Generally, the reasons for estate planning include:
- Protecting your assets against future creditors to which you or your family could be exposed;
- Tax savings on beneficiary income;
- Enhancing your eligibility for government entitlements;
- Protecting your assets from the possible reintroduction of estate duty or a capital gains tax;
- Protecting your assets against relationship property claims, including the interests of your children against claims by their spouses or partners; and
- Controlling succession of your estate to your children or other beneficiaries.
Creditor Protection
If you are at risk through your business activities as a director or as a professional you may wish to ensure your assets are safe from creditors.
Usually a discretionary family trust is set up and assets are transferred to it through an ongoing gifting programme. Assets owned by a trust do not form part of an individual’s personal estate available to the Official Assignee in bankruptcy. These assets are therefore protected from exposure to your family’s future creditors.
However, this protection is not total. There are circumstances where trusts may not protect your assets against the claims of creditors. For instance, trusts do not afford protection against existing creditors as transfers of assets to trusts can be reversed by the Court where:
- The person transferring the property is adjudged bankrupt within 2 years after the transfer;
- You were unable to pay your debts at the time you made the gifts (see discussion of forgiveness of debt below);
- The transfer has the effect of defeating creditors (whether intentionally or not);
- The transfer was made with the intention of defeating creditors;
- The transfer was made in order to defeat the claim or rights of any other person.
In addition, if a disposition is made to a trust without intending to defeat rights but for other reasons (say creditor protection or income protection) the transaction may still be vulnerable.
If you or your family’s assets are exposed to business risk then the sooner those assets you want to protect are transferred to a family trust, the more likely you will be able to shelter those assets if something goes wrong in the future.
Income Tax Planning
A family trust offers the opportunity to distribute income among yourself and members of your family with lower tax rates, which may result in income tax savings.
Maximising Your Entitlement To Government Benefits
Of concern to many New Zealanders is means testing for Government benefits and subsidies. Although means testing in respect of the Residential Care Subsidy is now being progressively decreased from 1 July 2005 for people over 65 and in long term residential care.
If you transfer assets out of your name and into a family trust you will be able to keep a measure of control over your assets, while maximising your entitlement to health, welfare and other government subsidies and benefits. However there are anti-avoidance provisions in the Social Security Act and trusts should not be established solely to avoid means testing.
Political Risk
A trust may assist in minimising the effects of any introduction in the future, of a capital gains tax, inheritance tax, wealth or a similar taxation scheme.
The gifting of assets to a family trust reduces an individual’s personal net wealth and this may assist in minimising liability were such taxes enacted.
Pure Estate Planning
A family trust enables the controlled succession of an individual’s assets to children and grandchildren. It provides an opportunity to take into account the particular circumstances of each beneficiary in respect of any marriage, financial or housing difficulties they may have.
In addition the costs of administration of your estate on you death may be reduced since the bulk of your assets will be held by the trust.
Estate Planning Tools
The use of estate planning tools such as trusts, contracting out agreements and leases for life raise a number of questions as to their effectiveness and exact legal character, some of which you may have considered, others you may not have.
These tools do not provide perfect solutions to your asset protection needs. Each of them carries with it an inherent risk that your estate planning/asset protection objectives may not be totally met. That is not to say that these tools are ineffective – merely that they have their limits in terms of use and effectiveness.
As we work our way through the available tools, we will draw to your attention the limitations that may exist or potentially exist in their use.
Our advice as to the limitations inherent in the following estate planning tools is based on our analysis of the law as it currently stands.
Section 21 Agreements or Contracting Out Agreements
Property (Relationships) Act 1976
Under the Property (Relationships) Act (formerly the Matrimonial Property Act), relationship property, including the family home and chattels is deemed to be owned equally between married, and de facto couples (heterosexual or same sex), who have been in the same relationship for a minimum period of 3 years, regardless of the actual ownership shares.
The Act continues to apply after the death of one spouse or de facto partner. The surviving spouse or de facto partner can choose to apply to the High Court for a division of the relationship property or can take under the deceased spouse or de facto partner’s will.
Section 21 of the Act permits married and de facto couples or parties contemplating marriage to make ‘any agreement they think fit with respect to the status, ownership and division of their property (including future property)’. This is called a “contracting out agreement” (they were formally known as matrimonial property agreements).
