New law changes will make trusts more important

John Brown says new laws will change the ways and reasons people use trusts.

Monday, January 22nd 2001, 10:19PM

by John Brown

The new relationships property law changes will have important implications for the way New Zealanders view trusts.

It is another example of the age-old tug of war between trusts and lawmakers, the changes giving the courts greater power to reach into trusts and yet trusts will become more important.

The new regime will require a change in thinking by many New Zealanders about trusts. The New Zealand addiction to family trusts has largely been driven by external policy issues, including:

avoiding crippling estate duty due to the rapid increase in land values;

avoiding the higher tax rates of 66c in the dollar in the 1970s;

protecting assets in the face of personal guarantees and failing businesses in the 1980s; and

the desire to keep rest home subsidies and ensure that no government benefit was lost through means testing.

Instead of being used as a reaction to these external issues, trusts need to be evaluated in the light of the long-term benefits they can provide.

A well-constructed trust may serve several generations. This becomes increasingly important where there is legislation that disadvantages or even penalises personal ownership of assets. Even though the courts will now have greater powers to reach into trusts, Parliament has been reluctant to attack trusts head on.

The courts’ new powers are restricted to those where any orders the court may make are in respect of trust income, not trust capital.

Long-term asset planning will become increasingly important. The courts’ powers under the existing Matrimonial Property Act 1976 and the new legislation are limited to changing inter vivos trusts, not testamentary or will trusts.

This will see parents and grandparents leaving assets in trust, rather than to offspring personally. Subsequent generations will have the benefit of those assets, but not the personal ownership. This may require a change in attitude to assets and personal ownership as well as some evaluation of trust drafting.

While the modern trust has become increasingly flexible, careful thought will be required as to how discretionary trust powers are exercised and how the people who will exercise those powers are appointed and removed, particularly after the trust founder has died.

In some circumstances it may be appropriate to establish separate trusts to hold separate assets.

If the figures on the growth of family trusts are correct — from 6,500 in 1965 to approximately 100,000 today — this growth is not without good reason.

While trusts may not yet be as popular as laws necessitated in the past (one historian considers that by the beginning of the 15^th century most of the land in England was held in an early form of trust), the full present benefits of trust ownership will become increasingly realised, and the new legislation will provide added impetus for this.

John Brown LLB, Dip Fin Pl is the author of the recently released CCH Master Trusts Guide which looks at trust busting, trustees’ duties, beneficiaries’ rights, trading and charitable trusts. It also includes a clause by clause analysis of a family trust deed. The book is intended for those with some understanding about trusts but who wish to know more. To order your copy Click Here

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