Family Trusts

Family Trust Gifting: A Gift For You

Janet Xuccoa

Hello Everyone

Well the New Year has well and truly started for us. In Trust Land we’ve conducted hundreds of Annual Trustee Meetings. Out of those ATM’s we found a common issue arose – Family Trust Gifting. So I thought I’d talk a little about Gifting and hopefully remove all the confusion.

Additionally, for those of you who didn’t know, my GRA Birthday is fast approaching. That special day where it all began for me as your Professional Trustee was 29 March 2005. So to celebrate my GRA birthday, we are going to make a Gift ourselves.

Read more about that at the end of this post.

Family Trusts: How to Gift

You cannot simply transfer your assets to the Family Trust. If you did this, the law would deem that you have made a gift and gift duty would be payable. So to avoid gift duty, you need to sell your assets to the Trust at market value.

When you do this, the Trustees will probably not pay you cash for the assets. Rather, they will give you an IOU, which is often referred to as a Deed of Acknowledgment of Debt. This Deed of Acknowledgment of Debt will record that the Trust owes you a particular sum of money for the asset it has just purchased from you.

The balance owed to you by the Trust under the Deed of Acknowledgment of Debt will be an asset in your hands and a liability to the Trust. To reduce down the credit balance owed to you by the Trust under the Deed of Acknowledgment of Debt, you need to gift.

The Trust Gifting Process

Gifting is a process involving you annually forgiving part of the debt owed to you.

At law, you are able to forgive up to $27,000 per person, per year, without incurring gift duty. If you chose to forgive more than this balance, you will be liable to pay gift duty on the amount of the gift you have made over and above this $27,000 threshold.

The gifting process involves five steps: |

1. You as the Donor (the person making the gift) will sign a Deed of Partial Forgiveness of Debt and Gift Statements;
2. The Trustees as Donees (the people accepting the gift) also sign the Deed of Partial Forgiveness of Debt and a Trustee Resolution noting on behalf of the Trust their acceptance of the gift;
3. A copy of the Deed of Partial Forgiveness of Debt and the original Gift Statements are filed with the Inland Revenue Department;
4. The Inland Revenue Department stamps the Gift Statements and returns them to the person who prepared the documents; and
5. The stamped Gift Statements should be filed with the Trust’s papers and the Trustee Resolutions accepting the gift should be filed in the Trust’s Resolution Book.

Some people try to shortcut this process and only have the Donor sign the gifting documents. I think this is a dangerous practice as I believe you should be able to show that a gift has been made and accepted.

Why Gift?

Each time you gift you transfer in more wealth to your Family Trust and you transfer wealth away from yourself. Hence if a creditor attacks you personally and all the assets are in the Trust, those assets should be protected.

This means that should anyone bring a successful legal claim against you, they will not be able to satisfy their judgment against your personal assets as you will not own any assets of significance. Rather, it will be the Trust that will hold all the assets and all the wealth.

Of course having said the above, you cannot transfer assets to the Trust to avoid creditors that are already on the horizon. Additionally, the correct transfer process that I have previously discussed must have been undertaken. Most importantly, the administration of the Trust must have been carried out correctly.

Potential Family Trust Gifting Problems

There are two problems I frequently see in practice. The first involves no gifting and the second involves incorrect gifting.

People often believe that once they have completed their first gift they either don’t have to gift anymore, or that their gifting will happen automatically. They are usually wrong on both counts.

If a credit balance is owed to you by the Trust, you need to keep gifting until that balance is eliminated. You also need to ensure that someone actually completes the gifting process. Often this will be a Professional Trustee.

If you do have a Professional Trustee you should ensure they prepare your gifting documents for you. They may for example think one of your other advisors is taking care of this. They may even forget. Accordingly, your gifting may become overlooked. To avoid this, simply diary out your gifting date and call your Professional Trustee or whoever is completing your gifting documents and prompt them.

Incorrect gifting is the second issue that can arise. This can occur when financial statements are not prepared and financial statement reviews are not completed.

Simply put, what happens when this issue arises is the balance recorded in the Deed of Acknowledgment of Debt that the gifting is based on, is not congruent with the balance noted in the financial statements.

This incongruence arises for different reasons, often because the Trust has given back funds to the Settlors. Accordingly, the credit balance owed to the Settlors is less than that shown in the previous year’s gifting documents.

When financial statements are not prepared and the annual financial statement reviews are not completed, the issue never becomes identified and lays dormant. Identification only occurs when an individual or a Trust is questioned or attacked. That’s when the problem is highlighted and comes home to roost.

Of course this can be avoided if you make sure the Professional Trustee does their job and ensures annual financial statements are prepared and carries out that all important annual financial statement review.

Gifting Summary

I hope the above shines some light on Gifting. As you can see, it’s a really important part of gaining asset protection and has to be completed correctly.

Failing to have your Deeds of Acknowledgment of Debt contain the all important Hawkins and Entrenchment clauses can undo all the good work gifting brings about. Not gifting from the correct balances recorded in financial statements just creates havoc with the gifting programme. Taking short cuts with the preparation of the gifting documents themselves doesn’t pay.

So if you are going to set up a Trust and put assets into it to gain asset protection, take care to correctly complete your Gifting.

Our Gift To You

To help celebrate my GRA birthday here is our Gift to you: (This promotion has now finished).

We invite all clients and prospective clients who do not have their annual gifting documents currently prepared by GRA, to take advantage of this gift.

Let us complete your first years gifting for absolutely nothing. Yes that’s right - completely free of charge. If we do this for you, it could mean you save several hundred dollars. (This promotion has now finished).

As with all offers there are a couple of conditions…

First, your Deeds of Acknowledgment of Debt have to be up to date and in a form acceptable to us. Secondly, we must prepare your gifting documents for the 2011 and 2012 years at our standard fees. By the way, those fees are $200 + GST per person per gift.

Lastly, this offer is only available for a limited time. (This promotion has now finished).

So, don’t look a gift horse in the mouth! Contact me now by email or telephone and take us up on our Gift. By the way, with all the money you are going to save through this Gift, remember to send your Professional Trustee a Birthday Card – she’ll really appreciate it (hint!)

All the best.

Janet Xuccoa  BCom LLB
Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? For Help, please contact us for an interview.  Please go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth. GRA are accountants who provide expert accountant advice both in NZ and offshore.

Family Trusts Gifting

Annual Trustee Meetings: Explained

Hello Readers

I hope you’ve enjoyed your Christmas break and are now fully rested, ready to tackle the New Year.

Usually most of us have some spare time at the beginning of a new year and I recommend some of this time being used by Trustees to conduct an Annual Trustee Meeting (”ATM”).

An ATM is our way of of taking care of your Family Trust to protect you, your family and your future.

So what exactly is this and how does it help the Trust?

