Beneficiary Current Account Balances – The Practical Implications

Sep27

One thing we see a great deal with trusts that have been around for a while is high beneficiary current account balances where the trustees owe beneficiaries quite significant amounts of money.  This has come about through trust income being distributed to beneficiaries who have a lower marginal tax rate as the trustee, i..e income splitting.  Even though the trust income has been distributed the beneficiary never received the funds and they were recorded as a loan to the beneficiary in the beneficiary current account.  Sometimes these balances can be large – over $500,000 in a few circumstances.

These amounts the trustees owe the beneficiaries can cause some serious practical implications as follows:

  1. The amounts are repayable on demand.  This means if a beneficiary asks the trustees to repay it they must.
  2. The amount is an asset in the hands of the beneficiary and should be taken into account when the beneficiary fills in any statement of assets and liabilities, for example when applying for bank loans.  The difficulty here is the beneficiary has no idea they are actually owed the money!

The options to deal with this are limited.  We have heard of some accountants wanting to ‘gift’ off the balances through journal entries which is not advisable as the only person who can actually gift the balances are the beneficiaries.  Also, there is an added complication that if the beneficiaries gift the balances they will also be considered a settlor of the trust under trust law principles.

The best course of action is to be open with the beneficiaries.  With the proposed changes to New Zealand’s trust they are going to be able to obtain this information in any event, assuming there are no further changes before it is finally passed by Parliament.  Sit them down and tell them they are owed money but the trust cannot pay it back but it will be paid back in the future.

TRUST POWERS

Apr17

The Clayton v Clayton decision regarding trustee powers, and other powers, equating to property continues to be very relevant in the trust law area both in New Zealand and overseas.  Effectively the courts are looking at the substance of the relationships between the parties of a trust, but the provisions of the deed of trust are still extremely important in the end result of any court decision.  This can be demonstrated by the following two cases.

Goldie v Campbell: in the New Zealand High Court case the settlor was also the trustee and had the power of appointment and removal of trustees.  Based on Clayton principles on first glance, this would make the trust structure open to attack by third parties based on the power that individual wielded and this was argued in the hearing.  However, the High Court after reviewing the deed of trust ultimately found the trust assets were not relationship property as there were restrictions on those powers and the trust was formed for specific purposes.  The most important thing was that the person holding these powers could not apply the trust assets for his sole benefit which was different to Clayton.

Mezhprom v Pugachev: this was a UK High Court case but it involved a number of New Zealand governing law trusts.  The settlor and discretionary beneficiary in question was also the Protector of the trust and had to give his consent to a number of trustee decisions, including distributions, investment, removal of beneficiaries etc.  The judge in question ruled that the powers held by that person were not restricted and could be exercised solely for his benefit.  As a result, the judge viewed that the beneficial ownership of the trust assets had never been transferred to the trustees as control over those assets had never been given up.

Based on current case law these decisions are hardly surprising.  Neither trusts were considered shams but the trustee, and other, powers are very important, especially if the holder of those powers can exercise them solely for his or her benefit.  We suspect there is a large number of trusts in New Zealand that is attacked in court would fail and the trust assets would be available to settle third-party creditor claims.

Marcus Diprose

As always, the Covisory team is happy to talk to you about your needs, now and going forward. If there is anything we can do to help, please call or email me.

Please note that the information in this article is for informative purposes only and should not be relied on as legal advice.

TRUST FORMATION TIME FRAMES

Mar29

A lot of clients we deal with come from an environment that setting up a trust structure is easy, and can happen pretty much overnight.  That may have been the case in the past but it is the exception rather than the norm in today’s professional environment.

Too often we are seeing requests come in on a Tuesday or Wednesday to put together a trust structure for a property transaction that settles on a Friday.  You can imagine the disappointment when we say that this is not possible.

The main issues causing formation time frames to be greater than in the past are:

  1. Anti-money laundering rules: trusts are considered to be high risk for money laundering which means enhanced due diligence must be carried out on the parties involved in the structure before any document drafting can start.  To complete these checks all know your client documentation needs to be collated which can take a few weeks depending on the geographical spread of the parties.
  2. The Inland Revenue Department no longer issues IRD numbers on a same day or overnight basis.  So, for those trust structures that need an IRD number to get GST registered to complete the land transaction a suitable time frame to obtain an IRD number must be budgeted for.
  3. A great deal of the work we do is restructuring of current trusts as the trust deed does not reflect what the settlors originally intended as the formation was rushed.  Some measured consideration during the trust formation process would have meant a lot of these issues would not have arisen.

 

Our advice is simple: when forming a trust budget on sufficient time to get everything in place.

Avoiding issues with Property Transactions

Feb23
GST issues relating to Partial Use

We commonly come across errors around accounting for GST on property transactions and their financial impact can be significant for the parties involved. Following on from our discussion around whether there is GST or not on property transactions let us now look at the GST impact around partial use when purchasing property.

By law, GST is charged on all land sales and claimed on all land purchases. Exceptions being when that property is used for making non-taxable supplies such as Residential accommodation or the transaction is compulsory zero-rated.

