Wills and Enduring Powers of Attorney

Aug07

Covisory Trust Services provides trust advice and independent trustee services. Although not strictly trust services we have found ourselves working with Wills and Enduring Power of Attorney, either as part of a wider succession planning exercise or in stand-alone engagements. We have found that many treat Wills and EPAs as after thoughts.   Clearly this should not be the case they are key documents for any estate and succession plan.

Wills

Deciding what age, you should write a Will is a personal decision. We would recommend not leaving putting a Will in place too long, accidents and unexpected events can and do happen. If you die without having made a valid Will then you will be Intestate and the provisions of the Administration Act 1969 will then apply. This act is very prescriptive on who can benefit from the deceased’s estate.

For many of our client’s trust structures hold the majority of their assets. These trusts effectively manage the transfer of assets to the next generation. Yet, many still have assets owned in their personal name. A Will is the best way to transfer those assets to other parties.

Haven’t we all seen the scenario of a Will once complete, often languishing in a drawer or filing cabinet, not seen again until the person dies and it is probated. We recommend to clients that a Will should be reviewed regularly every two years. Life does not stand still and this enables people to consider changing circumstances, including change of relationships, children being born and so on.  We have seen Wills where a divorced spouse is still the major beneficiary under the Will!

No two Wills are the same as everyone has specific circumstances. Although most Wills are based on templates, the clear majority of the Wills we produce for clients need specific drafting after meetings. There are several areas that need to be considered from appointment of executors to the distribution of personal property thru to the divestment of powers to appoint and remove trustees under trusts. It is important to get the document and then the clauses right.

Enduring Powers of Attorney (“EPA”)

Life can hold many unexpected events. You never know when the ability to make your own decisions could be taken from you. EPA’s are legal documents that protect you and what is precious to you. There are two types of EPAs:

  1. Property – which allows your attorney or attorneys to make decisions in respect of your personal property. This EPA can be in force at any time, regardless of mental capacity.
  2. Personal Care and Welfare – which relates to medical and care provisions if you are mentally incapacitated.

The sole biggest decision for the donor (the person appointing the attorney) is who will be the attorney. Clients often agonise and overthink the issue. For an EPA for personal care and welfare, only one attorney can be appointed at any one time. This is often a close family member like a husband or wife. For an EPA for property, multiple attorneys can be appointed to act together.

Regardless of who is appointed the donor must be comfortable with their choice. Also, the attorney must be happy to accept the role and responsibility as well.

Earlier this year changes were made to the Protection of Personal Property Rights Act 1988. This Act governs EPAs for both property and personal care and welfare. The changes were made due to the perception that the previous regime was being abused.  Unfortunately, we have seen examples where older people were being forced into signing documents they didn’t understand. Resulting in giving away their rights especially in relation to personal property.

The new regime also has seen the release of new EPA forms. These forms have a tick box approach. In theory, the new format should allow someone to simply complete them before taking independent advice and executing the documents.  To ensure there is no undue influence on the donor an independent person needs to meet the donor. Their role is to explain the terms of the EPA and ensure that the donor is not being influenced during the process.

Despite good intentions, the forms are not working as they should. They are very rigid and have a lot of language in them that make them difficult to understand from a layman’s perspective. From our experience, the new documents have overwhelmed clients. Many have struggled with the layout of the form. This is not the result the government was after!

If you would like to some assistance, the Covisory Trust Services team can help you through this process of putting these important documents in place. If you have any questions or would like to discuss further please contact Marcus Diprose.

AML – Are You Ready?

May04

In 2013, the laissez-faire world of New Zealand business as we knew it came to an end with New Zealand playing catch up with the rest of the world.  Phase 1 of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (“the Act”) introduced new laws to tackle money laundering and terrorist financing.

The Ministry of Justice estimates $1.3 billion of proceeds from illegal activities are laundered through New Zealand businesses each year. The new rules have added in an extra level of regulation that has taken some people in New Zealand by surprise.  However, many countries around the world have already adopted these rules and New Zealand was late to the party.  On a positive note the rules New Zealand adopted are more robust than many other countries.

