IBBZ Accounting

Chartered Accountants & Tax Specialist

 

Our Trust Service

  • Trust Bookkeeping, Tax returns, preparation of financial statements, tax planning and asset protection.
  • Formation of discretionary trust (includes all meetings with you and the registration with the IRD)
  • Formation of charitable trust (includes all meetings with you and the registration with the Charity Commission and the IRD)
  • Consultation on Trust, Tax, and Commercial Arrangement matters
  • Independent trust management advisory services (includes annual minute/record keeping)

Why us?

Because experience and expertise matter. Our professional trust expert: Saurav Wadhwa has done extensive research on New Zealand Discretionary Trust while studying Master’s Program at Auckland University of Technology. His areas of expertise in trust law are: Sham Trust, Asset Protection and Commercial Arrangements.


Saurav is also a Tax Specialist and holds Masters in Tax, his areas of expertise in Tax are: Tax Avoidance, Commercial Arrangements and use of trust in Tax Avoidance, Income and Deductions.


Blend of skills in Trust and Tax makes him perfect advisor for small businesses and individuals like you. Saurav understands the cause and effects, advantages and disadvantages of having a trust and is able to provide you proper guidance if you are looking to form a trust.


Saurav understands the numbers very well. He is a qualified Chartered Accountant and registered with highest professional accounting bodies of Australia and New Zealand. He can help you to plan for the future to satisfy all your financial needs.

We believe in providing quality advice at affordable prices and strive to achieve 100% customer satisfaction.

Feel free to have no obligation free consultation to discuss your needs in person.

Concept of Trust

Trust is a legal arrangement between parties. Trust itself is not a legal entity, the parties involved to form a trust represent trust. It is mainly trustee who is actually legally binding agent of the trust who acts on the behalf of the trust.


The inception of trust - long ago English Law encountered some problems due to assets transferred in trust were not being returned to the original owner. When husband (warrior) used to go on a war, he used to leave his assets (house) for his wife and kids under the care of neighbour or friend. This is to ensure if he does not return from the war, his family will be looked after. During those days women had no right to own assets on her own name that is why third party (trustee) was used to own assets on behalf of wife and kids (beneficiary). And when, the person (trustee) responsible to look after the family (beneficiary) ignored them, women (beneficiary) went to the court to ask for a justice. The court said we do not recognise this arrangement, as per the legal contract trustee is the owner, but actually he was the owner on behalf of the beneficiary, it created confusion, and this gave birth to the concept of trust.


In a trust law, person responsible to look after the trust (“Trustee”) is merely responsible to look after the assets for the intended beneficiaries of the settlor.

Benefits of having a trust

• To protect assets for family members. For example, once you set up a trust, your personal assets will be transferred to the trust and trustees will own the assets on behalf of your beneficiary. Thus, it protects those assets from your creditors or debt collectors or IRD, as the assets are no longer yours.

• To preserve wealth for the next generation. You can name your children or children’s children as beneficiary of the trust, as they can receive benefit directly from your trust. 

• To help someone manage their assets in case they are not able to manage their own affairs because of age or infirmity or disease. For example, in case you are not able to manage your assets due to any reasons, the trustees will own it and help to manage those assets. 

• To change or reduce tax liability. With the highest rate being 33% not many advantage, but you can do some tax planning.

• To protect assets against creditors. However, please note that in some cases, the Court may rule that your trust is “sham”; it means you may lose all the benefit of having it (As seen in Rosebud Corporate Trustee Limited v Bublitz [2014] NZHC 2018). 

• To manage assets to be qualified for the Residential Care Subsidy (From 1 July 2014, the threshold has changed to $218,423 or less to qualify for the program). However, there are some “gift rules” that will affect the Residential Care Subsidy program. Not much advantage left these days.

• To address the effect of the Property (Relationship) Act 1976, as there is a possibility of an equal split of assets for couples had been together for three years. For example, Mr A and Mrs A are in a de facto relationship. Mr A or Mrs A can protect his or her own personal assets if the assets are put in their own trust. However, the family home might not be protected (As discussed in Clayton v Clayton [2013] NZHC 309).

Trust Wiki

Trust: Trust is a legal arrangement between parties. The concept of trust is nothing more than an arrangement. It has not separate legal identity. Trust don’t sign any kind legal document on its own name. It is trustee who files the tax returns or sign document on behalf of this arrangement (known as trust). It is a very unique arrangement: where settlor transfer his/her assets to trustee and trustee will own and manage the assets for the benefit of one or more beneficiaries.

Trustee: Trustee is the legal owner of the asset and they hold and manage the asset for the benefit of beneficiaries. They have no interest in the property other than being a legal owner of the assets. Being a trustee is a responsible job and this should not be taken lightly. Trustee own and manage the asset on behalf of beneficiaries, end of the day trustee is just a keeper/guard of the assets.

Settlor: Settlor creates the trust and transfers their assets to the trustee. Settlor is like someone who starts the arrangement of trust. You can also be a Settlor and Trustee of the Trust, it may seem both are the same person, but it’s actually two different person in terms of trust law as they both have two different roles to play.

