Have you got your Affairs in order before you Travel Overseas?

Although travel insurance is top of mind when travelling overseas, the importance is ensuring your personal affairs are in order is often overlooked. We asked Nigel Smith of Covisory Partners for his thoughts on Estate Planning best practice before you travel.

It never ceases to amaze me just how many people decide that they need to update their Will, Trust or letter of wishes a few days before a major overseas trip. Often these documents have sat hidden in a dark place gathering dust for years despite frequent reminders from lawyers and accountants that you need to check they are still appropriate. Then all of a sudden, a few days before you board the plane for that lengthy overseas holiday, a sudden panic takes over and you have to recheck them.

We generally recommend you at least read and check your Wills and letters of wishes, plus any powers of attorney, every 2 years. Usually, no major changes are required, with only minor tweaks which can be easily done via a codicil, a secondary document which amends rather than replacing or redoing a Will.

The reality is that you are often more likely to die while in a car going to the airport than on the trip itself. However, people do die on holidays so none the less it is better to check these than not. A few years back a NZ family of 4 were all killed when a light plane crashed while on a sightseeing flight in the islands. A family friend who was the executor spent 1 year sorting out the Will but more importantly the business which the family-owned.

So, what do you need to think about? Firstly, a Will is a legal document and it is very fixed and inflexible. It needs to be done properly by someone who is appropriately qualified. It should cover:

  • Who is your executor? This is the person who administers the Will.
  • Bury or cremate.
  • For those with children under 18, who will become their guardian?
    • This is very important as there are a lot of factors to consider in reaching this decision like:
      • Who?
      • Their ages.
      • How busy they are.
      • Do they have kids themselves?
      • Will your kids fit into their family?
      • Financial support – what if one of them needs to give up work to look after your kids?
      • Back up/secondary guardians.
      • Use of your house or beach house.
      • Where they live – same school zones or city etc.
  • Today most valuable assets are owned in trusts and not part of a Will, but personal property and effects are still owned personally. There may be some valuable items in this, but there will always be more fights over sentimental items than those of value. Making a list of specific valuable or sentimental items and who they are to go to is very helpful, as are pictures.
  • Whether your executor can charge for their time.
  • Any replacement trustees or who the power to appoint and remove trustees goes to.

This is not a comprehensive list but it is a start. By comparison, a letter of wishes to your continuing trustees is an informal, non-binding document. It can be a simple letter from you. It needs to spell out who gets what and when. It can also cover various “options” or different eventualities, eg if my child does drugs, they get nothing.

While non-binding trustees will usually follow it and courts will look at it to decipher a settlor’s intention. Again, this is a document that does need to be thought and talked about.

Finally, there are Powers of Attorney (POA). These fall into 2 distinct categories:

  • Health and Welfare which apply when you are sick or injured and unable to act for yourself; and
  • Enduring or general powers which allow someone to act for you and a company while you are away or otherwise can’t.

There are specific forms for both which sadly have become far more complicated in recent times. However, we recommend that you look at having both.

So, these are all matters that do require some clear and deep thinking. While the urge may be there to do this quickly before you get on a plane etc, if you do then make sure you do a full and proper job when you get safely back.

Nigel Smith is a director of Covisory Partners Limited a chartered accounting, trustee and advisory practice dedicated to looking after families, their businesses and investments.

Make ‘The Talk’ about Money with your Kids

In our practice, one of the more challenging aspects of family planning is settlors of a trust not trusting their children to manage his or her own money, let alone significant funds tied up in trusts after the settlors have died. 

There is a reluctance to involve children in decision-making aspects of family structures mainly due to trust issues the parents have with their children, and sometimes spouses of the children.  These are genuine concerns, and we continue to work with clients in this area to help smooth the transition.  The last thing anyone wants is the next generation to have no idea about money and then for the substantial assets built up over time to be wasted.

So, what can be done?  There are a few things that can be considered as standalone techniques or combining several different techniques, and I am not talking about having an Agee jar on the kitchen windowsill to encourage saving. This might work for a five-year-old, but not someone in their mid-20’s.  However, it is essential to ensure the ages of children are considered in any strategy as it believed that a lot of money habits formed by children are entrenched by the time they are 7 years old.  Regardless of what age children are, we have found that allowing children into a decision-making process is very important for their financial education, otherwise they are disengaged and lack the skills to manage theirs and potentially the family money later in life.