As you will know by now under the new laws Banks, Casinos and a range of Financial Service Providers had “practical measures” imposed on them to protect New Zealand businesses and reduce the ability of criminals to benefit from illegal activity. It has taken awhile for these organisations to come to grips with the amount of information (read mountains of paperwork) required to comply with these measures.

In short, every customer’s identity needs to be verified and their source of wealth determined to ensure there is no criminal activity involved.

Phase 2 will see the Bill, when it is passed mid-2017, extend this requirement to real estate agents and conveyancers, many lawyers and accountants, businesses that deal in expensive goods and betting on sports and racing.  The law will come into effect in stages between July 2018 and July 2019 allowing these businesses to prepare for the changes.

One result of the introduction of these new rules is that when applying for an Inland Revenue Department (“IRD”) number for a non-resident/off-shore individual is that you either need to supply a New Zealand bank account number or have completed customer due diligence on the applicant.  In our experience, New Zealand banks are not interested in opening bank accounts for non-residents if it does not result in ongoing income for them, which is the case for most non-resident applicants.  This only leaves one option and that is to have a reporting entity as defined by the Act, carry out full know your client (“KYC”) checks on the applicant.  The process of opening a bank account also takes a considerable amount of time and paperwork compared to previously.

Covisory Trust Services is a reporting entity for the purposes of the Act and governed by the Department of Internal Affairs.  In our capacity as a reporting entity we regularly carry out independent KYC checks for non-resident applicants for IRD numbers and provide the appropriate sign-off for the IRD to allow the application to proceed without having to open a New Zealand bank account.  Assuming the KYC checks do not throw up any untoward results they can be completed relatively quickly.  This is a bonus when the IRD application is urgent.

If you are interested in using this service or just want to talk about anti-money laundering and its possible impact on your business please contact either Marcus Diprose or Nigel Smith (www.covisory.com)

KYC – Know Your Client

The AML Act imposes obligations to ensure NZ businesses, NZ Banks and financial services are not helping facilitate criminal activity. Instead of taking people at face value we now need to know our clients. Are they who they say they are and where did their wealth come from?

  1. All parties to the transaction need to be correctly identified.
    1. This includes verifying identification documents such as a passport, drivers licence or other government-issued identification document.
    2. Other documents that provide proof of the address of the applicant must also be verified.
  2. Identify the source of wealth of the funds being used in the transaction.

 

 

Clayton v Clayton – A Reinstatement of the Trust?

Jan10

A trust should be a simple concept.  A person, the Settlor, provides property to another person, the Trustee, to manage on behalf of the beneficiaries.  However, over the last twenty to thirty years, and in particular post the repeal of estate duty, there has been a definite trend for the Settlor to retain a certain amount of control over the trust property.  The recent New Zealand Supreme Court decisions in Clayton v Clayton look at these types of arrangements and it is clear a number of New Zealand trusts will now need to review powers that vest with parties that are not the trustee.

The Clayton litigation involved a husband and wife with substantial assets held in two trusts.  Although the parties ultimately settled out of court in late 2015 the Supreme Court still issued two separate judgements due to the precedents raised in the cases.

Background

Mr and Mrs Clayton entered into a relationship in 1986 and were married in 1989.  They separated in 2006 and the marriage was formally dissolved in 2009.  Before they were married they entered into a section 21 contracting out agreement.  Under the terms of the agreement Mrs Clayton was to receive a maximum of $10,000 for each year of marriage up to a maximum of $30,000.

Vaughan Road Property Trust (VRPT)

The VRPT was settled in 1989.  A summary of the trust was:

  • Mr Clayton was the settlor and sole trustee.
  • The discretionary beneficiaries include Mr Clayton, Mrs Clayton and their two daughters.
  • The daughters were the final beneficiaries.
  • Mr Clayton held other powers under the deed of trust, including the power to add and remove beneficiaries, bring forward the vesting day and resettlement the trust.

Mrs Clayton argued that the VRPT was a sham or an illusory trust.  The claim of sham failed and the Supreme Court said that the term illusory trust was unhelpful.  There is either a trust or not and this will be driven by the actions of the parties involved.