Advantages
Contracting out agreements can be used to re-organise the ownership of assets between married or de facto couples.
The utility of contracting out agreements for estate planning purposes lies in the ability to transfer assets without attracting gift duty. For example, the objective may be to reduce the risk from the family’s trading activities. One spouse or de facto partner may ‘take’ the trading risk by taking the trading assets while the other spouse or de facto partner takes the assets to be ‘protected’ (e.g. the family home).
A second advantage results where the contracting out agreement transfers a share of an income-earning asset to a spouse or de facto partner in a lower tax bracket. Income tax advantages may be gained through the effect of splitting taxable income between the spouses.
The transferred property should not exceed 50% of the total value of relationship property belonging to both spouses or de facto partners in order to avoid a gift arising in favour of the spouse or de facto partner that has received more than 50%. If a gift arises you could be liable for gift duty.
Despite this limitation, the different permitted forms of valuation generally enable a flexible approach to be taken to ensure the optimum division of assets. For example, the spouse or de facto partner having the trading risk might take the rapidly depreciating assets such as motor vehicles, and the ‘protected’ appreciating assets would go to the spouse or de facto partner who is not exposed to the trading risk.
If more than 50% of relationship property is transferred to one spouse or de facto partner, the excess can be dealt with by loan to the other spouse or de facto partner. The amount of the loan can then be gifted to be exempt from liability for gift duty under the Estate and Gift Duties Act 1968.
Disadvantages Of Contracting Out Agreements
An alleged disadvantage of contracting out agreements is that they are irrevocable unless set aside by a Court. The party seeking to revoke the agreement must show that it has caused “serious injustice”.
Some spouses worry that should the parties to a contracting out agreement later separate or divorce, there can be no reassessment of the division of the assets. However, given the fact that, except in a limited range of circumstances, the Act results in an equal division between married or de facto partners of property acquired during and prior to the relationship, such an agreement will merely reflect what would happen in any case on the event of a separation or divorce.
If one party takes the ‘protected’ assets and the other the ‘business’ or risk assets, it is possible to provide for realignment on any future separation. If this issue is of concern to you, you should discuss it with us and we can explain how you can make provision for any future difficulties.
Requirements For Effective Contracting Out Agreements
For contracting out agreements to be legally effective they must comply with the following requirements that are laid down by the Act:
- The agreement must be in writing;
- The agreement must be signed by both parties;
- Each party must have independent legal advice as to the effect of the agreement;
- A separate solicitor must witness the signature of each party to the agreement;
- The witnessing solicitor must certify that the effect and implications of the agreement have been explained to the signing party.
Civil Unions
The Civil Union Act gives civil unions the same status as marriage. It came into force on 26 April 2005. Civil union partners are generally treated in exactly the same way as married partners and differently from de facto partners. For the most part they have the same rights and obligations as married partners have on death except under some of the provisions of the Wills Act (discussed further below).
Contracting Out Agreements As A First Step
Contracting out agreements are often used as the first step in the estate planning process. After splitting the assets using the contracting out agreement those assets may be transferred to a family trust or trusts.
The ability to evenly split the value of the assets between the spouses or de facto partners (without incurring gift duty and other consequences) allows for the maximum potential of a gifting programme to be realised. How this occurs and the benefits of doing this are described in the discussion of trusts below.
Trusts
What Is A Trust?
A trust is an obligation imposed on a person (the trustee) to hold property or income on behalf of and for the benefit of another person or class of persons (the beneficiaries).
All references to trusts in this paper are to ‘discretionary’ trusts.
Discretionary trusts are trusts in which trustees have the power (discretion) to pick and choose among many beneficiaries (often defined as a class e.g. “all my children and grandchildren”) each time they make a decision to distribute money or property from the trust property. The beneficiaries do not have a right to compel the trustees to distribute the trust’s assets in their favour, only a right to be considered in respect of any distribution.
What Are The Components Of A Trust?
A trust comprises four components:
- The settlor is the person or entity who establishes the trust by transferring property to it.
- The trust property is the assets owned by the trust. It can take any form whether land, cash, shares, vehicles or any other form of property, ownership of which can be transferred.
