The trusts context in New Zealand
Why do people settle trusts?
1.20In the Second Issues Paper we outlined several historical reasons why New Zealanders have been so partial to trusts, including the estate duty rules that applied before estate duty was abolished in 1993, the relationship property statutes, and the misalignment of the trust tax rate and personal tax rates. We also raised the possibility that trusts were being established for the purposes of qualifying under social assistance policies and avoiding creditors and because there had been active promotion of trusts.
1.21From the submissions received on the Second Issues Paper and consultation undertaken, it appears that trusts are being established for the following main reasons:
- to allow self-employed persons to separate business assets from personal assets. This can protect personal assets from ordinary business risks, and personal liability arising from negligence (such as a leaky home claim against a builder). Ordinarily, the trust and the company through which the business will be operated are established at the outset. Assets that have been acquired before the beginning of the business venture will be transferred to the trust, to protect these “personal assets” regardless of the success or failure of the business. The New Zealand Law Society (NZLS) suggests that many trusts have been set up in New Zealand for this purpose.
- for traditional estate planning. For example, a trust may be used to keep a farm within a family for successive generations. The orderly control and transmission of wealth was described as the most important reason many people establish trusts. The discretionary trust provides a high degree of flexibility that is useful for regulating the destiny and transmission of property in the future, in a world where lives and circumstances change over time.
- to protect separate assets from relationship property claims. Two circumstances are frequently mentioned. First, a settlor may settle the family home on a trust for the benefit of themselves and their children and grandchildren after a first relationship ends, but before a subsequent relationship begins. Second, instead of making an outright gift, a settlor may settle assets on a trust for the benefit of their children and grandchildren to prevent the assets becoming subject to a claim from a child’s spouse or partner in the event of a future relationship breakdown.
- for the efficient operation of a business. This applies particularly to family businesses, where proceeds can be shared with family members who have no control over the business. For example, a trust may own the shares in the company which operates the family business, meaning that the profits can be distributed to the beneficiaries on a flexible basis. The NZLS points out that trusts have been used as a legitimate business vehicle in a wide variety of commercial contexts and that they are used for the same reasons as limited liability companies and partnerships.
- to provide for family members with special needs, or to provide a particular benefit to a class of persons, for example, the education of the settlor’s grandchildren.
- for investment schemes and innovative commercial arrangements, including energy trusts, unit trusts, and superannuation trusts.
- to provide for philanthropic or charitable activities.
1.22There is also some evidence that trusts have been used for purposes that may be considered less acceptable, including:
- to obtain tax advantages. Since the decision of the Supreme Court in Penny v Commissioner of Inland Revenue and the realignment of top tax rates, it is likely that fewer trusts are now being used to obtain otherwise unavailable tax advantages. However, some trusts established for this purpose may still exist. A number of submitters did not view tax minimisation as problematic.
- to qualify for state assistance. The Ministry of Social Development considers it is common for trusts to be established to avoid the income and asset tests it uses to assess eligibility. Some settlors and their families may be using trusts in an attempt to appear less wealthy and therefore eligible for government support, such as the Residential Care Subsidy, the Student Allowance, and Working for Families. However, trusts do not always achieve this purpose. Many of the different rules regulating different types of government assistance allow the government to consider dispositions to trusts as part of a settlor’s assets. Other submitters have suggested that it is rare for trusts to be settled for this purpose.
- to attempt to defeat known creditors, though this is probably uncommon because of the strength of the “look-through” provisions in the Property Law Act 2007.
- to defeat the equal sharing regime under the Property (Relationships) Act 1976 (PRA). For example, after relationship difficulties begin one party might settle a trust for the benefit of themselves and their children, to the exclusion of their spouse, and begin to transfer relationship property to the trust.