Mrs Clayton also argued that the powers held by Mr Clayton should be considered as relationship property under the Property Relationships Act 1976 as they were rights or interests in property.  The Property Relationships Act 1976 applies for a de-facto relationship and as the VRPT was settled before Mr and Mars Clayton were married it applied here.  The Court of Appeal had previously found the power to add and remove beneficiaries held by Mr Clayton was relationship property and attributed fifty percent of the assets of the VRPT to Mrs Clayton.  This decision was challenged by Mr Clayton in the Supreme Court.

The Supreme Court ruled in favour of Mrs Clayton but did decide that Court of Appeal was incorrect in their approach.  Instead, the Supreme Court took a holistic view of the trust and the powers held by Mr Clayton.  The court ruled that Mr Clayton’s powers collectively under the VRPT were classified as rights and, therefore, gave Mt Clayton an interest in the VRPT for the purposes of relationship property.  As these powers were provided to Mr Clayton after the relationship with Mrs Clayton began the Court valued the powers as equal to the net assets of the VRPT.

It was important to note as the Court took an overall view it considered both fiduciary and personal powers held by Mr Clayton and bundled them up together.  This is an important point – it was clear the court was looking at the substance on how the trust operated as opposed to the strict legal form which is equity in a nutshell.

Claymark Trust

The legal principles that affected the Claymark Trust were different.  The Court had to decide whether the Claymark Trust was a nuptial settlement under section 182 of the Family Proceedings Act 1980.  This section allows the Court to order varying a trust to be made for the benefit of the children or a spouse or civil union partner.  However, for such an order to be given the trust must be considered a nuptial settlement and unlike for the VRPT Mr and Mrs Clayton were married when the Claymark Trust was settled.

The Supreme Court said that a two-stage approach to section 182 claims should be taken:

  • Step 1 – determine whether the settlement is a nuptial settlement. The Supreme Court said that to be considered a nuptial settlement the trust must have a connection with the marriage.  It is important to note that the make-up of the assets is not important and a nuptial settlement can be made for business reasons.  In this case, the Claymark Trust was settled during the marriage with assets acquired during the marriage for the benefit of the Clayton family.
  • Step 2 – decide whether the court’s discretion under section 182 should be exercised, and if so, how the discretion would be exercised. This simply means each case will be considered individually and practically this requires a comparison of how the parties will benefit from the trust post-separation compared to what would have hypothetically occurred had they not separated.

For the Claymark Trust, the Supreme Court found there was a nuptial settlement and the discretion under section 182 should be exercised.  This was because there were clear benefits to Mrs Clayton from the trust if the marriage had of survived.  As the parties have settled no formal order was given by the Supreme Court but if no settlement has existed an order would have been given to split the Claymark Trust equally into two separate trusts.

The result here is that section 182 is potentially a very powerful tool that can be used by the courts to benefit a spouse in the event a relationship breaks down and there are substantial assets tied up in trusts.  As long as a spouse can prove the trust was a nuptial settlement he or she should be able to obtain a court order that provides them with benefit from the trust.

Practical Implications

What does this mean for current New Zealand trusts?  There are now a number of specific issues that should be considered by Settlors and Trustees:

  1. Trusts which have a number of powers that vest in a singular Settlor or Principal Family Member should be reviewed and if necessary amended to ensure those powers are not held by the Settlor. This is especially so if that person is also a trustee and beneficiary.
  2. Consideration needs to be given that when a relationship starts a section 21 contracting out agreement is entered into, that covers all interests in trusts as well, i.e. they remain a person’s separate property.
  3. If parties are in a relationship and want to keep property separate, including the formation of a new trust during the relationship; then a section 21 contracting out agreement should be put in place.
  4. As always in the event of a relationship breakdown, it is far easier to negotiate a settlement between the parties as opposed to entering into prolonged and expensive litigation.

It is clear the courts are looking at trusts from a perspective of how they have been run and how the parties have acted.  The Supreme Court simply confirms that approach and this case simply reinstates general trust principles.

If you would like to discuss how these changes will impact your Trusts or have any questions relating to Trusts please contact Marcus Diprose.