- A trustee is a person or entity holding the trust property under the trust obligation to hold it for others (the beneficiaries). A trustee’s duties are detailed below. Legal title to all trust property is in the trustee’s name. We strongly recommend that an independent trustee be appointed to a family trust. Without an independent trustee there is a much greater risk of the trustee being defeated in a challenge by a creditor or the Inland Revenue as being a sham.
- The beneficiaries are the persons for whose benefit the trust is established by the settlor and managed by the trustee. Beneficiaries have certain rights in relation to the trust and the trustees. These include:
- The right to be considered as a potential beneficiary;
- The right to have his/her interest protected by the Courts;
- The right to take and enjoy whatever part of the income of the trust the trustees choose to give to him/her; and
- The right to have the trust property properly managed and to have the trustees account for their management of the trust.
A Memorandum of Wishes is usually completed by the settlor to indicate to the trustees how the settlor wishes the trust to be administered, principally in relation to the beneficiaries and distributions of income and capital. The memorandum cannot be binding on the trustees because that will destroy the benefit of the discretionary nature of the trust.
Legal And Beneficial Ownership Of Assets
The feature of trusts that makes them so useful for estate planning purposes is the division of ownership in the trust property. The legal and beneficial ownership in the trust property is split. The trustees are the legal owners of the trust property. For example, their names will be found on the certificate of title for a piece of land that the trust owns.
The beneficiaries are, to the extent that any have been ‘appointed’ to receive an interest in the property, the beneficial owners of the trust’s assets since they are the parties to benefit from the trust.
If, in a discretionary trust, no beneficiary has been ‘appointed’, the trustees hold the beneficial ownership for the beneficiaries who are eligible to be appointed until they make a decision to appoint or the trust ‘settles’ on expiry of its term. Such beneficiaries are referred to as ‘contingent beneficiaries’ because their interest in the trust property or income is contingent on the trustees exercising their discretion to appoint them to a share of the trust property or income.
An appointment can be quite limited e.g. to receive a 1/10 share of the net income of the trust for a particular year. That appointment does not entitle the beneficiary to the same share the next year unless the trustees’ resolution provides for that to happen.
The trust property does not form part of the personal estate of either the trustees or the beneficiaries. This means that trusts can provide a number of advantages (which we outline in the section entitled What are the Advantages of a Trust) to individuals concerned about the maintenance and control of their asset and income base.
This concept of split ownership is important to understand, as a person cannot be a sole trustee and a sole beneficiary of a trust, as the legal and beneficial interest in the trust property would remain with the same person and there would be no trust. Alternatively, if a trustee ended up in that situation, the trust, if the trust deed was not drafted properly, could terminate early with the trust property transferring to the trustee/beneficiary with perhaps very unfortunate consequences such as loss of government superannuation or welfare benefits.
How Is A Trust Set Up?
A trust can be created a number of ways. The most prudent way to create a trust is by the execution of a Deed of Settlement (the “trust deed”) by the settlor and trustees.
The Trust Deed
- Outlines who the trustees and beneficiaries are, the name of the trust, for how long the trust will operate, how the trust property will be invested and the rules that are to apply to the trust;
- Usually allows, at the absolute discretion of the trustees, distributions of capital and/or income in each year to suit the needs of the beneficiaries and to maximise tax savings; and
- Will also specify to whom the remaining trust property is to go on the winding up of the trust.
Power of Appointment of New Trustees
Trustees are appointed at the time a trust is set up.
However, because over time trustees may retire or die, the trust deed normally contains a clause giving someone (usually the settlor or the trustees) the power to appoint new trustees.
Resettlement
Where the trust deed allows, all or part of the trust property can be resettled for the benefit of a particular beneficiary or group of beneficiaries in the form of a new trust for that particular beneficiary or group of beneficiaries. This is a useful power for trustees to have as it allows a certain customisation for the particular circumstances of each beneficiary.
How Do Trusts Acquire Assets?
An outright gift of an individual’s assets to a trust is not possible without incurring gift duty. Gift Duty is a tax payable on gifts made by a person exceeding $27,000 in any 12-month period. While $27,000 can be gifted duty free in any 12-month period, any excess is taxable at rates ranging from 5% to 25%. Higher amounts can be gifted but duties will be payable at the rates set out in Schedule A of this paper.
Sale of Assets with debt back
The most common method of transferring a settlor’s assets to a trust is for the trust to purchase the assets, with a debt equivalent to the purchase price left owing to the settlor. This debt is in the form of a loan by the settlor to the trust and is documented in a “Deed of Acknowledgment of Debt”.