From 1st April 2011 new apportionment rules were introduced requiring suppliers of land or supplies that include land to charge GST on the supply at the rate of zero percent where the purchaser intends to use the land to make taxable supplies.

However, what happens in the case of transactions where there is both a residential and economic activity component to the property transaction. Inland Revenue allows for the apportionment into two distinct supplies for GST Purposes. Each component must be valued separately and be considered independently to determine what GST is payable or receivable.

Let’s consider the following example:

Sarah purchases a new building for $5 million on 30th October 2017. Sarah has a balance date of 31st March. There is no GST included in the supply as it is subject to the zero-rating rules.

Where both the vendor and purchaser are registered for GST AND the purchaser declares on Schedule 2 of the ADLS/REINZ Sale and Purchase Agreement (S&PA) that they intend to use the building for making taxable supplies AND the purchaser does not intend at the time of settlement to use the property as a principal place of residence. Then under Clause 15 of the S&PA it will become compulsory for the transaction to be zero rated for GST purposes.

Sarah intends the building to be mixed-use and to lease the ground and first floor of the building to commercial tenants, and the 2nd floor of the building will be leased to residential tenants.

On acquisition, Sarah applies the rules in section 20(3I) of the GST Act 1985.

  1. Calculate the nominal tax component that would be chargeable on the value of the supply if subject to the standard rate of GST.

a. $5m x 15% = $750,000

2. Determine the extent to which the building will be used for making taxable supplies.

a. Sarah determines that the building will be used 66.7% for making taxable supplies (rent to commercial tenants) and 33.3% in making exempt supplies (rent to residential tenants).

3. Sarah now needs to account for the proportion of the nominal GST component that relates to the non-taxable use of the goods as output tax on the acquisition of the building.

a. $750,000 x 33.3% = $249,750

4. On the acquisition of the building, Sarah will need to account for output tax of $249,750.

The same principals would apply to transactions where there is both a residential and economic activity as in the case of Farms (Rural farms, lifestyle farms, and orchards), Vacant land where residential use is planned, land used for a Dairy, or hotels and motels where the owner or manager lives onsite.

The rules require the taxpayers to make a fair and reasonable estimate on the intended taxable and non-taxable components of the initial transaction. In subsequent periods after the initial tax deduction claimed the taxpayer may be required to make further adjustments if the actual taxable use of an asset was different to its intended taxable use.

The first adjustment period runs from the date of acquisition (30th October 2017) to the persons first balance date after acquisition or to the person’s first balance date that falls at least 12 months after the date of acquisition. In Sarah’s example, this would either be 31st March 2018 or 31st March 19. Subsequent adjustment periods would run annually from this point.

In our example, Sarah elects to go with option 1 the period 30th October 2017 to 31st March 2018. Her second adjustment period will run from 1st April 2018 to 31st March 2019. There is no limit to the number of adjustment periods in relation to land.

Using our example, Sarah would be required to keep records showing the usage for both the taxable and non-taxable portions. These logs form the basis to make an annual adjustment if the percentages differ or there is a change in use.

This document has been written as a general guide and should not be used or relied upon as a substitute for specific professional advice.

Are you avoiding issues with Property Transactions – What happens around GST?

Jan09

Whether there is GST or not on property transactions gives rise to a lot of confusion. The implications if you do get it wrong can cause serious ramifications for both parties to the agreement – think 15% of the purchase price. We are talking hundreds of thousands if not millions of dollars.

The standard ADLS/REINZ Sale and Purchase Agreement for Real Estate in New Zealand (currently ninth edition 2012 (7)) has highlighted the need to ask questions around GST. The agreement does make things slightly easier as long as the form is filled in correctly. We have put together this basic overview as a starting point.

Let’s set out the basics firstly from the Vendors Point of View. To be able to register for GST the vendor is not using the land for their principal place of residence and instead is using the land for making “taxable supplies”. Examples could be:

Taxable Supply for GST purposes
Long Term residential letting NO
Short term letting where you receive a rate per night. For example – Airbnb YES
Commercial Lease of a building YES
Farming (but there are exceptions) YES

If the vendor does make a taxable supply and has registered for GST, then they need to show this on the Sale and Purchase Agreement by:

Respond YES to the question asking whether the Vendor is registered under the GST Act in respect of the transaction evidenced by the agreement and or will be so registered at settlement This question is located at the top of Page 1 of the Agreement
The purchase price must be shown as “plus GST (if any)” Located on Page 1 of the Agreement. This averts the possible problem if the purchaser nominates a non-GST registered entity after signing. Meaning the vendor would still need to account for 15% of the purchase price to the Inland Revenue, and ends up getting 15% less of the sale as a result of the Purchaser’s actions.
The Vendors GST registration number is to be entered in under Schedule 2 of the agreement.

If the vendor is not registered for GST, then they respond NO to the question asking whether the Vendor is registered under the GST Act in respect of the transaction evidenced by the agreement and or will be so registered at settlement and they do not have to fill out Schedule 2.

Secondly if the purchaser is GST registered then they need to state this in Schedule 2 answering all questions 3 to 11. If they are not registered, then they would answer questions 3 and 4of schedule 2 as NO.

