Day of reckoning for family trusts

Article by Rob Stock, Sunday Star Times, 9 February 2020.

Trusts were once a sign of success, but forthcoming legislation will undermine their value.

Half of all family trusts serve no real purpose and could be closed, Perpetual Guardian’s top trusts lawyer, Henry Stokes, says.

‘‘I personally believe that there could be at least a 50 per cent reduction in trusts, and you would be much closer to the number of trusts that we should actually have,’’ he said.

New Zealand fell prey to a fashion for trusts, when they seemed to become a badge of success and wealth, but changes in trust laws in January next year mean trusts are going to become more expensive to operate, he said.

From next year, trustees will also have to tell people when they are beneficiaries of the trusts they manage, which would mean a massive number of adult beneficiaries, added to trusts when they were children, would suddenly have a right to find out just how wealthy their parents really are.

‘‘The whole underlying principle of the new act is that beneficiaries should have sufficient information to be able to be sure that trusts are being run correctly, and that trustees are doing their jobs,’’ Stokes said.

There were an estimated 450,000 trusts, making New Zealand one of the world’s most over-trusted countries.

‘‘There will be a large number of people who will be finding out for the first time they are beneficiaries of a trust,’’ he said.

people setting up trusts often did not tell beneficiaries, especially their children, not wanting to reveal how much they were really worth, for fear that realising the extent of family wealth could weaken their work ethic, or make them start thinking of that wealth as their own.

But when the new Trusts Act comes in, beneficiaries will have the right to ask for information on trust assets, which could give them a clear picture of how much the family is worth.

Many people would not be comfortable telling the children exactly how much money their parents had, Stokes said.

‘‘Most people have a vague idea of what mum and dad are worth, but not exactly how much,’’ he said.

New Zealand had had a highly successful trusts sales industry.

‘‘At one stage everyone was saying: ‘You should have a trust’’’.

But many of the things that made trusts attractive no longer applied.

Death taxes and superannuation surcharges were removed. Courts got into trustbusting, which meant they no longer offered much protection in property relationship break-ups. Residential rest home care subsidy means-testing was changed to include assets gifted to trusts.

‘‘Trusts are no longer as strong as they used to be,’’ Stokes said.

Many people still had legitimate uses for trusts, such as business owners seeking to preserve family assets from creditors, but Stokes said up to half of all trusts were set up for reasons that no longer held, and their settlers should consider closing them.

The new Trusts Act would make trusts more onerous to run, and more expensive, which could provide the catalyst for many to be closed, creating a windfall for the legal industry.

‘‘It’s going to be quite interesting. I think that a lot of people will be choosing to wind up trusts.’’

‘‘There will be a large number of people who will be finding out for the first time they are beneficiaries of a trust.’’ Perpetual Guardian lawyer Henry Stokes