The Deed should record that the debt is:
- Repayable on demand; and
- With interest payable at the current prevailing market rate but only if demanded by a specified annual date. If no demand for interest is made by the specified date, the interest liability for that interest period lapses. This is often referred to as a “Marshall” clause.
Advantages of a loan
Another advantage of selling assets to a trust with a loan back is the flexibility it creates for the lender (i.e. the settlor). The loan can be repaid in instalments, which are not taxable. These instalments can be regular or random depending on the wishes of the lender. The lender could require that interest be paid if and when needed by the lender.
Forgiveness of debt
In family trust situations this debt is progressively written off by the implementation of a gifting programme.
Each year the settlor will make a gift to the trust, by the completion of an annual “Deed of Forgiveness of Debt”. Usually the amount gifted will be the maximum non-dutiable amount allowed under the Estates and Gift Duties Act (currently $27,000 per annum).
In addition, the settlor is required, within three months of making of the gift, to complete an IRD gift statement providing details of all gifts made by the settlor within the previous 12 months.
The Advantages of a Trust
Trusts are perhaps the most effective of estate planning tools due to their flexibility and the nature of their taxation treatment.
The privacy of trusts is another advantage. Trusts are generally not recorded on any public registers. Their existence or their workings even among family members may not be known. Passive trusts with no income do not have to file tax returns.
The setting up of a discretionary family trust and the subsequent transfer of assets to that trust through an ongoing gifting programme can assist an individual to meet his/her estate planning objectives.
Disadvantages of a Trust
There are some disadvantages to the creation of a family trust.
A trust is just like a company. After the formation of the trust, there will be ongoing maintenance required.
From an administrative viewpoint, meetings of the trustees will be required to oversee the ongoing administration of the trust investments. If the trust has significant assets, meetings of the trustees should be more frequent than a trust which only holds a family home.
Proper records and accounts must be kept.
A separate tax return must be prepared for the trust and for any minor beneficiaries of the trust.
Winding up a trust should be done with expert legal advice if undesirable taxation consequences are to be avoided.
The transfer of assets into a family trust carries with it the disadvantage that those assets are no longer able to form part of any contracting out agreement, since those assets are taken out of the ambit of the relationship property regime.
Trustee Duties
Trustees must abide by the requirements imposed by the trust deed, the Trustee Act 1956 and the common law as to the operation of the trust and its investments. We briefly summarise these duties:
- A trustee must know the terms of the trust.Upon becoming a trustee, you must review the trust deed and other documents that affect the trust property, get to know the terms and what they mean. If you have replaced another trustee then it is your duty to check on what they did. If they have breached the trust deed or their duties under the trust then you may be responsible to rectify the retired trustee’s breach. If you do not, you may become liable for that breach.
- A Trustee must protect the trust property.This duty involves obtaining the documents of title, insuring the trust’s assets and making sure that the trust’s assets are physically protected.
- A Trustee must conform to the terms of the trust.Generally, a trustee must comply with the terms of the trust. Where the terms of the trust are unsatisfactory it is possible for trustees to seek a variation of the trust in certain circumstances. These include:
- Where all the beneficiaries are aged over 20 and of sound mind and have consented to the change;
- By making an application to the Court for a variation – in accordance with statutory provisions such as s64 and 64A of the Trustee Act;
- Where the Court has allowed the terms of the trust deed to be deviated from.
- A Trustee must be impartial.The trustee must take into account the interests of all the beneficiaries and act impartially in relation to those interests. This duty can be modified by the trust deed and usually is in the discretionary trust context, where the trustees are given absolute discretion in determining which, if any, beneficiaries are to benefit (either by way of income or capital payments) from the trust in any particular year.