Well, Trustees have a duty at law to annual review the affairs of the Trust so by holding this Meeting they are satisfying their duty. Additionally, this meeting will go a considerable way to ensuring the successful operation of the Trust and can be instrumental in avoiding a Trust failure.

The Value of an ATM

To demonstrate how an ATM can help a Trust, let’s take the example of Mr and Mrs Boiler. They were the Trustees of the Boiler Family Trust which contained the following assets:

* Family home;
* Shares in Boiler Orchard Limited; and
* $47,000 in cash on term deposit.

When I looked at this Family Trust it initially appeared to be in good health. But it soon became apparent when reviewing the financial statements and talking to the Trustees that the assets of the Trust were under threat. You see the liabilities of the Trust had increased in the last two years. I wanted to know why that was.

The Trustees told me that the Trust’s orchard business had done well over the years but in the preceding two years a large supermarket had come to town. When this occurred, the town’s population purchased all the goods they needed from the supermarket. T

This meant the produce the orchard produced wasn’t selling and what was selling had to be sold at a heavily discounted price. As a result, the Trust had suffered losses in the last two years and had to increase its Bank borrowings just to serve debt.

I was not the Professional Trustee of this Trust but Mr and Mrs Boiler had come to me for advice. I immediately recommended the orchard be sold. It was a case of selling in an orderly fashion or in another year, having the Bank foreclose and sell. The latter option was not attractive. A sale proceeded and financial disaster was avoided.

Family Trust Lessons

What’s interesting about this case is if this Trust had a Professional Trustee who had conducted with their co-Trustees an ATM, two things would have been identified.

First, the news that the supermarket was arriving in town would have been aired.

Secondly, the Professional Trustee would have considered this broadcast and discussed the need to sell the orchard business. The Professional Trustee would have given this advice because it would have been clear what was going to happen.

Hopefully, all Trustees would have agreed to sell the business and the need to increase debt would have been avoided. Overall, the Trust would not have suffered the loss it did as the Trustees could have taken action much sooner than what they did.

I hope you can see from the above example the value in holding an ATM.

ATM Checklist

At the Meeting several points should be addressed. These are as follows:

• Trustees should identify and discuss the objectives of the Trust and determine whether those objectives should be carried on in the forthcoming year;
• A schedule of assets and liabilities of the Trust should be completed and analyzed. Trustees should in particular discuss how well the investments are performing and how comfortable they are with the level of debt the Trust is carrying or exposed to.
• Trustees should check the assets of the Trust are well maintained and if maintenance is necessary, should make a list of what is required and who will be instructed to carry out maintenance out.
• All insurance policies for the assets of the Trust should be checked to ensure insurance cover is adequate.  Policies must be checked that they are held in the A report by the Professional Trustee and the findings of the Financial Statement Review they have undertaken, should be given to all other Trustees.

The above list of points is not exhaustive but merely suggestive. This is because the matters discussed at each Trust’s ATM may differ depending upon the nature and objectives of the Trust.

Lastly and most importantly, once the ATM has been completed, the Minutes of the ATM should be prepared and signed by all Trustees.

Those Minutes should contain the decision the Trustees have unanimously made regarding whether or not to retain the current assets of the Trust given the nature of those particular assets and taking into account the objectives the Trustees have. In my experience, this task is best carried out by the Professional Trustee.

I hope this information spurs you on to holding an ATM. As always, if you have any queries, would like a review of your Trust or need help, just contact us.

A review of your Trust and structures may end up saving you money and a lot of heart-ache. We work by phone, email or skype for your convenience.

Best wishes for the New Year.

Janet Xuccoa  BCom LLB
Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth. GRA are accountants who provide expert accountant advice both in NZ and offshore.

A Christmas Message From The Professional Trustee

Christmas is always a time for celebration but in my book, it’s also a time for reflection and some forward thinking.

What did the year bring and what will the new year look like are often questions that cross my mind as I see one year out and another year roll in.

This year, we’ve all been touched by the global events that have faced our world. New Zealand is not an island that stands outside the global economy and we have truly felt the effects of the global recession at home. The majority of our markets, including retail, property, tourism and exports have all taken a bit of a hit. The labour market has definitely felt the effects of the global recession and we all know how the finance / credit market has tightened and affected us personally and our businesses.

They say however every cloud has a silver lining and I think this is true with respect to the global recession we’ve all faced this year. Out of emergences, better people and better processes emerge. We set about the subject of learning and we start to think about how we can manage our lives, our households and our companies more effectively and efficiently. Often, we emerge and find ourselves in a much stronger position simply through having to focus on how to survive and build a better, stronger future.

Additionally, we frequently ask ourselves what makes us really happy. This is a very interesting question because it usually involves not only having enough assets and money to do the things we want to do, but it also encompasses having great relationships with our family and our friends. And to build those relationships we need time. So once again, we look at where and how we spend our time and how we can achieve closer relationships with those that we love whilst at the same time, meeting our work and business commitments.

As the Professional Trustee here at GRA I’ve seen lots of good things this year. In particular, my fellow Partners and I have pushed really hard to dig deep and gain an in-depth understanding of our clients’ needs and wants. This work has lead to us completing over 128 presentations throughout New Zealand in 2009 and to us developing some innovative products and services that have assisted our clients with the issues they have been facing. Some of these new products will be released next year and I just know our clients are going to find them very instrumental in helping them achieve their financial goals.

One of the biggest highlights for us as a firm and for me personally as the Professional Trustee, was being awarded the prestigious Corporate Trustee of the Year Award by the New Zealand Trustees Association. This was the first time in the history of the New Zealand Trustees Association that an award like this had ever been given to a Corporate Trustee and we took it home!!! That made me incredibly proud. And a little bit of pride is a good thing in my world because it makes us continually strive to deliver top notch service to our clients.

Unfortunately, I’ve also seen my fair share of friends and clients feeling pain and stress this year. Some of our clients’ businesses have been adversely affected by the recession and some have even suffered personal relationship problems. One person close to me didn’t cope well with the pressures the recession brought at all and sadly isn’t celebrating Christmas with any of us this year.

As a firm and as the Professional Trustee, we do our upmost to help clients when they face really difficult times and we try hard to help them make decisions in their lives that will either solve their issues or at the very least, help minimize their pain. As a human being I really sympathise and empathise with people who face difficult problems. I’ve lived long enough and been though enough life experiences to know that hardship can strike each and every one of us without warning.

So, I guess this year I can say I’ve seen the great tapestry of human life. I’ve witnessed the good and the bad. Throughout the year however one thing has remained constant in my mind. This one thing has come up time and time again when I have been presenting and meeting prospective clients.

Many people when they are enjoying life and events are going their way, do not pause to consider what could occur if life was heading in the other direction - southwards. As a consequence, they fail to keep their eye on the ball. They forget to strategise and plan and take steps to protect what they have worked so hard to achieve and gain. As a result by the time the horse has bolted from the stable and they are faced with difficult times, it is too late to put a plan into place.

