By Robyn Walker, Amy Sexton & Viola Trnski

Trusts are always very topical, but with an increase in the trustee tax rate likely after the election, recent changes to trust disclosure rules and Inland Revenue currently consulting on an updated Taxation of Trusts Interpretation Statement, trusts are again a hot topic. This article goes back to basics, providing a general overview of trusts, when taxpayers may want to consider settling assets on trust, the obligations of those involved in a trust as well as a look at the draft Taxation of Trusts Interpretation Statement.

A brief history of trusts

The concept of “the trust”, as we know it today, has its roots in Roman times. As early as two centuries BC, the fideicommissa emerged; this concept involved Roman knights leaving property to a person for safekeeping when they left for war. However, following the knight’s wishes was solely a moral obligation of good faith.

In the 14th century, English landowners used trusts to pass on land after death while avoiding inheritance rules (which, at the time, meant land could only be left to the eldest male heir).

The trusts we use today are based on the same concept, albeit with a few more rules and legislative oversight. The Trusts Act 2019 (the Trusts Act) was the culmination of a decade-long project to make trust law more accessible, codify trustee obligations, and set out reporting and filing requirements.

Trusts Act 2019 reform

While overseas trusts are primarily a vehicle for the wealthy, in New Zealand, they are utilised by a wide range of society including many middle-income New Zealanders. As of 30 June 2022, there were over 400,000 trusts registered with Inland Revenue.

The Trusts Act reformed and modernised the legislation governing trusts in New Zealand, making trust administration less expensive and increasing the duties and obligations of the trustees. This represented a radical shift in New Zealand’s trust law and a divergence from England’s approach.

Prior to this reform statute law governed the administration of trusts. Longstanding principles of equity were drawn from English case law, and there was limited codification on the obligations of trustees or rules establishing a trust.

Trust structure and requirements

For an express trust to exist, there must be identifiable beneficiaries, identifiable trust property, and the intention to create a trust. While a written trust deed is not required, it is commonplace and good practice to create certainty around who the beneficiaries are and what the trust property is. Trusts are flexible and can be structured in a range of ways for a variety of purposes.

There are three key roles in a trust:

1. The settlor(s), who settles the property on the trust by transferring assets to the trust
   
2. The trustee(s), who makes decisions about the trust property and decides what distributions are made to beneficiaries
   
3. The beneficiary(ies), who receive distributions from the trust
   

Trusts are a creation of the law of equity and are not a separate legal entity distinct from its trustees.

Purpose of trusts

Common purposes for settling assets in trust include (but are not limited to):

• Ring-fencing assets for specific purposes: you can set aside money or assets for a specific purpose, or beneficiary, by putting them into a trust. Examples of this might be to pass on the family home to the next generation, retirement planning, education fees, or looking after minor or disabled family members.

• Protecting assets from creditors: trusts can be settled so that assets are protected from personal claims by creditors (given the large number of small business owners in New Zealand, this can be a common risk management strategy).

• Relationship property: trusts can protect assets that would otherwise be subject to relationship property claims if a relationship failed.

• Long-term “special” assets: long-term assets like family holiday homes can be placed into a trust to ensure they continue to benefit multiple generations of a family for a long period of time.

• Charitable giving: to provide long-lasting benefits to a specific cause.
  

Despite the likely increase in the trustee tax rate, trusts will in most cases remain an effective vehicle for their original purpose.

Trustee obligations

There are two types of trustee obligations under the Trusts Act. Mandatory duties apply to all trustees and cannot be opted out of, while the default duties can be modified or excluded by expressing this in the trust deed. The trustee’s role has always been underscored by the principle of good faith to the beneficiaries, taking into account their interests and the purpose of the trust.

Mandatory duties

The mandatory duties require trustees to:

1. Know the terms of the trust
   
2. Act in accordance with the terms of the trust
3. Act honestly and in good faith
4. Act for the benefit of the beneficiaries or to further the permitted purpose of the trust
5. Exercise powers for a proper purpose
   

Other obligations of trustees

Trustees are also required to maintain core documents relating to the trust, including the trust deed and any variations, records of trust property and assets, accounting records and financial statements, and trustee decision-making.

There is also a specific presumption in the Trusts Act that trustees must notify basic trust information to every beneficiary. This basic trust information includes the terms of the trust, how the trust is administered, and information about the trust property, as well as any information that is reasonably necessary for the beneficiary to have to enable the trust to be enforced. There is a second presumption for trustees to provide certain trust information if requested by beneficiaries. Trustees do not need to disclose reasons for their decisions.

Trustees decide whether the above presumptions apply, and must have regard to (non-exhaustive):

• The nature of the interest held by the beneficiary,

• Confidentiality concerns,

• The intentions of the settlor,

• The ages and circumstance of the beneficiaries, and

• The effects and practicality of providing the information.
  

Taxation of trusts and the 39% rate

An increase to the trust tax rate to 39% looks likely from 1 April 2024, with both major parties committing to this change.

The Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill introduces the rate increase but has been paused due to the election and it will be the next Parliament who has responsibility for analysing this proposed law change.

Inland Revenue interpretation statement consultation

Inland Revenue is currently updating its Taxation of Trusts Interpretation Statement. Consultation is currently open and comments are invited on the draft statement before 13 October 2023.

The new drafted guidance includes changes to, among other updates:

• Updated definitions to account for the new trust disclosure requirements,

• Discussion around who is a “settlor”,

• Confirmation that trustees generally shall act in their capacity solely as trustee, and that joint trustees are treated as a notional single person,

• Clarification on certain types of income and distributions, and

• Trust compliance and administration.
  

I have a trust...so, what?

Trusts remain a genuine and appropriate choice for many people looking to protect their assets, and provide for themselves or others, despite the proposed increase in the trust tax rate. There is often no black or white answer as to whether assets should be retained in a trust, or if there is another more appropriate structure. It will depend on your intended purpose and specific circumstances.

However, due to the many changes that have gone on in the trust world it is always worth seeking advice to ensure your trusts remain fit for purpose, are operating in line with their intended purpose and trustees' obligations under the Trusts Act are being met.

If you need assistance or would like specific advice, please contact your usual Deloitte advisor.