 

Let’s look at some possible scenarios

Vendor GST Registered Purchaser GST Registered
NO NO 1.      No GST on the sale

2.      the Vendor must answer NO on the front page to confirm they are not GST registered.

3.      The price can be shown as either Plus GST (if any) or inclusive of GST (if any) or if neither is crossed out it automatically defaults to Inclusive of GST (if any). In reality it makes no difference.

YES NO 1.      The vendor must answer Yes on the front page to confirm they are GST registered.

2.      The price must be shown as Inclusive of GST (if any). This way the vendor can only be better off if the Purchaser Registers.

3.      Questions 1 and 2 must be answered on Schedule 2

NO YES 1.      the Vendor must answer NO on the front page to confirm they are not GST registered.

2.      The price to be shown as inclusive of GST (if any)

3.      The purchaser can claim the GST in their GST return as they pay for the property (irrespective of their actual GST registration basis).

YES YES 1.      Where both parties are GST registered AND the purchaser declares on Schedule 2 that they intend to use the property for making taxable supplies AND the purchaser does not intend at the time of settlement to use the property as a principal place of residence then under Clause 15 it will become compulsory for the transaction to be zero rated for GST purposes.

Yet, let’s consider what happens when the GST status of one of the parties to the transaction changes prior to the settlement date. If the purchasers GST status changes they are required under clause 14 to provide the vendor with no later than 2 days prior to settlement for the correct position to be recorded on the settlement statement. The relevant date for GST status is taken from the status of the parties at the date of settlement.

In the next edition of Covisory Connect we will address GST issues around partial use and change in use. As always, we would advise that you seek specialist legal and tax advice when faced with GST.

The Brave New World – What changes are likely from our Labour / New Zealand First Government

Nov03

The past three months has taken New Zealand on a political roller coaster with the result being a new minority government with a new policy and social agenda for the next three years.  In our view, it was always a strong possibility that New Zealand First would go with Labour, and the exclusion of the Greens from the government is political suicide as they sit once again outside of the government and will have little to show for the same level of support that New Zealand First gives to Labour.

Labour identified a number of priorities it would be addressing in its first 100 days and is set to wind back much of the deregulation National introduced. Change is coming and what is going to be interesting is what does this change mean for you as typically a business owner in the context of the post-election New Zealand.

 Taxation
  • The promised tax cuts will not occur.
  • We would expect the top marginal individual rate and the top trust rate to increase to at least 36% and be aligned.
  • The Brightline test for residential property will extend from 2 to 5 years. What will be interesting is which properties this applies to, ie existing own properties or those bought after the law change is made.
  • A tax working group will be put together and involved in public consultation. Its report back will affect taxes from 2021 on.  It will focus on no increases in taxes, and no inheritance tax or other taxes on the family home.  That still does leave the door open for inheritance tax or other taxes on other assets and investments.  We think capital gains is unlikely as a tax, but time will tell.
  • A 12.5% tax back incentive for research and development.
  • Continued focus on multi-nationals. Nothing changes from the old government here and the BEPs programme will continue.
  • A key one will be the removing of the ability to use negative gearing losses. The question is exactly who this will apply to, ie company groups or just individuals claiming the losses in their tax returns?
  • An Auckland regional fuel tax for the Auckland Council and is expected to be implemented within 6 months.
Land
  • Foreign ownership of land is to be subject to greater restrictions and greater involvement of the OIO. The concern here is the OIO is already significantly overloaded and has to date been largely a rubber-stamping exercise anyway.
  • A rent to own scheme for low-income workers to assist them to buy their first home.
Other
  • Expect labour law reforms. Now is a good time to get rid of underperforming staff while you are still able to.
    • The 90-day trial periods, introduced by National in March 09, will be replaced with new trial periods and will require reasons for dismissal and justification.
    • Reinstatement will be the primary remedy for employment grievances.
  • The increase in the minimum wage to $16.50 from 1 April 18 and expectations for it to be moved to over $20 within the next 3 years.
  • Changes to paid parental leave increasing to 26 weeks per year, taking effect from 1 July 18.
  • Immigration restrictions targeting students and low skilled workers.
  • Superannuation to remain at age 65. With the Government resuming contributions to the New Zealand Superannuation Fund to help safeguard Universal Superannuation at 65.
  • Buy Kiwi made preference by the government.
  • Focus on regional development and rail networks, both within Auckland and in the wider sense.
  • A review of the reserve bank with an aim to lowing the New Zealand dollar.
  • Expect inflation to increase with particularly the increase in costs as a result of some of these and the added burden of the increase in the minimum wage. It can only push inflation up.

 

On the whole however, there is much for business and our clients to be happy with and excited by in terms of what Labour and New Zealand First have promising.  It creates opportunities in itself and you need to quickly focus on these to understand where they will be.

If we couple this with the trust law reform, which will still come into effect next year, even under a Labour government, it is going to be a busy year or two as we all get used to significant change in our existing environment.

As always, the Covisory team is happy to talk to you about your needs, now and going forward.  If there is anything we can do to help, please call us.

Please note that the information in this article is for informative purposes only and should not be relied on as legal advice. 

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.