Pricing out trusts

A few years back a Trust owed IRD a substantial amount of money. The trustees of said trust skipped New Zealand and moved to Australia. Rather than deal with international debt chasing, IRD took an Auckland lawyer to court and held that as the “Professional Trustee” he was just as responsible for the debt. The courts agreed, and ruled that there was no such thing as a “Professional Trustee”. So, the lawyer had to pay a few hundred thousand dollars out of his own pocket.

Skip forward and we are finally seeing the ramifications of this case come through the Hutt Valley. Some of the larger law firms are so cautious about this topic that they are effectively making trusts for the rich and wealthy only, and turning what used to be annual fees of a few hundred dollars into a few thousand. Others just want nothing to do with trusts and are preparing all the required paperwork then sending the other trustee’s a letter asking them to accept their resignation as trustee.

So what does a professional trustee do anyway? They make sure the minutes are being kept up to date, ensure the beneficiary rights are accounted for and help keep the other trustees up to date with applicable law changes.

Trust’s are great and they have a very special role to play in family and tax planning. Trusts date back to the days of the crusades and allowing the knights to ensure their family could maintain living in the family home even while they were at war. Not to mention the tax benefits as there was death duty at the time. Back to the current period and although there may still be wars, the crusaders/army have a better chance of getting back home.

So why do people still have trusts?

The reasons can be as varied as the people who have them. They can be used in conjunction with a will to ensure the appropriate people maintain control of the family home. In today’s society it is not uncommon for marriages to end & new partners to be found. Maybe you want to make sure your family home stays your’s and not that of a new partner, just because you have been with them for three years. The same can apply to your wayward child and a casual partner. Alternatively, Some people like to ensure the family assets are protected from people that may want to take them to court. If you were wondering how Terry Serepisos (the bankrupt property developer from Wellington) could drive around in a Ferrari while owing IRD and ACC millions, now you know. Furthermore, Trusts normally can present substantial tax benefits. While the current government has set the tax rate to be equivalent to the top tax rate, this can change just as easy as the government. In essence, Trusts are like a will and insurance policy all in one and you wouldn’t own a house or be in business without insurance.

However, the biggest advantage is also the biggest disadvantage. If you have a trust you have likely gifted most of your assets into it. So now those assets are not yours! This is why many people need to be reminded about their rights and options with regard to a trust. Often people have a lawyer as a professional trustee. More often than not, the lawyers form the trust.

However, with lawyers not wanting to be involved and few accountants willing/ or able to be a professional trustee. There is a serious risk that trusts will no longer be managed correctly. One has to ask the question who cares about a few silly minutes or the beneficiaries rights? Well the simple answer is Inland Revenue (IR). IR is constantly looking for “sham” trusts, by “Trust busting” sham trusts IR can reallocate income from the trusts, there are often gifting issues that need to be considered and not to mention the ineligibility for residential care subsidy. However, if you talk with your accountant, chances are they can act as an “advisor”. This means they can keep you in the loop about new laws, keep all the minutes up to date and even assist you in ensuring you adhere to your trustee obligations. Here is the best part, they seldom charge as much as a lawyer.

By Shawn O’Grady

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Give us a call on (04) 563 6965 or email: dennis@taxman.co.nz or shawn@taxman.co.nz

Keep an eye out for June’s article!

TAX DATES TO REMEMBER

20th June 2014 - monthly employers PAYE payment

28th June - two monthly GST Return for April/ May