RETENTION OF TRUST RECORDS

Oct14

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.

Law Commission recommendations around a Trustees Duty

Mar16

Six mandatory and eleven default duties of trustees will be imposed which will apply unless the terms of the trust indicate otherwise. This is essentially formalizing what was developed through case law.

Mandatory Trustee Duties would be:

  • To be familiar with the terms of the Trust;
  • To act in accordance with the terms of the Trust;
  • To act honestly and in good faith;
  • To act for the benefit of the beneficiaries or to further the purpose of the trust, in accordance with the terms of the Trust;
  • To exercise stewardship over the Trust property for the beneficiaries or the purpose of the trust;
  • To exercise power for a proper purpose.

Default (applicable to all trusts) Trustee Duties would be:

  • The duty to maintain impartiality or evenhandedness between beneficiaries;
  • The duty not to make profit from the trusteeship;
  • The duty to act without reward;
  • The duty to avoid a conflict of interest;
  • The duty to be active (meaning the duty to consider the exercise of the trustees’ discretions regularly and not to fetter these discretions);
  • The duty to act personally;
  • The duty to act unanimously;
  • The duty to manage the trust;
  • The duty to invest;
  • The duty to keep trust property separate from the trustee’s own property;
  • The duty to keep and render accounts, and to provide information to beneficiaries; and
  • The duty to transfer property only to beneficiaries or persons legally authorised to receive property.

Key Law Commission Recommendations | Keeping New Zealand Trusts in step with the times.

Mar16

The New Zealand Courts are making it very clear that they expect certain standards to be observed in the investment and administration of Trust assets and (where applicable) trust liabilities or potential liabilities. If the standards are not maintained, then the trustees can be held liable.

In 2009 the Law Commission was asked to review the Trustee Act 1956 and trust law generally. In September 2013 they tabled a report in Parliament, Review of the Law of Trusts: A Trusts Act for New Zealand (R130), which was preceded by six issue papers. At the heart of the report is the recommendation for the introduction of a modern and comprehensive Trusts Act to replace the outdated Trustee Act 1956 – keeping New Zealand Trusts in step with the times.

The main points addressed are:

  • setting out the characteristics of a trust and how a trust is created;
  • setting out the duties of trustees;
  • modernised trustee powers provisions;
  • a modernised, flexible approach to investment;
  • improved procedures for the appointment and removal of trustees;
  • more comprehensive and useful provisions on the variation and revocation of trusts;
  • a refined approach to the power of the courts to review the actions of trustees; and
  • the replacement of the rule against perpetuities and Perpetuities Act with a new rule limiting the maximum duration of a trust.

 

Essentially the 59 year old Trustee Act is not in step with how trusts are now being used. Over the past 20 years the use of trusts has grown steeply and the current estimate is that New Zealand has now somewhere between 300,000 and 500,000 trusts operating. Although the New Zealand Government agrees that there is need for a new Trusts Act it has called for further research on the implications of the new Act on existing Trusts and work still is needed on many of the Law Commissions recommendations.

 

Current Responsibilities and Standard of Care required of a Trustee

Nov23

A Trustee’s duties include:

  1. Efficient Management – the requirement to regularly take stock of trust assets and liabilities, setting up structures for the administration and management of the trust and keeping abreast of trust issues.
  2. Keeping full and candid accounts keeping appropriate and adequate accounting records and preparing financial statements in respect of appropriate accounting periods. Trust accounts kept must be proper, faithful and accurate.
  3. Objectivity / Impartialityacting in the best interests of all the beneficiaries, present and future. Trustees must act impartially in their decision making and at all times protect the interests of the beneficiaries.
  4. The duty to considerconsidering whether or not and in which ways trustees should exercise their powers and discretions having regard to the terms of the trust and the interests of the beneficiaries.

A trustee must take all precautions which would normally be taken by an ordinary prudent person managing the affairs of others.

In addition to these requirements, if a trustee is a professional person (such as a lawyer or an accountant), when investing trust funds, for  example, a professional trustee must exercise the care, diligence and skill that a prudent person engaged in his or her line of business would exercise in managing the affairs of others.