16.5Submitters were asked whether the existing legislative mechanisms for addressing the impact of trusts were adequate, and if not, whether they could be made more effective and how that could be done.
16.7Some submitters considered existing mechanisms to be inadequate in one or more respects. Tobias Barkley argued that existing legislative mechanisms are inadequate because they are not designed to remedy situations involving discretionary trusts, especially where the settlor is able to benefit from the trust assets and continue to exercise control, so the circumstances of alienation of the property are irrelevant.
16.8Several submitters considered that existing statutes concerned with creditor protection, relationship property, tax avoidance and social welfare eligibility could be strengthened and made more explicit. Several submitters commented that there was a need for effective enforcement of current legislative provisions.
16.11Peter Kellaway recommended that the Official Assignee be able to set aside the form of a transaction and claim the assets as part of the bankrupt estate. He considered that it may be necessary to amend the definition of the bankrupt’s property or provide a specific provision regarding the setting aside of trusts where the substance of the transaction is to defeat the bankrupt’s unsecured creditors. He thought there might be a need to provide for the same powers in the Trustee Act, but leaving it to the court’s discretion to set aside the trust.
16.12The NZLS and Taylor Grant Tesiram considered that there are sufficient powers within existing tax statutes and other commercial laws to address trusts; there is a broad range of remedies available, and the present rules are working well. KPMG considered that the application of tax laws to trusts can be significantly onerous and a trust structure can be disadvantageous in certain circumstances. The NZLS and Taylor Grant Tesiram observed that tax legislation is constantly updated and reviewed, and considered that there was no particular issue of concern in respect of tax laws as they relate to trusts. WHK considered that recent changes to income tax rates may have addressed concerns about people using trusts improperly.
16.13Although submitters considered the current legislative mechanisms in other areas to be largely adequate, those who commented specifically on the Property (Relationships) Act identified the look-through mechanisms in this Act as problematic. Submissions generally considered that the current provisions should be strengthened because the court’s ability to make orders in respect of property transferred to trusts in property relationship cases was too limited.
16.14However, these submitters were cautious about proposing specific amendments to the Act. The Auckland District Law Society (ADLS) argued that significant statutory reform should only be considered following a careful review of case law in specific areas. Chapman Tripp commented that the solution was not to try and formulate a “simple fix” for trusts. Reform needed to focus on the objectives of the statute, which applied to a range of entities and persons and not just trusts. Taylor Grant Tesiram favoured a separate review for the possible shortcomings in the Property (Relationships) Act and related legislation rather than addressing these in a review of trust law.
16.15The NZLS submitted that the problems around the Property (Relationships) Act arise because the objectives of trust law and relationship property law differ. Relationship property law is aimed at ensuring a fair distribution of the assets produced or enhanced by a qualifying relationship. It said that:
A clear decision needs to be made about whether the equal sharing concept should be paramount. If it is to be paramount, the legislation should clearly say so and contain wider discretions giving the courts freedom to make appropriate orders in relation to trust assets that would otherwise have been relationship property or separate property subject to a court order. Such legislation would also require the courts to have regard to the other beneficiaries of the trust when making orders.
16.16Views on how best to address the issues arising here varied.
16.17The NZLS commented on section 182 of the Family Proceedings Act, under which the courts can vary the terms of a trust where it is an ante- or post-nuptial settlement. Whilst acknowledging the historical reasons for the separate regime for modifying trusts in section 182, the NZLS considered that the interrelationship between section 182 and the Property (Relationships) Act needed to be reviewed. It commented on the inconsistency of the Property (Relationships) Act applying to de facto couples, but section 182 not doing so, and of the equal sharing principle, which is paramount in the relationship property area, not applying to ante- or post-nuptial trusts that hold assets that would otherwise have been relationship or separate property.
16.18The NZLS suggested that there ought to be a single set of provisions dealing with trusts contained in the Property (Relationships) Act and that this should replace the current provisions in both Acts.
16.19The NZLS considered that there was room for improvement and some harmonisation of approach between the provisions relating to the residential care subsidy and the Legal Aid Services Regulations 2006, although each did have a different focus and therefore required a different approach to assessment and criteria. It considered that the residential care subsidy regulations should have more focus on the “interest” of the beneficiary under the trust and the likelihood of the beneficiary receiving a benefit. If deprivation of property remained part of the test for residential care subsidy purposes, a purpose or intention test with a rebuttable presumption operating for a specified “look-back” period was suggested.
16.20Jennifer Dalziel considered reform was required to prevent people obtaining access to the residential care subsidy, the Community Services Card and the student allowance through the use of trusts.
16.21The TCA commented that succession laws (such as the Family Protection Act 1955 and Law Reform (Testamentary Promises) Act 1949) needed to be looked at as trusts can be used to sidestep a will-maker’s obligations under these Acts. John McIlwaine suggested that the use of trusts to hide assets from the reach of the Family Protection Act be considered. There are no mechanisms in these statutes to look through or recover assets from trusts.
16.22We understand from submissions that, except in the relationship property area, there is no strong evidence of significant overall problems in the operation of individual statutes that address the impact of trusts, as opposed to more minor issues. In contrast, more significant issues were raised by submitters and through informal feedback during the course of the project over the adequacy of the look-through mechanisms in the Property (Relationships) Act. In the next chapter we discuss the specific issues with these look-through mechanisms.
16.23While some submitters did raise specific issues with other statutes, there was no clear consensus as to problems. Key statutes, such as the Property Law Act, Insolvency Act and Income Tax Act, have been updated recently and were considered satisfactory. A specific problem with the insolvency of trusts and the Official Assignee’s standing to make claims as assignee of a bankrupt settlor is addressed at the end of this chapter.
16.24The enforcement of existing provisions could be improved and there may also be a case for approaches in individual statutes to be strengthened and made more explicit, as suggested by some submitters. The Ministry of Social Development may wish to consider reviewing the Social Security (Long-Term Residential Care) Regulations in light of the comments put forward by the NZLS regarding the potential harmonisation of the regulations with those relating to legal aid. The broader question of the suitability of existing mechanisms for discretionary trusts with some ongoing settlor involvement, for example as a trustee, a beneficiary, or an appointer, as is common in New Zealand, is also worthy of attention.
16.25However, we acknowledge the point raised in submissions that any review and amendment of provisions in legislation needs to take into account the impact on the entire legislative and policy scheme in that area. Accordingly it is preferable that these matters be considered in the context of those individual regimes rather than as part of this set of reforms.