So the one thing that I urge everyone to do over Christmas is take a moment. Think about this …

Have you done all that you can do to put your affairs in order?

Have you taken every step you can take to protect your assets?

Do you have an up to date estate plan?

Have your written your “Letter” that I’ve blogged about?

Have you sat down with us and spoke to us about your forthcoming year, your goals and aspirations and asked us how you can legally minimize your tax liabilities?

Have you had a meeting with us to discuss how you might get ahead financially?

A half hour discussion with us could be the difference between maximising your life and the economic opportunities available to you, or not.

The last thing I ask everyone to do over their Christmas break is enjoy and savour each moment. Think about giving and serving your family and friends. Be thankful. It may well be true that not everything has gone as planned this year in your life. Things may have been a bit hard and in certain cases, downright difficult. But there is a new year to plan for and if you have friends and family around you then you are very rich indeed in love and support. It’s these things I believe that give us genuine happiness and satisfaction.

On behalf of the Trustee Services Team and the Professional Trustee I want to take this opportunity to wish all of you the very best for Christmas. Christmas is meant to be a time for pure delight so fill each moment with joy and cheer. Savour this special time. Have fun with each other and have happy and safe holidays. Remember, it’s the memories that we create that we look back on. So, ensure the memories you are building are happy ones that you will be glad to treasure and pull out in the future and relive.

As always if you need assistance over the Christmas break you can contact myself, Janet Xuccoa, by telephoning 021 479 630 or you can telephone our offices on (09) 522 7955 and leave a message on our message service. This service is monitored.

Lastly, you can send me an email on jx@gra.co.nz or Request Contact. When I’m not dealing with Santa and his Elves I’ll be monitoring my emails so will respond to you. Alternatively, you can call Juliette Egden, our Trustee Services Manager on 09 550 8054.

Thank you for all your support in 2009,

Janet Xuccoa BCom, LLB
Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Email: jx@gra.co.nz
Ph: +64 9 522 7955

Family Trusts NZ

Family Trust Gifting: The Dangers

Hello Everyone,

This week I had an interesting conversation with two individuals who had received some really poor advice from their advisors. This advice has cost them dearly in terms of the assets they are about to lose.

But the rot doesn’t stop there as the loss of their assets will have a long term effect – it will most definitely deprive their children of their inheritance.

[By the way the lessons from this story will be covered in my next upcoming Auckland seminar entitled "Family Trusts Tips & Traps" ].

The story goes something like this …

Mr and Mrs Smith were offered a business opportunity which they decide to take up. Before they did so, they approach their advisor who told them to set up a Trust and move their family home into the Trust. This would of course bestow asset protection upon the home the Smith’s were told. And the Smiths being sensible individuals relied on that advice.

A Trust was duly set up and the Smiths sold their family home to that Trust. Because the Trust did not have any money to pay the Smiths for the home, the Trustees gave the Smiths an IOU – a Deed of Acknowledgment of Debt in legal speak.

At this point the first error was committed. There was no Hawkins or Entrenchment clauses in the IOU and we all know what that means. Just in case you don’t however, don’t worry. We are going to tell you because this would be one of the largest mistakes we see when Trusts are set up and IOU’s are given out.

The Smiths were then told to enter into a gifting programme and to forgive $27,000 of the debt each and every year that was owed to them by the Trust. Again, the Smiths being the sensible individuals they were, relied on that advice. They were also under the impression that their advisor would take care of preparing the gifting documents for them on an annual basis. After all, it was the advisors job to do this.

At this point the second error was committed. The advisor didn’t run a computerised gifting programme. That advisor simply ran a paper spreadsheet. Unfortunately, the other member of their staff, who was also responsible for completing Trust work, also ran a manual paper spreadsheet. Neither the advisor nor the staff member had regular Trust Department meetings so neither of the spreadsheets were ever checked to ensure that all clients actually got put on to a spreadsheet. Truly a recipe for disaster!!! As it turns out, clients gifting was often missed because they were never noted on either of the manual spreadsheets.

If the above two errors weren’t bad enough a third error was committed. It was this error that was truly fatal for the Smiths.

The Smiths business venture was really going well so they decided to sell their house and get a bigger one. This did mean they would have to take on a bigger mortgage but because the business was prospering, the thought of a larger loan didn’t bother them. So they instructed their advisor to attend to the conveyancing of the property. Once the house was sold, the sale proceeds were placed in the Smith’s personal bank account. We all know the danger of this, but just in case you don’t worry. We will tell you and we’ll do this because this is another very, very common mistake we see.

After the house was sold, another business opportunity came up in connection with their existing business. This opportunity however would require the Smiths to move overseas for a couple of years. They decided to take up this new business venture, so delayed buying another house. They were unsure about what they should do with their Trust so they called their advisor.

The advisor told the Smiths to put the sale proceeds they got from their home on term deposit and that there wasn’t any further need to gift as they were now heading overseas. Therein lies the nail in the Smiths coffin unfortunately but the Smiths, holding the view that their advisor knew what he was talking about, relied on that advice. They did indeed put the sale proceeds in a term deposit account held in their personal names and they did indeed stop their gifting programme.

All went well in the lives of the Smiths for about two years. But then the market turned. Their business overseas went into liquidation. They returned to New Zealand to find the manager they had left in charge was not coping and to make matters worse, the market in New Zealand had also changed. What was once a profitable business, was now in the red. Rather than producing money each and every month, all it produced was more debt.

The New Zealand business duly went into liquidation, leaving a sizeable debt owed to the Bank. At the time when the Smiths originally purchased their New Zealand business they gave a personal guarantee to the Bank. But don’t worry – the Bank got paid in full!!! How? Easy. The sale proceeds on term deposit were held in the individuals personal names so the Bank simply applied the guarantee against those proceeds and took them, crediting those monies against the monies the New Zealand business owed them. We’ve told everybody for years how to handle the Banks. Don’t worry if you are unsure about this point. We’ll gladly tell you because this is probably one of the largest traps people fall into.

How could all of this been avoided? What does this have to do with stopping the gifting programme? How do you handle the Banks?

To find out the answers to these questions and the ones we’ve highlighted above, simply come to my next seminar called “Family Trusts Tips and Traps”.

Go on - Register Now. It could save your assets – even if you don’t go into business!!!

All the best, Janet.

Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and get tips, updates and useful information to help you protect your assets and grow your net worth.

The Beneficiaries Want The Money…Help!

You’ve worked hard for what you have and to ensure your assets are protected, you’ve gone to the trouble of putting them in a Family Trust.  Now those assets are protected for you and your loved ones – for the Beneficiaries of the Trust.

But what happens when the Beneficiaries want the assets?  Can your children or say other Beneficiaries, such as your siblings, get access to those assets?  Can they find out what’s in the Trust and what they’re entitled to?  Are they entitled to know all about the Trust and its affairs?