Some techniques to consider:

  1. For those who have children who are teenagers, it is essential that they learn about budgeting at this age.  This can be achieved through bank account and allowance control and using a budget spreadsheet to keep within.  It is important to discuss wants versus needs at this stage.  Another option is incorporating children into family budget discussions.
  2. For those children who show an interest in investments at this age, playing a game to invest in stocks or other investments and then track performance over a period is helpful.
  3. Teaching a child about philanthropy is becoming more and more necessary.  The concept of giving, either through donations of money or time through volunteering for charities, is becoming a priority in today’s modern society. 
  4. For those with older children who have either left home or are increasingly independent to ensure they learn about family businesses or investments, they can be added as advisors to boards to sit in on meetings and learn about the family financial holdings.  Eventually, this may lead to proper directorships or trusteeships.
  5. We have also seen some families set aside some funds for the children to manage themselves along with professional advisors.  This separate fund can also include a charitable object as well, so not all funds go to the child, but they are forced to provide benefit to others.  Having a professional advisor involved in the structure can also help a child find his or her own way without too much interference from the parents.

Regardless of what path is chosen, and we emphasise that every family will have different considerations, it is important not to be overly secretive about family finances, especially as children get older.  In our experience, those families who have parents that are secretive are the ones that end up in arguments later.  Changes to the Trustee Act scheduled for later in 2019 will make this information available to all beneficiaries but be open and honest will help limit any family squabbles going forward.

There will also be children who will not be interested financial matters.  The concern here is the parents continue to financially support those children until well after they should be financially independent.  This becomes a habit for both the parents and the children, and it is hard to break the longer it goes.  Parents do support children in several different ways, financial assistance being one of them, but the last thing any party would want is for financial support to carry on indefinitely.  Often from a parent’s perspective, the hardest thing will be is to say no.

For those with substantial family assets children should be educated on the ramifications of entering a long-term relationship without adequate protection.  This can be a challenging conversation, but a necessary one in today’s environment for sorting our property when a relationship splits.

It is clear there is no right answer here.  All we can recommend is to start talking to children about money as soon as you can and involve children in financial decision making as much as possible. 

Are you ready for the Changes to NZ’s Trust Laws?

If you are a trustee or a beneficiary of a NZ trust it is worth doing your homework.

In late 2017 the new Trusts Bill was introduced to the New Zealand Parliament.  It is expected to become law later in 2019 and it will have some major implications for trustees.  The law changes will have a major impact on how trusts are administered in the future and new trust deeds will need to be carefully considered by any settlor, rather than rely on a template deed that has been in use for twenty years.

So, what are the major changes:

  1. Trustee Duties: the new law differentiates between mandatory duties and default duties.  Mandatory duties cannot be modified (such as duty to know the terms of the trust, duty to act in accordance with the trust terms etc) but the default duties can be excluded by the deed of trust.  This includes duties such as duty to have a general duty of care, duty to invest prudently etc.  It will be very important for any new trust being put in place that before the document is signed a good conversation occurs between the professional drafting the document and the settlor about what should and should not be excluded.
  2. Beneficiaries: under the new rules all trustees must inform every beneficiary they are a beneficiary of the Trust.  They must be informed of the names and contact details of the trustees, whether there are any changes to the trustees, and of their rights to request trust information.  This is a significant change and it must be emphasised that the trustees have a positive duty to do this.
  3. Disclosure of Trust Information: this is defined as information regarding the terms of the Trust (i.e. the deed of trust and all amendments), the administration of the trust and the trust property but does not include trustee decisions.  There is a presumption towards disclosure to beneficiaries unless there is exceptional circumstances and this is following modern common law principles.   
  4. Increase to the Trust Period: currently New Zealand Trusts have a trust period of 80 years.  The law changes revoke the Perpetuities Act and increase the trust period to 125 years.   

What are the practical implications you need to think about?

  1. New Trusts:
    1. As a settlor wanting to put a new trust in place, you need to carefully think about:
      – whether any of the default trustee duties can be excluded
      – who will be the beneficiaries of the Trust, especially when more information will be supplied to beneficiaries in the future
      – where are the trust documents to be kept?
  2. Existing Trusts:
    1. For existing trusts, the deed of trust and trust structure should be comprehensively reviewed, and varied if necessary, for the following:
      – Trustee duties
      – Class of beneficiaries and whether this should be limited going forward as the trustees will need to inform all beneficiaries, they are a beneficiary of the Trust.  A lot of older style deeds have a ‘kitchen sink’ class of beneficiaries to include nieces, nephews, spouses etc.  Clearly this has some major issues going forward. In some older trust deeds there may be no power to remove or appoint new beneficiaries.
      – What information should be provided to beneficiaries once any changes to the beneficial class are complete and the implications of providing that information.  For example, a beneficiary may have a beneficiary current account in their favour which is repayable on demand.  We believe that due to the presumption of disclosure in the new rules, trustees will need to provide to ALL beneficiaries a copy of the deed of trust and the annual financial statements for the trust.  This point alone will result in some significant changes to beneficial classes of trusts in New Zealand.
  3. Can the deed of trust be amended to take advantage of the increased time period for a Trust? It is likely this will not be possible in some older deeds, but more modern deed may have some flexibility to allow this.
  4. Do you really need a trust?  We suspect there are a lot of trusts in New Zealand that are not required and the changes to New Zealand’s trust law is likely to be the catalyst for trusts to be unwound.

