The family trust has long been at the cornerstone of wealth and succession planning, but most trusts serve no real purpose and should be closed.
Trusts lawyer Henry Stokes, a former General Counsel at Public Trust and General Counsel at Perpetual Guardian, says that there should be a 50 per cent reduction in the number of family trusts in New Zealand.
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New Zealand, he says, has fallen prey to the misconception that family trusts were both fashionable and a badge of success.
“I personally believe that there could be at least a 50 per cent reduction in trusts, and you would be much closer to the number of trusts that we should actually have,” Stokes said in a recent interview on Stuff.co.nz.
Changes to family trust law mean that they are going to become expensive to operate from next year when trustees need to advise people who are trust beneficiaries, permitting now-adult beneficiaries to “peek over the shoulders” at what entitlements they were due.
“The whole underlying principle of the new act is that beneficiaries should have sufficient information to be able to be sure that trusts are being run correctly, and that trustees are doing their jobs,” Stokes said.
The New Zealand Trust Sales Industry
New Zealand has had a very active and successful ‘trust sales’ industry, he says.
Lawyers, accountants, insurance specialists, financial advisers and others have long advocated the supposed advantage of the family trust.
New Zealand, he said, was well “over-trusted” with over 450,000 trusts in existence with a large number of people finding out for the first time that they are beneficiaries.
Stokes said people setting up trusts often did not tell beneficiaries, especially their children, not wanting to reveal how much they were really worth, for fear it could weaken their work ethics, or make them start thinking of family wealth.
Those issues would become illusory once the new legislation comes into force.
Removing The Trust ‘Advantage’
The new laws implemented under the Trusts Act, removes many of the advantages that may once have existed for the family trust.
But when the new Trusts Act comes in, beneficiaries will have the right to ask for information on trust assets, which could give them a clear picture of how much the family is worth.
Many people would not be comfortable telling the children exactly how much money their parents had, Stokes said.
“Most people have a vague idea of what mum and dad are worth, but not exactly how much,” he said.
But the advantages that may once have existed will be no more.
Death taxes and superannuation surcharges were removed as a key advantage to the family trust and then the Courts moved heavily into trust-busting, which removed their benefits from property relationship breakkups.
Residential rest home care subsidy means-testing was changed to include assets gifted to trusts.
The reality, Stokes says, is that as many as half of the trust that have been set up were done so for reasons that no long apply and they should be closed.
Plus, the new Trusts Act legislation would make the family trust more expensive and onerous to operate, which will almost certainly lead to the closure of many and create a windfall for the legal profession.
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