Unfortunately, human nature being what it is, this issue comes up more than most people would like.  Usually, like all human being issues, feelings of suspicion, distrust and jealousy underline the problem. And just like a lot of issues, responding to the problem in either a confrontational manner or limiting the communication between Trustees and Beneficiaries doesn’t help.

What is helpful is understanding what information Beneficiaries are entitled to and then, having an open dialogue with an aim of improving matters – maybe even improving the relationship which is frequently at stake.

The Courts Decide

Traditionally, what a Beneficiary could and couldn’t see was based on whether they were a Fixed or a Discretionary Beneficiary.  Fixed Beneficiaries had an entitlement to the assets of the Trust and so had a right to view all Trust documents, including financial accounts.  Discretionary Beneficiaries on the other hand, had only an entitlement to be considered by the Trustees when those Trustees were handing out cash, capital and assets.  As such, Discretionary Beneficiaries had no entitlement to view Trust documents.

Thankfully, we moved from that position.  Now it doesn’t matter if a person is a Fixed or a Discretionary Beneficiary because now, it is up to the Courts to determine what documents a Beneficiary is entitled to see.

Under the ‘inherent jurisdiction’ approach a Court says it has the ability to supervise and if necessary, to administer a Trust and therefore, a Beneficiary has a right to approach them to seek disclosure of Trust documents.  Ultimately this means that it is up to the Court’s to determine what a Beneficiary can and cannot see.

Courts are mindful creatures.  They implicitly understand human relationships – after all they deal with human issues every single day.  With this understanding, they exercise their discretion and engage in a bit of a balancing exercise.  They weigh up the competing interests of different parties (eg: trustees and beneficiaries and third parties) and consider a myriad of issues including personal and commercial confidentiality, parties privacy, consequences of disclosure, etc.

Additionally, they are aware that Trustees do not have to disclose to Beneficiaries their reasons for exercising their discretionary powers.  This point is particularly important because it can have an effect on what the Court’s ultimate decision is – what the Court will decide a Beneficiary can and cannot see.

Sometimes, at the end of this balancing exercise, the Courts decide that disclosure should be limited and safeguards should be put in place.  Often this is to protect the relationships within the family.

Look What The Beneficiary Found

In the past, the Courts have said the types of information listed below should be disclosed to Beneficiaries. Remember, each case is decided on its own merits so the items noted on this list are not set in concrete.

* Deeds of Trust;
* Deeds of Variation of Trust Deed provisions;
* Deeds of Changing of Trustees;
* Deeds of Resettlement;
* Legal opinions relating to the interpretation of a Trust Deed’s provisions;
* Legal opinions with respect to a Beneficiary’s rights;
* Valuations of assets of the Trust; and
* Financial accounts of the Trust.

Some Secrets are Better Left Just That - Secret

Historically, under case law, Courts have said that Beneficiaries do not have a right to the types of information I have noted below. Read this list with the above Caveat - Courts can decide something different depending upon the facts of the case before them.

* Letters from Settlors to Trustees;
* Notes from Settlors to Trustees;
* Memorandum of Wishes made by Settlors;
* Notes made by Trustees setting out their reasons for the decisions they have made; and
* Statements which show the motives of Trustees.

Raiding the Trust

So the big question is now that the Beneficiaries have the financial accounts in their hands, what can they do with that information? Well, one common tactic is they can apply to the Courts for an Order, which would state that monies due and owing to them are in fact, paid to them. For this reason, it’s important to deal with the allocation of Trust income each and every year.

Any income that has been allocated to a Beneficiary and shown as such in the financial accounts may be called by that Beneficiary to be paid to them upon them becoming adults. A Court Order can also require this. Hence, in my view, only income that is to be spent on a Beneficiary should be allocated to them in the Trust’s financial accounts. Failure to allocate income in this manner may result in a Beneficiary requiring a Trustee to pay them the surplus income that appears as a credit in their Beneficiary account shown in the financial accounts of the Trust.

Summary

Like all human problems throughout time, good dialogue can solve the insurmountable. This is because open communication fosters goodwill and trust between people. If goodwill and trust exists, there is less of an opportunity for secrecy and distrust to creep in.

Trustees and Beneficiaries are human beings and human beings respond positively to people being honest and clear with them. So the order of the day is to seek opportunities to promote positive communication between each other.

In my view, it is really irrelevant whether a Trustee has to legally show a Beneficiary a Trust document or not. If a Beneficiary has had to approach a Court to get an Order to see the Trust documents, the relationship between the Beneficiary and the Trustee is in trouble and that is where the real problem exists.

Being clear and honest with Beneficiaries when they ask about a Trust’s affairs is a sensible thing to do as it preserves the relationship. Failure to do so will simply create suspicion and exacerbate tension. Remember … a Trust, is about relationships and about looking after assets for the future. So in the name of Trust, taking time to care for relationships and teaching Beneficiaries about money, assets and protection will ultimately ensure the future that you are working hard to provide for is kept secure.

Janet Xuccoa, BCom LLB

Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S.  Did you like this article?  Go ahead and sign up to our free newsletter and get tips, updates and useful information to help you protect your assets and grow your net worth.

Tags: discretionary trust

A Special Message For Trust Lawyers

Dear Trust Lawyer,

If you’re a Family Trust lawyer, I can assume you are at least curious about how you can reduce risk, improve your service and possibly increase your level of business.

If that’s true, please read this entire message. Even if we don’t end up talking, I’m sure you will get some value or ideas from what’s written below.

Risk Management

When it comes to trust work, we understand the pressures and risk that lawyers can face. Getting small but important trust administrative matters completed on time and correctly every time, is expected. And it’s what we as lawyers get paid to do.

On the other hand, failure to act properly as trustees on behalf of our clients can be devastating. It can cost us, our practice and our partners financially, let alone our reputation…

We’ve heard the stories before. Here are a few that I am personally aware of, that had tragic results:

• Failure by a lawyer to recognise that GST is payable on the sale of a property by the Trust that he was a Trustee of.
• A client (unbeknown to the lawyer acting as their trustee) registering the family trust for GST, claiming GST and then failing to repay the GST on the sale of the property.
• Then there’s the story about the employee of a practice who tried to cover their tracks when it came to gifting. They had ‘forgotten’ to complete gifting documents for a number of clients. To remedy this situation they decide to prepare 3 years worth of gifting for each client, get the clients to execute the documents and then present them all at once to the IRD. As you can imagine, the clients were not happy when the IRD demanded their pound of flesh from gifting duty.
• Or what about that life insurance money that paid out to the trust of one of your clients (with you as trustee) that you’ve held on term deposit for the past 4 years, waiting for the main beneficiary to come of age.

Does any of this sound familiar?

Why Does This Happen?

Failure to act properly as trustees on behalf of our clients can occur for a variety of reasons.

Some of those reasons could include inadvertent omissions as a result of an extreme or heavy workload. Mistakes can happen.

