I have been genuinely surprised recently by the number of baby boomers who are seemingly considering winding their trusts up as they move into retirement. Often stating they “don’t need them anymore” or are tired of the administration and the cost of it.

Admittedly, the new Trusts Act 2019 is a reason to take stock - and soon - but it is not necessarily a reason in and of itself, to wind up your trust. How quickly we forget; I recall being a junior clerk back in the late eighties and seeing the blind panic of a family sink in, upon the realisation of death duties issues, after a terminal diagnosis of a wealthy client.

The Return Of Death Duties?

And here we are with Covid-19, facing a mountain of debt, with a government in charge that has ruled out a capital gains tax and won’t want to raise taxes on workers any more than they need to. Is it really such a big leap to consider a reintroduction of death duties as wealthy baby boomers depart the mortal coil and look to hand their wealth on without a cent in tax being paid?

I was speaking to a senior client recently who recounted a story of death duties from when his own father passed away. He told me the IRD inspectors even insisted on visiting his father’s boat, and listed as dutiable, items as small as his father Steiner binoculars. Scary stuff The only way out of death duties was a trust with gifting complete.

Remember, the courts are full of disgruntled people challenging wills. The use of trusts greatly lessens the chances of what you want to have happen being undermined after your death. So, what are the tax issues associated with vesting and winding up or resettling a trust?

Firstly, before you look to wind up a trust, have a careful review with your solicitor. Who is in line to receive the assets as final beneficiaries? Is it even you?

From a tax perspective:
1. A wind up or resettlement triggers a disposition of trust assets and is a taxing event like any other disposal.
2. There is an immediate taxing event for any revenue account property or properties tainted by association that have not been held 10 years.
3. Disposals are deemed to occur at market value making depreciation recovery a near certainty.
4. Shares in companies held by trusts are likewise treated as sold which may jeopardise carry forward of losses or imputation credits.
5. Any tax losses in the original trust will be lost on windup or resettlement.
6. GST, resettlement is a taxable supply at market value - care is needed here to avoid GST traps, especially if the resettled trust is unregistered.

Start Planning For The New Trusts Act

The Trusts Act 2019 which is now law, comes into force on January 30, 2021. This window of opportunity should be used to review your trust.

What are the key requirements?

1. Trustees must write to all eligible beneficiaries and advise them of “basic trust information.” This includes the fact that they are a beneficiary. They must also be advised that they have a right to the trust deed and “trust information”, which will typically include the trusts financial accounts.

2. Each trustee is required to keep a copy of all core documents. These include the deed, assets and liabilities, i.e. its accounts, records of trustee decisions, contracts, financial statements, documents changing beneficiaries, memorandum of wishes.

3. Trustee default duties all apply unless specifically excluded. These include the duty not to exercise a power for one’s own benefit. How would you get on here if your live rent free in a home the trust owns? Another duty includes investing prudently. Are you comfortable that bank deposits yielding virtually nothing are prudent enough to defend yourself from a negligence claim by a beneficiary?

4. There is an opportunity to make some improvements to the trust, it’s now possible to extend its life from 80 to 125 years. Provide discretion to trustees as to what information should be given to beneficiaries and even to modify a trust’s powers of management to ensure these still suit your purposes.

So, review your trust deed with your trustees and legal advisers. Is the beneficiary list too wide, given the disclosure requirements? Make sure you have a file that holds all the trust documents. Is your accounting up-to-date for the trust even if you are not filing a tax return? Prepare to write to the beneficiaries with the basic trust information.