- Duty to invest trust funds diligently and prudently.The Trustee Act imposes a duty on trustees to invest all the trust’s funds within a reasonable time except those that are to be paid out to the trust’s beneficiaries. Trustees are personally liable for losses that accrue through leaving trust money uninvested.In addition, the Trustee Amendment Act 1988 places a responsibility upon trustees to invest the trust’s funds diligently and prudently according to the level of skill and care that a prudent business investor would exercise in managing the affairs of others. This is a high standard. Therefore, where a trustee lacks the expertise to manage the trust’s investments, the trustee should obtain advice from experts in the relevant field. Failure to do so may result in the trustee’s personal liability for any mismanagement of the trust’s investments.Trustees must consider the following factors in determining how the trust’s funds are to be invested:
- The desirability of diversifying trust investments;
- The nature of existing trust investments and other trust property;
- The need to maintain the real value of the capital or income of the trust;
- The risk of capital loss or depreciation;
- The potential for capital appreciation;
- The financial return on the proposed investment;
- The duration of the term of the proposed investment;
- The tax liabilities the proposed investment may have on the trust; and
- The likelihood of inflation affecting the value of the proposed investment or other trust property.
Unless authorised by the trust deed, speculation is prohibited. This does not mean that trustees are prohibited from making investments that may carry a degree of risk – it is taking of unreasonable risk that must be guarded against.
This duty can be modified by the trust deed and frequently is in the discretionary trust context.
- Duty not to profit from trusteeship.
The trustee has a duty not to profit from a trusteeship. This duty is a fundamental obligation which the Courts have held to be an inflexible rule.
A trustee purchasing trust property is liable to have the purchase set aside, if a beneficiary indicates dissatisfaction within a reasonable time. This applies even where the particular dealing was fair and the sale was beneficial to the trust estate.
The Taxation Of Trusts
A trust is a separate entity for tax purposes.
The taxation of trusts can be a complex issue and our treatment of this issue here is not intended to be an exhaustive exposition of the law relating to the taxation of trusts. It is merely intended to be an overview of the general principles involved in trust taxation.
All the income of a trust is taxable. For taxation purposes a trust’s income is classified as Trustee Income or Beneficiary Income. This classification determines at what rate tax is payable.
- Trustee Income is any income of the trust that is derived by the trustees which is not beneficiary income (further discussed below). Trustee Income for all trusts is taxed at a flat rate of 33%. The great benefit of Trustee Income is that once tax of 33% has been paid on it, it can later be paid to the beneficiaries tax free.
- Beneficiary Income is any income of the trust which vests absolutely in a beneficiary in an income year, or which the trustee pays or applies to or for the benefit of the beneficiary during the income year or within six months after the end of that income year. Beneficiary income is taxed at the beneficiary’s personal tax rate.
When the income is derived by a minor beneficiary (a person under 16 years of age), it is taxed in the hands of the trustees at the trustees’ rate of tax as if it were trustee income and not at the beneficiary’s marginal rate. This rule does not apply where the minor beneficiary income is less than $1,000 pa or the trust’s settlements were:
- Made by people not related to the minor;
- Made by a relative of the minor who is required by court order to pay damages or compensation to the minor;
- Made by a relative of the minor against whom a protection order has been made under the Domestic Violence Act 1995; or
- From an estate.
For taxation purposes, trusts are classified as Qualifying, Non-qualifying or Foreign Trusts. The classification of these types of trust depends largely on where the person who established the trust resides (i.e. where the settlor resides):
1. Qualifying Trusts
Qualifying Trusts are trusts that are based in New Zealand for taxation purposes because the trustees are New Zealand residents and they pay New Zealand income tax on trustee income. An exposure draft released in March 2005 by the Inland Revenue Department has proposed that a “qualifying trust” be referred to as a “complying trust”.
The typical New Zealand family trust, of the type we have discussed previously, will usually be classified as a Qualifying Trust.
Qualifying trust income is taxed either as:
- Trustee income at the rate of 33%; or
- Beneficiary income, at the beneficiary’s marginal rate or, where the beneficiary is a minor (under 16 years of age), at the trustee rate of 33%
Beneficiaries of qualifying trusts are taxed only on distributions of beneficiary income. Distributions of accumulated income, capital gains and the corpus of the trust are tax-free.
2. Foreign Trusts
A foreign trust is any trust where no settlor has been a New Zealand resident for the period beginning with the later of:
- 17 December 1987; and
- The date the trust was first settled.
A foreign trust is taxed on New Zealand-sourced trustee income only.
Generally distributions from a foreign trust to a New Zealand resident beneficiary will be taxable in New Zealand, except where those distributions consist of corpus or capital profits. Taxable distributions from a foreign trust are taxed at the beneficiary’s marginal tax rate.
