Bloomsbury Associates
Bloomsbury blog Trusts in the spotlight
Bloomsbury newsletter, 30 June 2015
Trusts have many uses, including creditor protection, protection against relationship property claims from partners or spouses under the Property (Relationships) Act 1976, estate planning and even tax minimisation in certain instances. Alongside other developments, recent court judgments have set new precedents that suggest trusts may be becoming less effective against these types of claims. In this article, we take a look at a few of the issues.
Residential Care Subsidy
According to the New Zealand Herald, 21% of those over 85 are in residential aged care.1 With science allowing us to live longer and healthier lives, the proportion of retirees in care is likely to increase.
Whilst it's clear many later in life may need this care, what has become less clear of late is who will pay for it. Historically, those who have been unable to meet the costs of their own care have had the costs met by the Ministry of Social Development (MSD), in the form of the Residential Care Subsidy.
The test of a person's ability to pay is assessed on the basis of assets held in their own name. If you have assets above a certain level - currently $218,598, including a house and car - you are responsible for meeting the costs of your own care.
Assets properly gifted to trusts were previously not included in this asset test, however, the MSD has been increasingly aggressive in ensuring that trusts are not used as a way to divest assets, and thus, gain subsidy eligibility.
The maximum you can divest is $6,000 per annum for five years prior to application, and $27,000 per annum per couple before that.
The MSD requires that applicants provide full information with regard to all the assets that have transferred into a trust and whether you were the settlor, trustee or beneficiary of a trust or estate. In addition, the MSD will look at the assets that a couple has transferred to a trust rather than just the share of the assets in the trust that came from the one making the application. The MSD can look back as far as it wants in order to determine if you are at the threshold for qualifying as a result of asset divestment.
This developing policy now substantially reduces the potential efficacy of trusts for accessing the Residential Care Subsidy.
Relationship property
A recent Court of Appeal case concerning Mark and Melanie Clayton, who separated almost a decade ago after 17 years of marriage, appears to be rewriting the law on trusts for relationship property purposes.
Mark Clayton has significant sawmilling interests in the central North Island, worth approximately $28 million. The business and other assets are owned by a series of companies and trusts. Melanie Clayton believed she was entitled to half of the value of the business and trust assets. The Court of Appeal decision this year resulted in Melanie being largely successful in 'busting' the trust.
In particular, the case found that Mark Clayton's power to add and remove discretionary beneficiaries to and from the trust (the power of appointment) fell within the definition of "property" in the Property (Relationships) Act, and was "relationship property" under that Act when the Claytons separated. The Court determined that the value of this property right held by Mark Clayton was equal to the net value of the assets of the trust at the separation date. Mark was required to pay Melanie an amount equal to half of that value.
Mark's lawyer was quoted in the New Zealand Herald as saying, "It certainly significantly reduces the apparent comfort people would have in putting all their property into trusts and thinking that was safe... There has been a long-held view that [a trust] protects them from creditors or from claims from their spouse and this decision means that will really need to be looked at very carefully because the courts have found it is not a shield necessarily."
Disclosure to beneficiaries
The Clayton case brought another issue to light with regard to disclosure. The court found that, if information regarding a trust was not disclosed, the court was entitled to reach adverse findings against the trustees under the presumption that they refused to reveal it because it did not help them. The implication for trustees is that the courts are moving towardstrusttransparency. This may extend to sharing information with beneficiaries and seeking their input.
Clayton to be appealed
We should note that Mr and Mrs Clayton both appealed (on different grounds) to the Supreme Court, and the Supreme Court has granted appeal on some grounds including the matters discussed in this article. The Clayton case clearly illustrates how complex the interface between trust law and relationship property law is and how quickly it is evolving.
Potential new trust law
Our last discussion point - and an item that we are closely monitoring - is the reform of New Zealand trust law that is currently underway.
The Justice Minister, Amy Adams, has advised that a new Trust Act is one of the three main areas she is focusing on in this term of Government. When enacted, the new act is likely to include several important provisions regarding the way in which trust assets are invested. In our view, almost all the proposed changes are positive.
Our view is that the six main areas of interest are:
- Trustees are likely to be required to invest for total return without specific regard to capital gain or income.
- Trustees are likely to be authorised to appoint investment managers and give them authority over investment decisions.
- Trustees are likely to be required to act in good faith, exercise the reasonable care, diligence and skill of a prudent person when appointing an investment manager, and must review the manager's performance regularly.
- Trustees are likely to be required to create a written investment policy statement which describes how the functions are exercised by the investment manager, and the general investment objectives. Investment managers will be required to agree to comply with the policy statement.
- Trustees are likely to be personally liable for default of their investment manager if they've failed to act honestly and in good faith, or failed to exercise the reasonable care, diligence and skill of a prudent person when appointing an investment manager or monitoring their performance.
- When appointing an investment manager, the two key issues trustees are likely to be required to consider are whether the manager has the appropriate skills and experience, and whether employing the manager is cost effective.
One area of particular interest is found in section R17 (2) of the Law Commission review, where trustees have the responsibility to exercise reasonable care, diligence and skill when appointing an investment manager.
We believe that means there needs to be a process - even a simple one - that a trustee can point to, to show that they have fulfilled this requirement. That process needs to be documented and reviewed on an ongoing basis. We are already working in the background to provide such a process to the trustees we work with, based on external checks of our investment due diligence process.
As this article suggests, trusts are currently very much in the spotlight. We believe those of you who have trusts should have discussions with your trustees regarding the matters outlined in this article. It might also be time to arrange for a specialist trust lawyer to review your trust deed to ensure that the trust still meets its intended purpose, is providing the best possible protection against claims and is managed in a way that is consistent with the proposed new trust legislation.