New Zealand is one of the most “trusted” countries in the world with estimates of at least 500,000 trusts in a population of just five million.
The upcoming Trusts Act 2019 updates and improves the general law governing trusts for the first time in more than 60 years. The Trust Act provides better guidance for trustees and beneficiaries and makes it easier to resolve disputes. These new laws of Trust Act will be applicable from 30 January 2021.
Establishing a family trust
In creating a trust, the ”settlor” transfers assets to the ownership of trustees, who are legally obliged to manage them according to the requirements of a document called a trust deed. As per New Zealand Trusts law the same person can be the settler, trustee and beneficiary. Generally, the key benefits of the establishing a family trust are:
To save and protect a family home and other assets against claims and creditors from the potential failure of a business venture.
Reducing the chance of relationship property claims by future partners.
As a mechanism for estate planning, that is, providing for your family after you’re gone and ensuring your wishes are carried out the way
Tax minimisation in certain circumstances, including preparation for possible capital gains or death taxes.
A normal trust (a “complying trust”) earns income – it will be taxed at 33% unless that income is distributed to a beneficiary of the Trust. If it is, the income will be taxed at the beneficiary’s income tax rate (unless the beneficiary is a minor) which is usually a lower rate of tax.
If the trustees wish to distribute Trust income to beneficiaries they must generally do so by the end of the tax year after the income was received by the Trust. If income is not distributed it will be added to the capital of the Trust.
Many people set up trusts in the 1990s to avoid their assets being “means tested” by the Government for rest home fees. People who have over a certain value in assets have to pay for rest home care themselves and are not eligible for the government subsidy.
Many of the key changes are aimed at making trust law more accessible to both lawyers and the public, strengthening the ability of beneficiaries to hold trustees to account.
In the earlier trust laws, trustees relied on lawyers, texts on trust law and case laws. mainly duty to act for the benefit of Beneficiaries. The new Trusts Act puts into law the duties of trustees and requires much greater transparency around trust activity. Trustees face increased compliance requirements. Beneficiaries now need to be told that they are a beneficiary of a trust and be regularly provided with information about the trust without them needing to request it. Beneficiaries information can only be withheld in exceptional circumstances.
However, for trusts existing before the Trusts Act 2019, it could mean that compliance duties will increase the time and cost of administering some trusts, meaning some are no longer cost-effective greater transparency will put things in the open that some trust owners might prefer to keep private.
Trusts are an important part of estate planning and provide an excellent option for managing assets under the right circumstances.
-Eshan Gupta of www.taxprofessionals.co.nz
For more advice on the taxation of your investment property and other accounting and business services, please contact the expert team at Tax Professionals. First consultation is FREE. Contact the Tax Professionals team at: 09 213 7315 or online at www.taxprofessionals.co.nz