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As most people with a trust will know, the landscape for trusts has experienced significant change in the last couple of years due to the introduction of the Trusts Act 2019. This Act replaced the Trustee Act 1956 and the Perpetuities Act 1954 and has seen administration and management of trusts increase considerably.
The new legislation applies to the majority of trusts operating in New Zealand. For instance, discretionary family trusts and business trusts are caught by the Act. The type of assets a trust holds and the value of those assets is irrelevant – the Act is very clear in that it applies to all express trusts.
Parliaments objective in passing the Act was to make the law in relation to trusts simpler and easier to understand so trustees administered and managed the trust under their control appropriately.
An effect of the Act is it has substantially changed the matters trustees must attend to. In particular, trustees’ obligations have been increased under the Act as have beneficiaries’ rights. Trustees will no longer be permitted to ignore their duties and treat trust assets as though they were their own if they want to keep their trust intact and maintain asset protection and other associated benefits.
Besides the Trusts Act 2019, trustees have been confronted with other new legislative amendments such as those made to the Income Tax Act and the Tax Administration Act. Both of these pieces of legislation impose additional responsibilities on trustees as discussed below.
Trustees have always had a duty to act for and in the best interests of the beneficiaries of the trust under their control. It’s an impossibility, however, for a person to enforce this duty, if they are unaware they are in fact a beneficiary.
To ensure beneficiaries are made aware they are indeed beneficiaries, Parliament has passed the Trusts Act 2019 which contains a rebuttable presumption trustees will inform a person they are a beneficiary of a trust. Under the Act, trustees must also provide beneficiaries with contact details for all trustees and inform them they are entitled to request a copy of the Deed of Trust and other trust information.
This duty is ongoing so should be considered at regular intervals.
Undoubtedly, an effect of this statutory duty is beneficiaries’ rights have been strengthened in respect of their ability to hold a trustee to account regarding how they have carried out their role in administering the trust and managing and investing trust assets.
Trustees may elect not to satisfy the disclosure presumption but to do so, the statutory process laid down in the Act should be worked through. Trustees should also keep firmly in mind, Parliament meant for beneficiaries to be able to enforce their rights and hold trustees to account. Accordingly, those trustees who do not wish to honour this positive duty, need to have good reason for not doing so and need to ensure adequate documentation backing their reasons is in place.
Trusts that are not required to file an income tax return have often elected not to complete annual financial statements. That decision frequently results in trustees being unaware of the financial position of a trust, including the value of assets the trustees have under their control, the quantum of liabilities the trustees owe, the balances owed to or by beneficiaries and the funds lent or received by the trustees in respect of other entities.
Additionally, when a trust does not prepare annual financial statements, it often does not hold nor document annual trustee meetings.
Lack of annual financial statements also results in important documentation being omitted which can bring about negative monetary consequences. For instance, the recent amendments made to the Income Tax Act 2007 will deem a beneficiary who has a current account with a balance of $25,000 or more to be a settlor of the trust if interest has not been paid at the prescribed or higher rate on the balance owed to the beneficiary by the trustees. That can trigger negative financial consequences if not dealt with via appropriate documentation.
Ultimately, failure to know the trust’s financial position, regularly review the affairs of the trust and have in place vital documentation makes it hard for trustees to account to beneficiaries and satisfy their legislative duties. This can result in claims being brought against trustees and other negative consequences such as a denial of incidental tax advantages.
Given the obligations now imposed on trustees under the Act and the increased scrutiny trustees now face, trustees are likely to elect to prepare some form of financial statements even when the requirement to file an income tax return is not present.
From 1 April 2021, trustees must satisfy the disclosure rules imposed under the Tax Administration Act 1994. The purpose of the rules is to enable IRD to gather information and to scrutinise trust transactions. It doesn’t matter if the transaction is taxable or not – all transactions are caught by the rules.
Under the rules, trusts that produce assessable income need to provide IRD with particular information relating to the trust they govern. This will mean that for those trusts that have not been preparing financial statements, such statements are likely to be required.
To keep matters simple (which they are not), we’ve noted below the type of information trustees will now likely disclose to IRD:
The disclosure rules apply for the 2021/2022 year, but IRD have the power to go back much further should they wish.
For many trustees, these new rules will mean they’ll need to review and tighten up their processes. No longer will they be permitted to adopt a do-nothing approach. Scrutiny is now being brought to bear on trustees’ behaviours by a government body which, if not satisfied, could trigger some hard questions being asked and even audits.
Several key pieces of legislation have been passed in the last couple of years which have far-reaching consequences for trustees and the way they manage the trust under their control. We’ve only touched on some of the new laws on this page.
Often trustees can feel overwhelmed by what they need to do to satisfy their legal obligations. This can lead to trustees engaging in ostrich practices, ignoring their statutory duties and burying their heads in the sand. We don’t advocate this approach. Help is at hand.
All we do at Black + White Trust Services Limited is trust work. This makes us ideally suited to help you honour your trustee obligations and administer and manage your trust.
In some instances it may be appropriate to close your trust. For the majority of trusts, however, we expect trustees will take advice, put in place appropriate practices, satisfy their duties, and comply with legislation. That’s where we come in. We can work with you, helping you to meet your obligations. We can even be part of your annual compliance regime if you wish. We’d love to hear from you so contact us to discuss your options as a trustee.
Trust Management + Administration
Trust Management + Administration
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