Beneficiary: Beneficiary is the one entitled to receive benefit from the assets in the trust. In modern trust law we create discretionary beneficiary, it means beneficiaries are on a discretion of trustees/settlor it can be changed during the life of trust. 
Now think this way trustee own assets on behalf of discretionary beneficiary but these beneficiaries can be altered anytime, and by circling around assets might end up back in the hands of settlor. The whole of concept of discretionary trust makes it very good tool for asset protections from third party or creditors.

Trust property: Trust property includes any property or asset in the trust owned by trustee for the benefit of beneficiary. It could be cash or cash equivalent, or property or antiques just anything which has monetary value.

Discretionary trust: This is the most common type of trust in New Zealand. In a modern discretionary trust, although the beneficiaries are stated in the trust deed, the trustee will have the power to nominate which of the beneficiaries can receive the benefit from the trust.

Charitable trust: Under section 5(1) of the Charities Act (2005) in order to become a charitable organisation or charitable trust, the organisation or trust must be set up for charitable purposes. Those charitable purposes include:


• Promotion of education 
• Promotion of religion
• Relief of poverty
• Other purposes of benefit to the community
• Establishment of facilities for recreation and other leisure-time activities for public benefit. 
Also, for a charitable trust, it is required to have a board of at least two trustees (Charities Act 2005)

Trustees’ duties: Trustees are the legal owner of the trust’s property. Thus, there are many duties for the trustees as listed in the Trustee Act 1956. These are the important duties that trustees need to focus on: 


• Duty of efficient management
• Duty to act prudently
• Duty to protect trust assets
• Duty to take independent advice as required
• Duty to keep accounts and render them to beneficiaries
• Duty to act personally
• Duty to know the trust deed
• Duty to know what the trust assets and liabilities are, the actions of former trustees and the state of the trust. 
• Duty to act as a fiduciary

Trust deed: Trust deed is a document setting out all the important matters in the trust. The trust deed should disclose all the information about the settler, the trustees, the discretionary and the final beneficiaries. It should also list the powers and obligations of all the parties in the trust. Trust deed also provides any rules about the administration and management of the trust. Trust deed is a vital document to mediate any disputes, thus it is important to take time and carefully prepare. Trust deed will be written, signed, witnessed and dated by preferably professional trust advisor.

How to set up a trust?


In order to set up a “valid” trust, there are many important matters that you need to pay attention to. For a valid trust, there must be some beneficiary and property.  The settlor must make sure to follow three certainties to settle a valid trust.

1. There must be a Property

2. Settlor must have Intention to set up a trust

3. Property should be held for someone, beneficiary or there must a purpose of the trust.

The settlor then transfers trust property to trustee (by gifting) to manage for the benefit of beneficiary. It is important for the trust to have a well-prepared trust deed, in order to mediate any disputes between parties in later course.

How to run a trust?

A trust is run by trustee. There may be more than one trustee of the trust. Because trustee is a legal owner of the property, they will have some power, duties and obligations to settlor and beneficiary. Trustee’s power will be shown in the trust deed. For the list of trustee’s duties and obligation, you can find it in the Trustee Act 1956. As a settlor, to protect and preserve your asset, you need to appoint trustee that you can trust and carefully prepare your trust deed to maximise the benefit of beneficiary. It is important to note that for the trust to run efficiently and effectively, there will be cost associated with the administration and management of the trust (such as conducting annual meeting, keeping accounts and preparing annual returns).

How can I protect my assets from creditors?


When settling a trust, as a settlor, you will transfer your assets to trustee and trustee hold it on behalf of any beneficiary of the trust. It means that you are no longer own those assets. Thus, if the trust is valid, it could prevent creditors or any third-parties touching those assets. However, it is subject to Insolvency Act and Companies Act. The key is to setup as early in your life as possible, as the longer the trust it is hard for the statutory regime like Insolvency Act to challenge the validity of trust.

How can I protect my assets from my partner?


When you are in a relationship, settling a trust can help to prevent splitting equally your personal assets with the greedy partner after separation as stated in Property (Relationship) Act 1976. When putting your assets in a trust, you no longer own the asset. Thus, your greedy partner cannot touch it. However, please note, in case of a family home or any property that has contribution of both partners, although they are in your trust, the Court might need to look at the facts before making decision. We have seen in many court cases about this relationship issue (Murrell v Hamilton, Clayton v Clayton, Prime v Hardie).


This area is very complicated in the decision of Clayton v Clayton it was quite favourable to the wife, as it was seen the husband was purposely putting asset away out of wife’s reach. There is no set outcome, each case is different.

What are the three certainties to create a valid trust?


For a trust to be valid, settlor must consider three certainties before settling (Knight v Knight). These certainties include: certainty of intention, certainty of object and certainty of subject.


