowhere near qualified enough to write on that topic! Instead this column looks at whether you should be forming a Trust or not.
With approximately 500,000 trusts currently set up in New Zealand it feels a bit like every man and his dog has one and it gives a false sense of requirement to have one. Just because your neighbour has a trust it doesn’t mean that you must have one as well.
Instead, look at your reasons for wanting a Trust and the obligations and responsibilities that come with it. Trusts are generally established for reasons like asset protection (from creditors, partners, etc), inter-generational wealth transfers, means testing, taxation, and so on.  
However, Trusts can also be pulled apart if the sole purpose of the trust is to defraud creditors, reduce your income assessment used in means testing by government agencies (child support and residential care subsidies), or if the Trust is not administered properly.  
In a few instances Trusts have been declared by courts as a “sham” and have been found to be “operating as an alter-ego for the settlor”.
Going back to the fundamentals of Trust law, if you’re settling a trust you are giving away all your rights to the assets you move into the trust and entrusting other people, the trustees, to look after them. Generally, you will become one of the trustees in order to keep some control on how the assets are being used. However, this raises another issue; you as a trustee are personally liable for any GST and income tax liability not paid by the Trust.
I mentioned above that taxation may be one of the reasons why people set-up trusts. A few years ago when the highest personal tax rate was above the Trust tax rate of 33 percent there was an incentive to redirect income through the Trust so you could get the advantages of a lower tax bill. However, this is no longer the case, with the top individual tax rate currently also set at 33 percent.
Also, distributing income to beneficiaries may be trickier than thought, with a distinction needing to be made between capital and income distributions. The tricky part is that not all Trusts give their trustees the discretion as to what income to distribute, so you could be left with some earnings unable to be transferred to the beneficiaries.
Trusts are also time consuming and costly to set up and administer. Greg Sheehan, CEO of RightWay, has a favorite saying when it comes to Family Trusts: “Don’t waste your time and money if you don’t plan on administering them properly.” This is exactly what many people are doing.
The Law Commission recently published its recommendations for trust law reform. Amongst other things, these recommend significant reforms to trustees’ duties, limitations on trustee exemptions and indemnity clauses, and broadening the default powers of trustees. While the final wording of the law is some way off, you can bet that it won’t reduce the administration requirement on trustees.
Family trusts also run the risk of disagreements and even breakdown in relationships between family members over the way the Trust is being managed and by whom.
In summary, if you’ve decided to establish a trust, do it properly. Have all the decisions documented, administer it correctly, accept that your assets are no longer yours and act like it.  Don’t think that you can use a Trust to reduce your other liabilities (child support or residential home care repayments) as there have been many changes put in place to deal with these situations. And one last thing, don’t listen to your neighbour, unless he/she is a tax advisor!
If you’re more confused than before, or this article has sparked a lot of questions, then send us an email or raise it with your accountant or lawyer next time you see them.

Debbie Haddon is operations director at online accounting firm RightWay Limited. Visit www.rightway.co.nz