We recommend the first step is to thoroughly review the deed of trust as the first step.  Covisory can help you with this so please contact us (+64 9 307 1777) to arrange a time.

New Zealand Foreign Trust Disclosure Rules

RETENTION OF TRUST RECORDS

We have seen a few cases recently where trust records such as trustee resolutions, financial statements etc have been disposed of. It appears these records have been destroyed along with the tax records for the trust after the 7 year retention period under the Tax Administration Act has finished. We want to remind everyone that apart from tax records all trust documents need to be retained for the trust, including all financial statements for the trust.

This is necessary especially if there are any queries about decisions taken by trustees in the past. Under the new anti-money laundering rules we are also seeing banks and other financial institutions request information about the original source of wealth transferred into the trust and this is hard to supply if all of the trust records have been destroyed.

Please contact Marcus Diprose if you need to discuss this further.

Insight | Disclosure of information to beneficiaries by trustees.

The recent decision in Erceg v Erceg by the Court of Appeal provides guidance on the approach to the disclosure of trust documents to beneficiaries (including bankrupt beneficiaries) by trustees. In our experience, many trustees fail to adequately provide information to beneficiaries about both their entitlement, the financial position of the trust and the decisions made by the trustees.
The Court of Appeal in its judgment set out what it considered to be the position regarding disclosure of information by trustees in the proper course of administration of a trust. In summary, the court concluded:

“The Trustees should approach a request by a beneficiary for disclosure of trust documents as one calling for the exercise of discretion in discharge of the fiduciary duty the trustee owes a beneficiary.
A beneficiary has an entitlement as of right to disclosure of trust documents. Consequently, there is no presumption favouring disclosure. But nor is there a presumption against disclosure.
Whether to disclose, and, if so, the extent of disclosure, are discretionary decisions for the trustee. Thus, if the trustee decides to disclose, the trustee’s discretion encompasses whether the disclosure should be complete or partial (for instance, made with redactions).
In making the decision, the question for a trustee is always: What, if any, disclosure will be better to:
a. ensure the sound administration of the trust;
b. discharge the powers and discretions in respect of the fiduciary obligations the trustee owes the beneficiary, in particular the trustee’s duty to account?
c. Meet the trustee’s obligation to fulfil the settlor’s wishes?”

The courts also noted that an excellent summary of the trustee’s obligations are set out in the case Schmidt v Rosewood Trust Limited [2003] UK PC 26; [2003] 2 AC709. It did however conclude that the considerations for a trustee will be circumstances dependent.

It is our experience that usually trustees do not provide any information to beneficiaries. In addition, beneficiaries are often not aware of their rights.

Based on our extensive experience in the management and trusteeship of trusts, we believe that beneficiaries should be aware that they are beneficiaries of a trust, they should have a copy of the deed, and unless there are compelling circumstances otherwise they should receive summarised financial information on an annual basis and details of trustee’s decisions. It is not necessary however for trustees to provide the basis of their decisions.

This continues to be an evolving area of law and with New Zealand currently going through a review of trust law, we expect there to be significant changes to the future Trustee Act which will actually statutory require certain disclosures to be made. Best practice is going to become standard practice in our opinion within the next few years.

If you would like to discuss this further please contact Nigel Smith or Marcus Diprose

Family Business ~ Insight | We’ve grown! Let us introduce Covisory Trust Services

Covisory Trust brings together two New Zealand trust experts Nigel Smith and Marcus Diprose. Collectively they have a wealth of experience providing independent trust advice and trustee services both domestically and offshore. Covisory Trust offers Independent Trustee Services, Trust Formation, Insurance Trust Services, Formation of NZ Limited Partnerships and Look Through Companies and Independent Trust Advice.

