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.