Where are my Trust Beneficiaries Living?

In New Zealand for a long time, we have exported our young talent, either permanently or temporarily overseas, on trips called “the Big OE” and similar. We often don’t think much about this when our kids leave, and the impact that that may have on trusts where they are beneficiaries.

Over the years Mum and Dad may get older, and eventually they may die. The kids may or may not have come back from overseas by that time. The problem is if they haven’t returned and the trust has built up significant wealth, then before anyone realises it, distributing wealth to those children who are overseas from the trust in New Zealand, is suddenly not very tax effective in the overseas jurisdiction.

This is because many overseas countries tax distributions from foreign trusts of income and/or capital gains as if that income is either income or capital gain in that country, whether or not tax has already been paid on it in New Zealand. In some countries, as discussed in other past Covisory Connect articles, there may even be wealth taxes or transfer taxes on that wealth that passes to the beneficiaries in those foreign countries. In some cases, we have seen potential tax imposts of up to 70% of amounts being distributed.

Where should you start?
Let’s use the starting point that you have a trust in New Zealand, as a trustee, as a settlor, as a parent, you need to know where your beneficiaries are and whether it is possible to get income to them in the future.

Taking a simple example, Johnny or Mary leave New Zealand and decide to go on their big OE to the UK. While there, they meet someone and decide to stay on a bit longer. Typically, they ring up Mum and Dad in New Zealand and ask for some money to help them buy a house in the UK, particularly given how expensive the houses are, and the fact that the Kiwi dollar doesn’t buy a lot of pounds.

Even though they may be Res Non-Dom (Resident Non-Domiciled) in the UK, if a distribution is made to them from a trust in New Zealand and those funds are taken into the UK, then those amounts will be taxable to them in the UK at their marginal income tax rates. This effectively means that the distributions are taxed again.

This makes getting funds to Johnny and/or Mary very difficult in the UK. In some cases, the thought is to have the trust distribute to Mum and Dad in New Zealand, and then them gift the funds on to Johnny and/or Mary in the UK. The problem with this is that the UK is a bit smarter than that and their revenue authorities have developed an avoidance rule which sees the amounts gifted to Johnny and/or Mary in the UK being taxable, if they can be traced back to funds that came from the trust. It is actually more complicated than that because it also looks at the income of the trust going forward after the gifts have been made.

What if the Trust loans the funds?
A similar problem arises with loans. Unless interest is charged on these, often the foreign country will impute a taxable gain or advantage to a beneficiary in that country equal to the interest not charged in the base currency.
The moral of the story is to understand the country that beneficiaries are moving to before they go there. Is it appropriate to make a capital distribution to a beneficiary while they are still tax resident in New Zealand in case they don’t come back from overseas or want funds while they are in the foreign country. Children who are beneficiaries may also move from one country to another and that is also something that needs to be considered.

What about Australia?
A similar example exists when beneficiaries move to Australia. If they enter Australia on a New Zealand passport, and both them and any spouse or partner do not take out permanent residence or citizenship for immigration purposes in Australia, then they are referred to as a foreign temporary migrant or a special category visa holder (the more derogatory term these days is a 501 visa holder for those that get deported back to New Zealand). In these circumstances, as an SCV holder, these Kiwis are not taxed on their foreign sourced income other than foreign employment income, even if the funds are taken into Australia. Thus, they can receive distributions from a New Zealand trust, and they won’t be taxable as long as they remain an SCV holder.

With the recent discussions between Australia and New Zealand about making it easier for Kiwis to get Australian citizenship, trustees will need to be talking to beneficiaries who are in Australia to make sure that they don’t go and obtain their Australian citizenship, as it may detrimentally affect the ability to get the money in the future.

We have been recently working on several jobs for clients around these circumstances, with children based in a wide range of foreign countries. Each one took some planning and each one could have been handled better had advice been taken earlier. In only one case were we contacted before the settlor of a trust was about to die. In every other case, we were usually dealing with trusts where the settlors had died or the ability to get income to beneficiaries in foreign countries was severely compromised because advice was not taken before the beneficiary had gone to that country.

What Should You Do?
We recommend that you consider where the beneficiaries of your trust are residing? If they are in New Zealand today great, but are they looking to move overseas in the future? You should consider where the beneficiaries are likely to end up against the likely timetable to want to distribute funds to assist them in the future. Naturally we are able to assist with this, but it is something that takes careful planning and management as time goes forward.

If you would like to listen to our Deskside Chat Video Blog on this issue please click the below link under latest insights

Talk to one of our Trust Team Members and discuss how we can help you.