For a variety of reasons we become less vigilant with trust work that we delegate to employees who themselves may fail in their duty.

Similarly, we may experience problems because we just don’t have the staff or the right processes in place to catch problems before they arise - or to stop our clients wandering and causing some disaster which we are implicated in!

Whatever the reason, the thing we ALL have in common, is that we all want to avoid these things from ever happening. Right?

If You Are Acting as Trustee, the Buck Stops with You

Whether you are acting as a trustee in your personal name or in the name of a corporate, we all know that at the end of the day, the buck stops with you.

If we cause a loss to a trust as trustee, a beneficiary has the right to feel aggrieved and may seek to recover against us. Ouch.

Judgements from our Courts have shown that time and time again.

We as trustees, we place ourselves at risk when we fail to act as we should. In fact sometimes, we can attract risk because we may not be clear about exactly what needs to be done.

And when that risk crystallises it can it can bring about some nasty results.

It may cause:

• sleepless nights as we go through the litigation process
• worried hushed conversations with our insurers
• financial loss to the Practice as we spend time fighting the claim or worse, losing the action, negative publicity either before or after the judgment has come down,
• loss of reputation whether warranted or not
• loss of income as other clients hear about the issues and leave the practice.

And if these consequences aren’t enough to send most lawyers running for cover, consider the increased scrutiny and negative attention that can result from colleagues and peers.

So, what’s the Solution?

After consultation and use by several practices already, Cornwall Trustees Ltd (through Gilligan Rowe + Associates Ltd) have developed a complete Trust Administration service designed for use by lawyers involved in trustee work.

It’s the provision of essential trust administration services, that you in turn can recommend to your clients.

For a low fee payable by your client, we take care of the small but critical tasks necessary for any trust to withstand any scrutiny. In effect we remove any risk attached to the ongoing administration by managing:

• Preparation of minutes/resolutions
• Deeds of acknowledgement of debt
• Variable interest loan agreements
• Gifting

And more.

What’s in it for you and your practice?

By briefing out trust administration work to us, you receive a variety of benefits including increasing the time you have available to spend on other matters that increase your income production.

Aligning yourself with New Zealand’s Corporate Trustee of The Year (that’s us), can add value to the relationship with your client and enhance your overall offering.

But the biggest benefit to you of working with us is the tangible risk reduction that you will experience and the peace of mind knowing that the small but necessary details are taken care of.

Non Competition

Of course, we respect that the client is your client. So for that reason, we give you our promise that we would not complete any legal work for your clients.

In fact, we’re prohibited from doing that.

Instead, we (where possible) would refer extra business back to you. How? If appropriate, after the analysis of your clients’ financial statements and other material (which is a normal part of our process), we can report any recommendations requiring your attention back to you and your client.

As an example, this work could include putting in powers of attorney for the client or registering a General Security Agreement.
Low Priced, High Value Service to Your Clients

Our processes, systems and attention to detail are second to none. In fact these attributes helped us secure our national award which is judged on procedure, merit, structure, achievement and client satisfaction.

It’s summed up in the following:

A real strength of Cornwall Trustees is the hands-on commitment from the Directors through to clerical staff where their integrity and personal belief in the structure and process provides the client with a high degree of security.   Errol Anderson, Registrar NZ Trustees Association.

We believe that these are all the things that your clients deserve.

Can We Work Together?

We’d like to share more detail about how we could add value to your practice - including our pricing.

The first step is to Request A Call. I’ll speak to you personally, answer any questions and email you an outline of our services and our promise.

If you can’t wait, please call (09) 522 7955 and ask for me, Janet Xuccoa.

Thank you for reading this.

Janet Xuccoa BCom, LLB
Professional Trustee Services
Gilligan Rowe + Associates

P.S.  We can work with trust lawyers anywhere in NZ.

Tags: Family Trust, Trust Administration

Family Trust Property Value Crisis: Your Obligations

Dear Reader,

Recently I received a couple of questions from a Reader who was in a difficult dilemma.   This Trustee was faced with the problem of having purchased a property on behalf of the Family Trust a couple of years ago.  The property, due to current prevailing economic conditions, had decreased in value.

To make matters worse, the Trustees borrowed money to buy the property and the interest rate on the existing loan was 10.25% p.a. The Trustees wanted to know if they had a legal duty to sell the property.

They also wanted to know if they did decide to keep the property, should they try to refix the existing loan to a new lower loan rate.

I thought I would answer these questions as I think it likely the situation being faced by this particular Trustee Reader, is being considered by many Trustees in the present time.

Family Trusts:  Your legal Duty

We need to remember Trustees have a legal duty to protect capital and assets held by a Trust.  This duty has far reaching tentacles.  For example, Trustees have a duty to ensure they invest and borrow prudently.

When deciding whether to sell a property held by a Trust, this fundamental duty has to be considered by the Trustees.  If there is no risk of foreclosure by the Bank and if Trustees can meet the monthly loan repayments, then I believe it would be best to retain the property.  I am basing my view on the belief that the property market is not in the best of shapes at present and a sale, whilst being achievable, may not result in the best of sale prices.

On the other hand, if the Trustees cannot afford to meet the loan repayments, then they should take immediate action to either market the property and sell it or look to refinancing the existing loan to a point whether they can afford to meet the loan repayments.  Trustees need to do this as one of their main legal duties is to protect the assets of the Trust (eg: the initial deposit put into the property) and losing a property at a mortgagee sale does not demonstrate satisfaction of this duty.

So, whilst Trustees do not have a legal duty to sell a property in a falling property market,  they do indeed have a legal duty to weight up the pros and cons of the situation and to make their decision accordingly.  Once that decision is made, Resolutions recording the decision should be completed by the Trustees.

On the basis that the Trustees do decide to retain the property, they should then consider if they will stick with the present loan term or will seek to refix the term of the existing loan.  Trustees may well want to refix to take advantage of new lower interest rates that are now on offer.

When deciding this question, Trustees must be prudent.  This means taking into account a couple of facts such as pre-determining what the cost of refixing the existing loan will be and what quantum of savings will be made as a consequence of moving to the new lower interest loan rate.

Interest Rates & Trusts

One matter to be aware of is that Reserve Bank has slashed the Official Cash Rate from 8.25% mid 2007 to 3.5% as at 29 January 2009.  Big deal you say.  Why should Trustees care? Because the OCR is one of several factors that influence the interest rates Banks set, which in turn, determines how much Borrowers will repay in loan payments each month.

Will the OCR decrease further?  That’s a million dollar question but some of NZ leading Economists think that the OCR could go as low as 2% by the middle of this year.  What that may mean is that interest rates could continue to decrease, maybe even reaching low levels such as 5.5% p.a or lower.