In our opinion current case law and proposed changes to New Zealand Trust law will put increasing pressure on trustee’s to do their job correctly and conversely be exposed to more risk. The Covisory team specialise in this area and we are well equipped to deal with your specific needs.

Our services will include:
  1. Independent Trustee Services

a. We will provide independent trustees services to a wide range of New Zealand domestic and foreign trusts.

(i) Full administration services to ensure the decisions of the trustees, and other parties to the trust, are:

* Properly documented;

* Record keeping is up-to-date;

* Accurate and timely reporting is maintained and communicated to all parties to the trust.

b. Act as a Court Appointed Trustee.

c. Have an independent Trustee Company for New Zealand Domestic Trusts (Covisory Trust Limited) and for New Zealand Foreign Trusts (Covisory (NZ) Trust Limited) which can act as a trustee of a Trust.

2.  Trust Formation

a. We provide full formation services for New Zealand trusts. Includes:

(i) Initial client meetings;

(ii) Drafting of all trust documentation based on the instruction of the client;

3.  Insurance Trust Services

Private businesses should always have some form of insurance coverage to help facilitate the sale and purchase of shares upon the death or permanent disability of a director/shareholder.

(i) We work with insurance brokers to set up buy/sell agreements and provide trustee services to deploy the insurance proceeds as per the provisions of the trust deed.

  1. Formation of New Zealand Limited Partnerships (NZLP) and Look Through Companies (LTC)

a. We provide full formation and administration services for both NZLP and LTCs including acting as a New Zealand resident General Partner or Director.

5.  Independent Advice

a. Full Review of Trust Structures due to changes to family dynamics or law changes.

(i) Including advice and recommendations on what steps to take on a go forward basis.

Recent projects the CTSL team have been involved in include:
  • Advice and formation of a New Zealand foreign trust structure to hold intellectual property;
  • Family restructuring; including the consolidation of a number of existing trusts, resettlement of assets, additions of beneficiaries and associated advice;
  • Advice to a New Zealand private charitable trust as to how distributions can be made under the terms of the trust and development of a checklist for the trustees to assist in vetting applications received for distributions.

 

If you would like to find out more about Covisory Trust Services please visit us at https://covisory.com/trust-services/ or talk to Nigel Smith today on +64 9 307 1777 (nigel@covisory.com) or Marcus Diprose on +64 9 307 1777 (marcus@covisory.com ).

Family Business ~ Insight | Ground Breaking Matrimonial Law Decision – What impact does it have?

The recent Court of Appeal decision in the Clayton v Clayton decision is ground breaking to say the very least.  While the decision is likely to be appealed to the Supreme Court because of the significance of it, it effectively busts trusts.

The term “Trust busting” is used when there is an attempt to penetrate a Trust structure and have the assets held by the Trust declared by the Courts to be owned personally by an individual.  The end result is that the Trust’s assets are then considered part of that individual’s net worth and are available to former spouses/partners with valid claims against that individual.

In its judgement of the Clayton v Clayton case the Court of Appeal has stated that the right to appoint and remove trustees is in itself property and a valuable asset of the appointor.  This means that that right has to be valued and the Court of Appeal found that the value of the right was equal to the net assets of the trust.  Therefore the trust’s assets were property of the person holding the power of appointment.

The significance of this is that for many individuals who have created trusts either during or subsequent to relationships, the assets in those trusts are now likely to be relationship property and subject to claim by their spouses.  In a single statement, the Court of Appeal has busted open the vast majority of trusts in New Zealand to future matrimonial claim and the 50/50 division of assets with their former spouse.

As noted, it is likely that the decision will be appealed to the Supreme Court. It will be very interesting so see whether their view differs.

In the meanwhile, we recommend that if in doubt you obtain advice immediately and that, more importantly, before entering into an a relationship or at worst within 3 years of entering into one, make sure that you get a properly executed pre-nuptial agreement as these still provide the best protection at the moment.

With the administration of trusts under the spot light we cannot stress the importance to obtain the right advice and set up the right trust structure to demonstrate that the management of the trust has a genuine intention to assist its beneficiaries.

The Covisory team specialise in this area and we are well equipped to deal with your specific needs. With the establishment of Covisory Trust Services Limited in 2014 we are well placed to assist you with all your trust administration, formation and advice needs.

We are in a position to provide an independent Trustee Company for New Zealand Domestic Trusts (Covisory Trust Limited) and for New Zealand Foreign Trusts (Covisory (NZ) Trust Limited) which act as a trustee of the Trust.