It is possible for a foreign trust to become a qualifying trust if a settlor becomes resident in New Zealand. The election must be made within 12 months of the settlor becoming a New Zealand tax resident and the trustee’s New Zealand tax obligations must be met in the income year of election and all subsequent income years. If those obligations are not met, the trust is deemed to be a non-qualifying trust (discussed further below).
3.Non-Qualifying Trusts
A non-qualifying is a trust that is neither a qualifying trust nor a foreign trust. An exposure draft released in March 2005 by the Inland Revenue Department has proposed that “non-qualifying trust” be referred to as “non-complying trust.” Generally, this is a trust where:
- The settlor is a New Zealand resident but where the trustees live overseas; and
- No New Zealand income tax has ever been paid on trustee income.
Distributions of income and capital gains (though not corpus) from a non-qualifying trust are assessable to beneficiaries either as beneficiary income or as taxable distributions. Except to the extent that such distributions constitute beneficiary income, they are taxed at 45%.
Leases For Life
What Is A Lease For Life?
A lease for life or life estate provides a person with the right to live in a property (usually for life). A lease for life is useful estate planning tool in that it enables a settlor to reduce the value of their estate while still retaining the security of occupying their own home. In other words, if you were to sell your home to a family trust, subject to a lease for life in the home, you effectively become a tenant in your own home for the rest of your life.
The property is sold for its current market value to a family trust, after the reservation of a leasehold life interest in the property, which is documented by a Memorandum of Lease for Life. This Memorandum of Lease for Life must be registered against the title to the property in accordance with the Land Transfer Act 1952.
It is important that the lease or life interest be reserved before the transfer of the remainder interest in the property to the trust. A sale of a property to a trust with a subsequent purchase back of a lease for life can create a tax liability on the lease for the trust.
The family trust is indebted to the former owner(s) of the property for an amount, which is equivalent to the difference between the property’s current market value and the value of the lease for life.
Intended Advantages Of Leases For Life
The value of the lease for life reduces the amount of debt owed by the family trust to the former owner of the property, yet the lease or licence has no value to a third party since it cannot be sold or otherwise transferred to that third party. In this way it is intended that an instantaneous reduction (equivalent to the value of the lease for life) in the value of a person’s estate is achieved while not incurring gift duty, and while guaranteeing the right of occupancy.
Such an instantaneous reduction in an individual’s estate is of course invaluable for estate planning purposes as it reduces the duration of the gifting programme and maximises that individual’s entitlement to asset-tested benefits and subsidies.
Potential Disadvantages of Leases for Life
If the property is sold and the property has increased significantly in value, part of this increase would belong to the owner of the life estate and can have tax implications as a result. This would not occur where there had been an outright sale of the property to the trust.
Valuation
Leases for life are valued by reference to:
- The age(s) of the lessee(s) and their life expectancy; and
- The rental the property would fetch on the open market.
Where there are joint owners (usually husband and wife) the spouse with the greatest life expectancy can be used to calculate the value of the lease for life since the lease continues until the death of the last of the joint owners.
Because a person’s life is of uncertain duration, expert actuarial advice is required to determine the life expectancy upon which to base the value of the lease for life (referred to as “Z” in the diagram above).
If the actuary states that you should be expected to live 15 years then the valuer will (give or take an adjustment or two) determine the value of the lease as 15 times the net present value of the net rental that the property would fetch on the open rental market.
This whole process means however, that you will incur substantial costs in respect of actuarial advice in addition to the preparation, registration and administration of the requisite memorandum of lease.
Trustee Resolution To Occupy
On the transfer of the property to the receiving trust, there is a less costly and complex alternative, which still enables the property owners to remain in occupation despite selling their home to the trust. All that is required is a Trustees Resolution that allows the beneficiaries to remain in occupation of the property as illustrated below.
The disadvantage with this alternative is that an immediate reduction in the value of the settlor’s estate is not achieved and there could arguably be adverse tax implications for the former property owner (i.e. the beneficiary).
Making the family home available rent free to beneficiaries in their capacity as beneficiaries is generally a distribution of capital that does not give rise to any income tax or gift duty consequences.
If the beneficiaries pay expenses such as rates and insurance from private funds, arguably these are expenses incidental to the occupation of the property and no tax consequences arise. Another option is to record outgoings paid by the beneficiaries as a debt owing by the trust to the beneficiaries. It is important to check that the trust deed allows this type of arrangement to be entered into and then to ensure that the arrangement is accurately documented.