We would all be multi millionaires if we knew when the OCR was going to reach rock bottom.  I’d probably consider giving up my day job as well if I could predict when interest rates will reach the bottom of the trough as well.  Because unfortunately I don’t possess ESP, I believe Trustees should adopt a prudent approach in the current market, and only fix their loans for a short period of time – say 6 months.  That way when the bottom of the loan interest rate barrel is in view, Trustees will only have a small amount of break fee costs to pay to the Bank when they chose to break the short term fixed rate and move to a long term fixed rate contact.

I’m also an advocate of not being too greedy.  According, if a new low interest rate, such as 5.5% p.a. was to come on the horizon, I may well take that up rather than wait for the rate to drop to say 5.3% p.a.  As a Trustee I would run the numbers.  It may not be worth running the chance that the rate would increase.  After all, how much would the savings of say 0.2% really amount to on the loan?

With respect to working out what sort of break fee costs Trustees will pay if they do chose to refix an existing loan to a new lower interest rate, advice should be obtained from the Bank.  Once this information is to hand, Trustees should compare the quantum of the break fee costs they will have to pay against the savings they will make each month on the loan at the new lower interest rate over the course of the new fixed term.

For example, let us assume Trustees decide to refix an existing original 30 year loan of $500,000 of which has been running for 2 years at an interest rate of 10.25% p.a. which has 3 years left to run, to enjoy a new loan interest rate of 5.99% p.a.  Let us further assume that the Trustees decide to lock in this new rate for 5 years.

The old repayments under the loan were $4,531.  The new repayments will be $3,072.  This means the Trustees are saving $1,459 per month in loan repayments. The break fee costs the Bank is going to charge is set at $50,731.  So the comparison is against the expected savings over the term and the break fee costs to be charged.

Based purely on this financial criteria only, I’d expect the Trustees to refix as the savings they will make outweigh the costs they will incur.   However, it must be remembered that the break fee costs will need to be paid up front.  This of course has to be taken into consideration. Once the decision has been made, Trustees should record it in Resolutions.

As to the question whether the Bank will try to charge the Trustees break fee costs for breaking the existing loan term, I say check your loan contracts.  Most of the contracts I have seen spell out very clearly what the Bank is entitled to charge for in the case of an early termination.  Solicitors usually go through this particular issue when acting for a Borrower as well.  Remember, it is a contract that Trustees sign at the time of borrowing funds.  Breaking legal contracts have consequences – usually penalties!!!

At present, there is much talk in the media about whether Banks will be stopped in their tracks from charging break fee costs.  We need to understand a couple of things however in this respect.

1. First, the sanctity of contact should be upheld.  If we all broke the contracts we made simply because a better deal (such as a lower interest rate) came along later on, where would we be?  Absolute commercial chaos would reign.
2. Secondly, Banks have placed reliance on Borrowers honouring their contracts.  In this vein, Banks have gone out and borrowed funds to on lend to their own customers.  This means than when a customer breaks their existing loan contract, the Banks will forgo the interest they expected to earn.
3. Lastly, if having a fixed contract simply means that the contract can be broken without any break fee costs being incurred by a Borrower, I imagine that Banks will offer only floating contracts rather than fixed contracts.  This has implications for all Borrowers eg: no certainty of payments each month.

All this commentary aside, as a Trustee I would still ask the Bank if they would consider wavering or reducing any break fee costs they had decided to charge.  After all, you don’t get if you don’t ask.  Need more help?  Go ahead Request a Call.  It’s free to take the first step.

Janet Xuccoa

All the best,

Janet Xuccoa BCom LLB
Professional Trustee Services
FamilyTrusts.co.nz
Gilligan Rowe + Associates Ltd

Learn more about Janet

_________________________________________________

More Information?

If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview.  Otherwise just call Janet Xuccoa. Janet can be contacted by emailing janet@familytrusts.co.nz or telephoning (09) 522 7955.

Guess Who’s Coming to Dinner? The Beneficiaries!

So you’ve decided the best thing to do to protect your hard earned assets is to put them in a Trust or Family Trust.  This way, asset protection will prevail and the assets will be available for you, your children and other Beneficiaries to enjoy.

But what happens when things turn sour and the Beneficiaries want to know what’s in the Trust and what they’re entitled to.  Are they entitled to know all about the Trust and its affairs?

This issue comes up more than most people realize.  It especially raises its head when Beneficiaries are fearful and suspicious which can occur if there is limited communication between Trustees and Beneficiaries.  The order of the day is thus good dialogue between everyone which tends to foster good will and trust.

In the event however that the Beneficiaries do want to know about the Trust, what information are the entitled to see?

Legal Basis of Beneficiaries’ Rights

Historically, it has been thought that a Beneficiary’s right to information stemmed from whether they were a Fixed or a Discretionary Beneficiary.

Fixed Beneficiaries had an entitlement to Trust assets pursuant to the Trust Deed provisions.  Therefore, it was posited, Fixed Beneficiaries had an entitlement to view Trust documents and to receive disclosure of Trust information.

Discretionary beneficiaries on the other hand had no entitled to Trust assets.  All they possessed was a right to be considered by the Trustees when the Trustees exercised their discretion with respect to the paying out of capital, income and /or the allocation of assets.   Accordingly, it was supposed Discretionary Beneficiaries had no power to demand to see Trust information or to view Trust documents.

Recent case law has now clarified the basis on which a Discretionary Beneficiary may seek disclosure of Trust documents and this has nothing whatsoever to do with whether they are a Fixed or a Discretionary Beneficiary.  Rather, the approach has been to apply to the Court’s on the basis that the Court has an inherent jurisdiction to administer Trusts.

Using this approach, the Courts have said that they possess inherent jurisdiction to supervise and if necessary, to administer Trusts.  Beneficiaries of both classes have a right to approach the Courts to seek discourse of a Trust’s documents and it will be for the Courts to determine whether they will exercise their inherent jurisdiction or not.  This of course means that the right of a Beneficiary to view Trust documents is at the discretion of the Courts.

The Courts have said that when they are considering exercising their discretion they will be mindful that they are engaging in a balancing exercise, balancing the competing interests of different parties (eg: trustees and beneficiaries and third parties) and will take into account various issues including personal and commercial confidentiality, parties privacy, consequences of disclosure, etc.

The Courts have also noted that they will be mindful that Trustees are not obliged to disclose to Beneficiaries their reasons for exercising their discretionary powers.  This is important as it could have an impact on what documentation is released to a Beneficiary to view.

In some circumstances the Courts have pronounced, disclosure may be limited and safeguards may have to be put into place.

What Information are Beneficiaries Entitled to View?

Types of information that Courts have approved for disclosure include:

• Deeds of Trust;
• Deeds of Variation of Trust Deed provisions;
• Deeds of Changing of Trustees;
• Deeds of Resettlement;
• Legal opinions relating to the interpretation of a Trust Deed’s provisions;
• Legal opinions with respect to a Beneficiary’s rights;
• Valuations of assets of the Trust;
• Financial accounts of the Trust.