We work with you to ensure that all trustees are actively involved in all decisions of the trust, and that the trustees have given due consideration to the best interests of the beneficiaries in any decision made and that each Trustee understands the implications for each decision made.  We will ensure that all resolutions are documented, record keeping is up to date and accurate reporting is maintained.

If you would like to find out more about Covisory Trust Services please visit us at https://covisory.com/trust-services/ or talk to Nigel Smith today on +64 9 307 1777 (nigel@covisory.com) or Marcus Diprose on +64 9 307 1777 (marcus@covisory.com ).

Family Business ~ Insight | Law Commission – Review of the Law of Trusts in New Zealand

Late last year the Law Commission issued its paper on its preferred approach to the review of the law of trusts in New Zealand.  This is not necessarily what the law will be when the Government looks at this and changes it, but in our opinion it will be fairly close to what they are recommending. The law of trusts is arguably in need of a review because the Trustee Act is based on law as it was in the 1950s.  It has simply failed to keep track of developments in the way we use trusts, let alone the developments in the area of law generally.

The Law Commission has issued a series of five issues papers exploring different issues around trusts.  The summary paper basically encapsulates their views after submissions have been received on these. The scope of the review by the Law Commission is limited to the review of the law that is required for trusts to be established and managed successfully.  This includes the concept of what is a trust, the obligations of those in trust relationships such as trustees, the powers and role of the trustee, the powers of the Courts in addressing these matters and the processes available for resolving disputes.  The objectives of the review are:

  • Modernisation
  • Clarification
  • A more useful and modern Trusts Statute
  • Reduction of administrative difficulties and costs
  • Fairness
  • Fit for a New Zealand context but consistent with International Law

It is proposed that a new trust statute will be introduced and this will include core trust principles from within both the existing Trustee Act but also from common law derived from Court decisions.

As part of this, there will be enhanced trustee accountability.  At present, it is not clear always what the accountability of the trustee as to beneficiaries and others involved with the trust.  It has not always been clear what obligations trustees owe, whether they can avoid liability and how beneficiaries can go about enforcing their rights, if at all.  The proposals set out in legislation Trustees’ duties and the law relating to trust deeds will be clarified so that the express relationships between the parties will be clearer.

One negative aspect of the proposals is that the Law Commission proposes that the office of the Public Trust is used as an independent expert and supervisor of trusts so that parties can go and obtain advice and also to resolve disputes.  While we favour the use of independent parties to do this, it should be noted that the Public Trust is now effectively a privately owned organisation and as such competes with many other trustee companies.  We think therefore it is likely that the role of the Public Trust will be changed so that it is potentially an expert opinion or a panel of expert firms with trust experience.

Without going into the details to any great degree, there are a few points that you certainly should be aware of in relation to trusts:

  1. Trustees under these proposals will be required to be far more diligent and far more involved in the operation of trusts.
  2. Their requirement to provide information to beneficiaries will be a lot greater than it is at present.
  3. It is proposed that directors of companies which act as trustees can be personally liable for debts of a trust in the same way as individual trustees are at present.  In effect there is a proposal to lift the corporate veil.
  4. That there will be certain mandatory provisions imputed into every trust deed.  It will not be possible to legislate out of these.  One of these for example will be the duty to avoid a conflict of interest.  On the face of it, this is pretty benign, but it could mean for instance that a trustee may not be able to buy or sell property personally from the trust.
  5. Each trustee will also be required to retain documents relevant to the trust such as a copy of the trust deed, any variations, a list of all assets currently held as trust property, records of trustees’ decisions and contracts entered into by the trust as well as financial statements.  These will be required to be kept by each trustee under the proposals.

 

On the whole, we agree that there is a need for a review of the current law of trusts and that the current laws do not in fact fairly reflect and govern the way trusts are used and operated in New Zealand.  Overall we support the conclusions reached and think that they are fair and reasonable and do create a degree of accountability.  However, there are a few areas that go too far and in particular some of the imputed requirements and particularly the use of the Public Trust go too far.

The only good news out of all of this is the proposal to increase the perpetuity period (the maximum life of a trust) out to 150 years.  So not everything is bad and overall we think that the proposals will be acceptable and workable.  There will certainly be trusts which will be adversely affected by these proposals, but they are the ones that probably need to be, given that they are probably not being administered correctly.  For those properly administering their trusts, there will be little to fear in the new proposals and potentially some benefits.

We will continue to keep you abreast of these developments and when the new Trusts Act is eventually enacted, and will work with you to review your trust to ensure that you are both compliant with the new law and obtaining the maximum benefits from it.  As always if you have any questions please don’t hesitate to contact us.