In the absence of any documentation, the Inland Revenue Department may treat the payment of outgoings by beneficiaries as rental income of the trust or as a gift to the trust. If the expenses are treated as rental income, a tax return will have to be filed by the trust. As the outgoings are deductible expenditure to the trust, the net income would be nil.
If the expenses are treated as a gift to the trust, a gift statement would have to be filed with the Inland Revenue Department.
Other considerations
Enduring Powers Of Attorney
Where a person loses mental capacity without having completed an Enduring Power of Attorney, an application needs to be made to the Courts to appoint a manager of their personal affairs and property. This not only involves considerable expense but is also a very time consuming process. The completion of an Enduring Power of Attorney bypasses these difficulties.
If a considerable gifting program lies ahead of a client, it is desirable to craft the Enduring Power of Attorney as to Property to include express authority to continue a gifting program.
Wills and Enduring Powers of Attorney are effective in reducing the difficulties and costs involved in dealing with a person’s affairs if that person were to die or become incapable of managing their own affairs.
Wills
As part of an overall estate plan, you should ensure that you have a will. There are formal requirements of a will and these are listed in the Wills Act 1837(UK). Failure to comply with these formalities may render the will void. For example, two witnesses must witness and sign the document along with the person making the will.
If you die without making a will,
- The costs of administering your estate are increased by the need to apply to the High Court for letters of administration in an intestate estate; and
- You have no control over who will administer your estate and who will ultimately benefit from it.
If you have a will already then you should ensure that it takes into account any changes in respect of your circumstances such as the establishment of a family trust and any transfer of assets to that trust.
It is important also to note that despite having a valid will, both the Family Protection Act 1955, the Law Reform (Testamentary Promises) Act 1949 and the Property (Relationships) Act 1976 have provisions which enable claimants to apply to the court to overturn a will.
Family members can, under the Family Protection Act, make a claim against the estate if the deceased person has failed to make adequate provision for them. If a claim is made a Court can order proper maintenance and support for close family members, including spouses and de facto partners, out of a person’s estate, if that is not provided in the will or on intestacy.
The Effect of the Property (Relationships) Act
If the partner who has died has made a will leaving property to their partner, then that surviving partner can inherit the property under the will, as has always been the case. However, the surviving partner can also make a claim under the Property (Relationships) Act for their share of the relationship property. The Court can allow a surviving partner to make a claim under the Act and to take a gift under the will. A surviving partner can still claim under the Family Protection Act and/or under the Law Reform (Testamentary Promises) Act.
A claim can be made under the Law Reform (Testamentary Promises) Act against an estate where the claimant had rendered services for the deceased who in his or her lifetime indicated that the former would be rewarded by testamentary provision or where the deceased promised to leave property to the claimant.
The Effect of the Relationships (Statutory References) Act 2005
As discussed above civil union partners are generally treated in exactly the same way as married partners except under some of the provisions of the Wills Act. This has created some anomalies:
- A will is automatically revoked on marriage, but not on entering into a civil union, even though the two relationships are otherwise accorded identical status.
- A civil union that is subsequently converted into a marriage will have the effect of revoking a will made during the civil union, but a marriage that is converted into a civil union will not have that effect.
- Gifts in a will to a spouse are automatically revoked on divorce, but gifts to a civil union partner are not revoked on dissolution of a civil union, even though the process, grounds and effect of the dissolution are exactly the same for both types of relationship.
Insurance
Various forms of insurance on offer provide a useful and cost effective method of protecting you and your family’s assets. For estate planning/asset protection purposes the use of Term Life Insurance and Income Protection Insurance (including mortgage repayment insurance) are particularly effective in minimising the repercussions of sudden and unexpected events (for example redundancy, death or sickness of the sole or major breadwinner) upon you, your family and your assets.
Those with children or other dependants in particular, should consider the use of the forms of insurance noted above to ensure that their dependants and others are adequately provided for and protected against debt and income loss.
Disclaimer
This Background Paper by its nature cannot be comprehensive and cannot be relied on by clients as advice.
This Background Paper is provided to assist clients to identify legal issues on which they should seek legal advice.
Please consult the professional staff of Lane Neave for advice specific to your situation.
