What’s this current publicity about “Trust-busting” and is your Trust still worth having?

What’s this current publicity about “Trust-busting” and is your Trust still worth having?

Do family trusts still serve your best interests?

The answer in most cases will continue to be a very definite “Yes”.  Many of us continue to want the flexibility a fully discretionary family trust provides.

Our wish may be to manage the transfer between generations of wealth within a family using an ownership vehicle (the trust) which sees family wealth passing to the next generation in a sheltered manner.  It may also be to quite lawfully shelter assets from the claims of future creditors, future relationship property claimants and other third parties.

In years gone by income tax minimisation and death duty minimisation were major drivers for many clients to settle wealth on a trust.  Additionally, some people have been able to use a trust to shelter wealth from rest-home subsidy claw-back, in days when the Treasury was under less pressure than it is now.  We are now on notice that our wealth whatever/wherever it is will have to be used first to fund our old age care.

So while Government initiatives from time to time may adversely impact upon the degree to which trusts can be used to successfully shelter wealth, there remain good reasons for many to want to have wealth owned by a trust for their benefit and their family’s benefit, and that is not likely to change in the foreseeable future. After all, trusts have been a feature of our legal system here in New Zealand for 170 years now and a feature of England’s legal system for hundreds of years before 1840.

So why this current talk of “trust-busting?”

“Trust-busting” activity is being spoken of quite often in the media today.  What’s that all about?

This expression is not entirely accurate, but essentially it is used to describe a wealth recovery effort that has been possible for many years.

Historically, people who sought unlawfully to avoid their legal obligations to the IRD or to their creditors or to an existing wife or partner by transferring personal wealth into a trust have always faced the possibility of that transfer being reversed by a Court on the basis that the wealth concerned should not have been transferred to the trust in the first place. That’s not a new development.

Clearly there should be a recovery remedy if a person is shown to have impoverished himself or herself by transferring wealth into a trust (or into any other type of ownership vehicle) at a time when he or she is unable to pay their debts.  Current insolvency law provides a remedy for a creditor when that circumstance can be established.

Similarly, if a spouse transfers wealth across to a trust when his or her spouse has a relationship property interest in that wealth, the aggrieved spouse is able to attack the transfer and recover his or her share of that wealth.  That is not a new development either.

Note though in these instances it’s not so much the trust that’s being busted, but the transfer of the wealth.   This is why we say the expression “trust-busting” is something of a misnomer.

Instances like this are grabbing the attention of the press at present (mostly in relationship property claim circumstances) not because the transfer of wealth to a trust is suddenly wrong or illegitimate, and not because trusts are being “busted”; rather the media considers reports of “trust-busting” legal proceedings will catch the attention of the casual reader.

Here’s a further heads-up on that topic.  Once the Government abolishes gift duty we expect it will become more common for creditors to chase wealth thereby moved into the trusts concerned, if New Zealanders start gifting-off large trust debts willy-nilly (that is, without regard to the impact of that gift upon their personal solvency).

We can advise you if you wish about the ramifications of effecting large scale duty free gifts, before you do so, if gift duty is abolished.

In the meantime, for those of us who have family trusts, they continue to remain an important part of our asset planning.

If you would like to speak with us about this or any other aspect of your estate planning, please do so.