Some information Beneficiaries are not entitled to see.  For example, the Courts have ruled beneficiaries are not entitled to view letters and notes from Settlors, Memorandum of Wishes, Trustees reasons for decisions made and motives of Trustees.

Beneficiaries Rights to Demand & Receive Payments

Because the Trust’s financial statements may be viewed by a Beneficiary under a Court Order, it is important to deal with allocation of income each and every year.  Any income that has been allocated to a Beneficiary and shown as such in the financial statements,  may be called by that Beneficiary to be paid to them upon them becoming adults.

Accordingly, only income that is to be spent on them should indeed be allocated to them in the financial accounts.  Failure to allocate income in this manner may result in a Beneficiary requiring a Trustee to pay them the surplus income that appears as a credit in their Beneficiary account shown in the financial accounts of the Trust.

Summary

I believe that one of the best ways of avoiding any type of disagreement is communication.  If full communication is made with a Beneficiary, whether they are a Fixed or a Discretionary Beneficiary, then there will be no mystery or reason for distrust to arise.

Whilst Trustees are not legally required to show Beneficiaries all Trust documents, it is in my view, sensible to be clear and honest with Beneficiaries when they ask about a Trust’s affairs.  Failure to do so will simply create suspicion and exacerbate tension.

Janet Xuccoa

All the best,

Janet Xuccoa BCom LLB
Professional Trustee Services
FamilyTrusts.co.nz
Gilligan Rowe + Associates Ltd

Learn more about Janet

_________________________________________________

More Information?

If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview.  Otherwise just call Janet Xuccoa .  Janet can be contacted by emailing janet@familytrusts.co.nz or telephoning (09) 522 7955.

Financial Statements & Family Trusts

Here’s a question from Mr Warren H. from Christchurch:

“Am I required to have financial statements completed for all
Trusts or just for Business Trusts”?

Thanks Warren T.

Janet Xuccoa

ANSWER: Warren, the Inland Revenue Department places a duty on Trustees to prepare financial statements and file tax returns if the Family Trust or other Trust earns income.  Trustees may also have to prepare and file GST returns.

Trustees need to remember that they are personally liable for the affairs of the Trust and this includes paying any taxes that are due to the Inland Revenue Department.

Good record keeping, including having bank statements evidencing transactions the Trust has engaged in, is crucial to preparing accurate financial statements from which the Trust’s tax returns can be compiled and the Trustees can be made aware of their taxation responsibilities.

Even if a Trust does not produce any income and simply holds passive assets such as a family home, I still recommend financial statements be prepared for the Trust.  These type of financial statement will note advances made by the Settlors to the Trust, loans the Trust may have made to other entities, the gifting position, the assets the Trust holds and the liabilities the Trust has incurred.  Again, such financial statements help the Trustees satisfy their duty when accounting to the Beneficiaries of the Trust.  Reduced accounting fees may well apply for the preparation of these types of financial statements.

Properly prepared financial statements are a great tool that Professional Trustees use to ensure the Trust is being administered correctly and that all Trust documentation is up to date and in place.  Without financial statements, this task is severely hampered.  Correspondingly, poorly prepared financial statements will be a hindrance to Trustees and in some situations can be very dangerous.  For these reasons, it is important to choose a qualified accountant who is familiar with accounting for Trusts, such as GRA.

For readers of this blog, GRA offer free accounting services for the first year for Trusts and Companies.  There are however a couple of conditions which will be disclosed to Readers on enquiry.

All the best,

Janet Xuccoa BCom LLB
Professional Trustee Services
FamilyTrusts.co.nz
Gilligan Rowe + Associates Ltd

Learn more about Janet

_________________________________________________

More Information?

If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview.  Otherwise just call Janet Xuccoa.  Janet can be contacted by emailing janet@familytrusts.co.nz or telephoning (09) 522 7955.

Tags: Trust Statements

Expats, Tax & Family Trusts: Important Information for Expats Returning to New Zealand

In this article Matthew Gilligan, Director of GRA, discusses what asset planning is and issues that expats and migrants to NZ should consider when migrating or returning to New Zealand.

Whether a returning expatriate or new migrant, if you are considering a move to NZ or have just arrived here, this information could save you …everything.

Expat Tax And Legal Structures For Asset Ownership In New Zealand

Asset planning is the process of structuring the ownership of assets, to maximise the taxation and legal benefits available to private individuals. It looks at asset protection, estate planning, taxation and matrimonial issues as part of the process. For migrants and expatriates, asset planning becomes more complex due to cross border tax issues. The taxation rules of the country of origin, intermingled with optimised ownership structures in New Zealand, often creates taxation challenges for migrants.

A key point to note is that a migrant coming to NZ has tax planning opportunities available to them before they migrate. Advice in advance of arrival into NZ is key to getting these benefits, as the opportunities are not always available once a migrant has landed here.

Discretionary Trusts

Discretionary Trusts are often used as asset protection vehicles in NZ, because New Zealand’s tax and regulatory environment make Trust ownership of assets extremely advantageous. In short there are few ( if any ) tax or legal disincentives of Trust ownership in NZ, but many advantages. This is quite different to, say, Australia where Trusts have all sorts of taxation complications that make Trusts an unattractive ownership option in many circumstances.

Some Taxation Benefits Of Family Trusts In New Zealand

1. The Trust tax rate at time of writing is 33%, which is lower than the top individual marginal tax rate. It is therefore possible to shield income from the upper marginal rates in NZ utilising Trusts. Similarly business ownership via companies owned by Trusts shields business income from the marginal tax rates, upon distribution of income from companies.
2. Discretionary Trusts allow private investment income and potentially business income to be apportioned across the beneficiaries. This concept often referred to as income spreading, allows income to be efficiently taxed at the lower marginal rates of family members ( say 12.5% to 21% ) rather than at Trust, corporate or upper marginal tax rates ranging 30-39%.
3. In certain circumstances Trusts can be utilised to stop the double taxation of income earned by companies on cross border income. This is a critical consideration for those intending to maintain international business interests.

There are many other tax considerations of Trusts, but for the purposes of this article it is sufficient to say that from a tax perspective, Trusts in NZ provide flexibility and taxation planning options for migrants that individual ownership of assets does not. Trust structures which are mainstream in NZ law, can be kept relatively simple and provide significant benefits if set up correctly.

Expats & Asset Protection

In addition to taxation benefits, Trust ownership of assets puts a wall between any potential creditor of a private individual and their assets. Risks may include prospective business ventures, claims stemming from personal liabilities and matrimonial property claims. For this reason GRA encourage their clients to utilise Trusts for asset protection purposes, in addition to the taxation benefits.

Expats, Estate Planning In NZ & Family Trusts

One more matter to consider when migrating or returning to NZ is your estate plan. Preparing a new Will binding under NZ law, that takes into account your current state of your (domestic and international) affairs is a prudent detail to cover off on arrival. GRA have an estate planning practice that can assist you with advice in this area. Generally where a Trust is involved, the Will directs your private estate to pass to your NZ Trust for the benefit of your surviving beneficiaries. Control can also vest to them via the Trust at your discretion.

