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Children, life interests and non-residents in Wills –why are the new trust information requirements relevant?

By Lee Harris - 27 Jun 2022

It is common for wills to delay vesting of assets until a later date (e.g. when children or grandchildren attain 25 years).  It is also common for couples in a second relationship to leave each other a lifetime interest in the family home. When either of these scenarios lasts more than two years, a testamentary trust is created.  In the majority of cases, the new financial reporting and disclosure requirements for trusts will then apply.

The new requirements include preparation of comprehensive financial accounts. They also introduce disclosure to Inland Revenue about the will-maker, the beneficiaries and the estate assets. The requirements continue annually until the testamentary trust no longer exists.

Testamentary trusts enable estate assets to be maintained for many years. However, there are significant factors to consider as a result of these requirements.

The first consideration is the increased compliance cost, as this will impact the final amount available for the will beneficiaries once the testamentary trust comes to an end. These costs include, but are not limited to, the payment of any tax, the payment of professionals to prepare such accounts, if the executors/ and trustees are themselves professionals who require payment and any insurance, either for the assets or for the benefit of the executors and trustees in respect of their roles and the general issues of whether the manner in which the funds are being held and/or applied are in themselves prudent investments of a standard that the trustees are entitled to enter into. If the estate is not large, it may be that there is a better alternative.

A second consideration arises when there is any foreign connection. Trusts (including testamentary trusts) are particularly troublesome when a party to the trust lives overseas. They rarely travel well once foreign implications are factored in.

If any foreign will-maker or beneficiary is identified as part of the reporting, Inland Revenue provides details of their interest (where appropriate) to the relevant foreign tax authorities. Depending upon the country, common examples of the foreign treatment include:

  • ignoring the testamentary trust and treating the beneficiary as the owner from the date of death
  • imposing foreign inheritances taxes on the beneficiary
  • taxation of less than market-rate loans
  • additional foreign reporting obligations
  • personal liability for the executor if foreign taxes are not paid

When the will-maker is not a New Zealand resident at the time of their death, there is a further unexpected sting. In that circumstance, the testamentary trust is treated as a New Zealand foreign trust pursuant to section HC 11 of the Income Tax Act 2007. The New Zealand executor is required to register the foreign trust with Inland Revenue.  Penalties for non-disclosure are a fine of up to $50,000, up to five years' imprisonment, or both.

For many years, the information obtained in New Zealand about interests in trusts has not aligned with the Financial Action Taskforce (FATF) requirements for member countries. The new reporting obligations have contributed to an improved rating for New Zealand in the FATF May 2022 follow-up report.  The new reporting obligations are here to stay.


Lee Harris

Tim Orr


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