Legal Assistant Melanie Gauthier recently wrote an Article for the Horowhenua Chronicle on issues you may face if you choose to wind up your trust early.
If you are thinking about winding up your trust early, here are a few issues to consider before making a decision.
Keeping your assets in a trust can offer some protection to the assets as you no longer own the assets. The assets are owned by the trustees of the trust who must manage the trust fund in accordance with the terms of the trust and the Trusts Act 2019 for the benefit of the beneficiaries of the trust.
If you are director of a company for instance, then keeping your personal and family assets in a trust is a good idea as it may protect the assets from possible claims arising from your activity as a director.
The trust can be useful too as it can protect the trust’s assets from personal creditors of the trustees or claims from family members under the Family Protection Act or from property claims of present/future partners of your children and grandchildren.
If you need long-term residential care in a hospital or rest home and are planning on applying to the government for a residential care subsidy, we recommend reviewing your personal financial situation and trust finances with your accountant before deciding to wind up your trust. Work and Income assesses your personal assets (financial means assessment) to see if you can be eligible for a residential care subsidy.
Assets transferred to a trust are usually excluded from the financial means assessment but any money that is owed to you by the trust will be considered as a personal asset and will be included in the assessment. If you have gifted assets to your trust, work and income will not count gifts up to $27,000.00 a year (or $6,500.00 a year in the last five years before applying). These thresholds apply to a single person or a couple indifferently. Any amount gifted above these thresholds will be included in the financial means assessment.
If the trust’s assets include a house, when transferring the house out of the trust the trustees may trigger some tax consequences. There is now a ten year bright-line period applying to residential properties purchased after 27 March 2021. Transferring a house out of a trust may trigger the start of the ten-year bright-line period and an on-sale within the next ten years might be taxable. Always check your tax situation with your tax advisor.
When a trust is created, the final beneficiaries of the trust are meant to receive the trust’s assets when the trust comes to the end of its life. If the terms of the trust allow you to wind up early and distribute to any beneficiaries (other than the final beneficiaries), you should still discuss it with the final beneficiaries and where possible obtain their consent to avoid any future disagreement.
Good trust management is needed in order to avoid any trustee liability. Trustees are required to follow new obligations and duties under the Trusts Act 2019, such as disclosing trust information to the beneficiaries. Trustees are presumed by law to give trust information to every beneficiary, i.e., the fact that they are beneficiaries, the names and contact details of the trustees, any detail regarding any change of trustees as these occur and the beneficiaries’ right to request a copy of the terms of the trust or any trust information.
Keeping the trust administration up to date, ensuring that all matters are dealt with accordingly will minimise the risks of the trust being challenged. Trustees should meet regularly and discuss the trust matters. If you decide to keep the trust, make sure you have a good trust management system in place.
Trusts are required to comply with the anti-money laundering legislation. Every time you need to consult your lawyer, your accountant, real estate agent, financial advisor or your bank, they have to complete a thorough risk assessment and verify the assets, the trust documents and the identity of all parties involved in the trust (trustees and settlors).
New tax reporting requirements for trusts were enacted as part of the Taxation Act 2020. From financial years ending on 31 March 2022, trustees who derive assessable income will need to prepare financial statements and provide additional information with their income tax returns to IRD. We recommend talking to your accountant to make sure you comply with the new reporting requirements.
All these new and increased requirements to keep the trust accounting, legal and tax administration up to date come at a cost and should be considered when deciding to retain or wind up a trust.
The decision to wind up a trust needs to be made on case by case basis so if in doubt we suggest that you talk to your accountant and your lawyer for personalised advice.