In addition to the structure of the estate, careful consideration needs to be given to taxation considerations for foreign and domestic assets in this process. Foreign tax jurisdictions crystallise taxable disposals of assets on death that often do not apply in New Zealand. For example, NZ (at the time of writing) has no capital gains tax regime, thus greatly reducing the impact of taxation duties on death. As many migrants will be aware, this is not the case  internationally for most OECD countries and careful cross border consideration needs to be given in this area of a migrant’s affairs to avoid unwanted bills to beneficiaries.

Setting Up Trusts  In New Zealand for Expats

Broadly speaking, there are two legs to successfully protecting your assets in a Trust.  Firstly, you need to get the assets out of your personal name and into a Trust.  Secondly, once they are in the Trust you need to ensure that they are safely protected there.  Looking at each of these issues in turn we discuss below.

Transfer Of Assets to Trust In NZ for Expats

In order to get assets out of your hands and into a Trust, you need to transfer the assets to the Trust at market value. NZ law taxes the transfer of wealth between related and non related parties that are in the nature of a gift, where the gift exceeds certain thresholds. For example, on the transfer of assets to a Trust, if the transfer of wealth exceeds NZ$27,000 (per spouse, per annum), or NZ$54,000 (per married couple, per annum), gift duty applies at sliding marginal rates peaking at 25% for gifts exceeding $70,000.

This makes the process of wealth transfer difficult for returning expats and migrants once they have arrived in NZ, due to the lengthy delay in wealth transfer under a gifting programme to avoid gift duty. A key point is that you can avoid gift duty and this lengthy wealth transfer process, before you become domiciled in NZ. This is discussed below in more depth.

Once your assets are in Trust, you then need to make sure that the Trust is appropriately administered so that it is not vulnerable to challenge as a sham by potential creditors or taxation authorities.  To this end we recommend the inclusion of a Professional Independent Trustee who can help you with the administration of your Trust. While you retain full effective control of the Trust, the independent Trustee greatly improves the integrity of the Trust in the eyes of the law in NZ. GRA offer this service and you can contact us to discuss this further.

No Gift Duty On Offshore Assets Gifted Before Migration

If you are a potential migrant thinking of moving to NZ or an expatriate returning, then you should be aware that there is an opportunity to transfer wealth and assets that you may have outside of NZ into Trust protection prior to your arrival in NZ without gifting restrictions applying.  (We note that this is subject to the rules of your current place of residence).  In NZ gift duty is payable if:

 The donor is domiciled in New Zealand; or
 The asset that is being gifted is situated in NZ at the time the gift is made.

Following this, if neither the donor is domiciled in NZ nor the asset that is being gifted is situated in NZ, then you have an opportunity to transfer an unlimited amount of assets into a Trust and there would be no gifting restrictions or gifting programme required to be undertaken.  This is a one-off opportunity as once you arrive in NZ with an intention of remaining here indefinitely, you eventually (and quickly) become deemed to be domiciled here. At that point the NZ gift duty rules apply.

If you are migrating/returning here or just arrived, the key is to seek advice as soon as possible. Based on that advice you will likely be best off to set up a Trust and look to transfer assets into that Trust prior to arrival. If possible you should try to avoid gift duty on the transfer of wealth, which many migrants and expats can, even if they have visited our shores already.

A word to the wise - there are very specific rules surrounding migrating foreign Trusts to NZ, and for this reason it is essential that you get advice that is correct. For example, if the migration process is not completed correctly, you may avoid gift duty but in turn have the Trust deemed a non qualifying Trust with all investments and capital taxable on distribution at 45%, - this would only happen if the migration process of the Trust was not handled correctly. If set up correctly it is not taxed on distribution.

GRA routinely give advice in this area and encourage you to contact us about these matters if they are of interest.

Tax Exemptions for new Migrants

There are also some different income tax rules that apply to new migrants, as well as returning NZ residents.  In order to encourage immigration to NZ both by new migrants and also expat New Zealanders there are concessionary tax rules that apply for a four year period following arrival in New Zealand.  Before we discuss the concessions it is useful to note what the tax implications of moving to NZ used to be before these new rules came into play on 1 April 2006.

If you arrived in NZ prior to 1 April 2006, and became a tax resident of NZ as a consequence, you were then expected to include all offshore income in your NZ tax return.  You would get a credit for the tax paid in the foreign jurisdiction, but would then have to pay tax in NZ if there was any shortfall.  On top of this there could be income that would be taxable in NZ that would not be regarded as income and taxable anywhere else.  An example of this was foreign exchange gains on loans or cash savings.  Where a NZ tax resident has loans or deposits denominated in a foreign currency, with certain exceptions, the movements in exchange on that are taxable.  This means that if there is a gain experienced because of the movement in the exchange rate, that gain is taxable. Finally, we note that there is a requirement to deduct non-resident withholding tax (NRWT) from interest paid to non-resident lenders.  Although this is a tax on the lender’s income, it is a cost that is often borne by the payer of the interest and is often an unexpected tax cost of becoming a NZ tax resident.

New Rules From 1 April 2006

If you put all of these rules together you can see assuming NZ tax residency can lead to significant and unexpected tax costs.  In order to mitigate this, on 1 April 2006 a new set of rules was enacted which allows new migrants or returning migrants, whom have not been tax residents for a period in excess of 10 years, to have a four year tax holiday from having to return foreign income in their NZ tax return. 

Although this is not an open-ended exemption, it is useful one and should be considered prior to arriving in New Zealand.  For example, it may be advantageous to move offshore investments into low tax jurisdictions where they bear minimal tax in the country in which the investment is made and then benefit from the four year tax exemption in New Zealand.

 
Summary

Trusts in NZ have advantages from both a taxation and legal perspective. Migrants and expats should consider setting up Trusts in NZ and should try to take advantage of pre-migration tax planning opportunities. There are many taxation, commercial and legal ramifications of migrating assets across borders. It is important to get the right advice to avoid costly mistakes to protect wealth.

 Whether a returning expatriate or new migrant, if you are considering a move to NZ or have just arrived here, we invite you to contact us directly for advice.
 

Matthew Gilligan

Matthew Gilligan Matthew Gilligan CPA
Managing Director
FamilyTrusts.co.nz
Gilligan Rowe + Associates Ltd

Learn more about Matthew

_________________________________________________

More Information?

If you have any questions or queries relating to asset protection, trusts or of you are an expat or new migrant you can Request-A-Call for a no-risk chat or to set up an interview.  Otherwise just call Matthew Gilligan, Managing Director of Gilligan Rowe & Associates Limited.  Matthew can be contacted by emailing mg@gra.co.nz telephoning (09) 522 7955.

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Tags: Expats