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.
Contacts
Lee
Harris
Tim Orr