Tips On Managing A Trust Next Year
Strong governance, good accounting and fairness will play a vital role in the success of a trust, writes Mark Withers.
24 October 2023
Firstly, let me say I would never be without a trust.
I do not subscribe to the view that you should wind your trust up now that the new trustee act requires some additional disclosures and transparency to your beneficiaries.
Life is just too risky. Business life in particular has become litigious and creditor protection is important. Those forming new relationships are vulnerable to devastating outcomes if they fail after just a very short time. And, of course, there has been a strong push from the Left for the introduction of some form of wealth tax which could be a straight tax of asset value, a land tax or even a back to the future reintroduction of death duties.
I just don’t feel lucky enough to punt on a sympathetic government being in power on my date of death, whenever that might be.
So, for me, my trust stays. It’s the best option to plan my affairs and to transition my assets under good governance and stewardship to my children and grandchildren when my time is done.
While I could arguably achieve this in my will, I don’t want the prospect of any dispute over my wishes, and I want all the protections I can gain in the meantime.
However, the question remains, can a trust now deliver any tax advantages given that the government is set to increase the trust tax rate to 39 per cent from April 1, where it will sit level pegging with the top personal tax bracket paid by individuals earning over $180,000.
Well, the answer to that will really come down to your own family circumstances and how you choose to govern and use your trust.
If your trust generates an income the trustees have the choice of retaining that income in the trust where it will be taxed at 39 per cent. Or the trustees can distribute this income to of-age beneficiaries who may be on lower tax rates than the 39 per cent payable by the trust.
But here’s the rub, do not be blinded here by the desire to simply save tax. If you make an income distribution to a beneficiary you must first be willing to pay it to them; they are entitled to know they are a beneficiary; be advised of the distribution and, of course, be paid it.
This is where good governance, fair play, and the opportunity to benefit from good accounting and clear direction from your trustees comes in.
When trustees make a decision to distribute to beneficiaries, they must consider all of them and should do so fairly.
Fundamentally, while a trust is often formed to protect a settlor’s assets, it is also there to benefit the beneficiaries of the trust, and in this lies an opportunity.
As your children and grandchildren mature, they will become expensive. First car, private school education, university costs, deposit for a first home etc.
These costs, that you will no doubt be called on to assist with, provide an opportunity for the trust to be used to make payments that are in the interests of the beneficiaries and are for their own individual furtherment and betterment.
Where the trust is used to make these payments, they should be accounted for accurately against the beneficiary that received the benefit and, in so doing, they can serve to offset any subsequent income or capital distributions that the trustees might make.
When managed well, this avoids a situation where a trust might otherwise build up a debt to a beneficiary when it makes an income distribution to them that might offer a lower tax rate.
So, looking for tax efficient ways to distribute income down to your beneficiaries and avoid the alternative of the 39 per cent trust rate is a great way to gain an advantage from your trust for your wider family. Just couple that with strong governance from your trustees and good accounting so fairness can be maintained, and you will have truly harnessed the essence of the benefits your trust can still provide in 2024.
Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. PKF Withers Tsang & Co Phone 09 376 8860, www.pfkwt.co.nz