• Certainty of intention: This means that settlor must have a clear and unambiguous intention to give up and transfer asset with genuine purposes. If the Court found that the settlor’s intention is not clear or misleading, the certainty of intention will be breached and the trust will become invalid. (As shown in Official Assignee v Wilson & Clyma
• Certainty of subject: To satisfy this requirement, the subject matter in the trust should be clearly named and transferred from settlor to trustee. It could be any property, asset, cash, bank account, share or dividend.


• Certainty of object: This means that the trust must have one or more named beneficiary and trust will be there for the benefit of beneficiary. If there is no clear beneficiary, then the trust will be created for no purpose and thus, it will be invalid.
Therefore, it is important that settlor needs to make sure to satisfy all three certainties before settling a trust.

Who can manage my trust?


Trustee will be the one who manage your trust and the trust property. In a trust, you can appoint one or more trustee who you have confidence. You can also be the trustee of your trust, but the trust will be vulnerable as settlor is also sole trustee of the trust (FMA v Hotchin). According to the Trustee Act 1956, trustee will have some power as well as owe some duties to the trust and beneficiary. Thus, you must choose someone who you can trust and have confidence to manage your affairs.

What are some drawbacks from having a trust? 


There are some drawbacks from having a trust:


• Don’t setup and forget about it. You need to constantly review the arrangement and be accountable.  You also have to pay for the annual administration cost and management cost of the trust as well. 


• When you settle a trust, you are no longer own those assets or properties, as they will be transferred to the trustee of the trust.


• In case, the trust is invalidly set up, you could run a risk of having a “sham” trust and lose all the advantages of having a trust. 


Therefore, you must be careful when coming to set up the trust and its formation. You should seek for legal and professional advice when settling trust for your loved ones.

How do you define sham trust?


In Rosebud Corporate Trustee Limited v Bublitz, the Court gives a definition of a sham trust at para 90


“A trust will be a sham where the intention was to create the appearance of a legitimate trust, but there was no intention to effect the rights and obligations of the relevant parties in the way that a valid trust would. A Sham will exist where there is an intention to conceal the true nature of a transaction, and a trust will be held to be a sham where there is an intention to have an express trust in appearance only. There is then an intention to mislead and the trust is void for lack of intention to create the trust. The settlor has to intend, at the inception of the trust, to give third parties, or the court the appearance of creating rights and obligations different from the legal rights and obligations actually intended”


Thus, sham trust is a trust created with no intention or intention of mislead others. Moreover, in a “sham trust”, in some cases, the settlor still have control and influence over the trust asset as seen in Official Assignee v Sanctuary Prop vest Limited.

What issues can make my trust invalid?


There are many different causes that can make your trust invalid. 


• The most common problem found in these cases is that there is no valid or real intention when creating the trust by settlor. Many settlors create the trust, but they still have power and keep their assets for themselves. When the trust has one person for both trustee and settlor, it is less likely that they can survive in court. Because in that case, we can see that it is likely that settlor still keeps the assets and no one can interfere in his decision making relating to the assets. Thus, it is deemed that they still have full control of their assets and the trust will be sham trust. (Rosebud Corporate Trustee Limited v Bublitz) However you can be sole trustee and the settlor at a same time, The law does not say that sole trustee who is also a settlor makes trust invalid. Basically the important thing is how trust was run was there a separation of roles or not. It means trustee has a trustee hat on, he is not a settlor anymore.


• Trustee is also an important factor of the trust. Sometimes, it is better to have a professional independent trustee to look after for your trust. However, if the court finds that settlor has a strong influence on the trustee or the trustee is working for the settlor’s benefit, it will easily make it a sham trust. Majority of time independent trustee are there just for legal purpose, as they have no role to play. You must look for the trustee who is genuinely interested in taking care of your property.


• The administration and management system is very vital to the validity of the trust. Although it can be time consuming to maintain a good administration and management system in the trust, it is very worth it when the trust is under question. Well-organised trust will be more likely to prove that it is there for a valid purpose, as trustees spend time looking after it. If a trust is found out to have bad administration and system, it is more likely that the trustee does not care about the trust and there are many other purposes behind it. Thus, court will question and do more investigation on it.


• As seen from Clayton v Clayton, Prime v Hardie, Murell v Hamilton, in case the plaintiff and the defendant were in a relationship, the court need to look at some factors about the relationship to make decisions:


I. Contributions direct or indirect to the property in question
II. The expectation of an interest therein
III. That such expectation is a reasonable one
IV. That the defendant should reasonably expect to yield the claimant an interest

If the plaintiff had an expectation of an interest and made contribution to the property and the defendant can reasonably expect to yield the claimant an interest in the property, the trust is more likely to be found as “constructive trust” to protect assets. Thus, it is important to look at the purpose and fact of the trust. (Prime v HardieClayton v Clayton)

How does “gifting’ work?


When settlor transfers asset to trustee, settlor is no longer own the asset and trustee is a legal owner of the asset. This transfer process is called “gifting”. However, when taking into account the assessment for a Residential Care Subsidy, there is a limit on the amount of “gift” each year that you can transfer. For tax purpose gift duty no longer applies, so you can gift the full amount of asset.