The process
It has been estimated that there are between 300,000-500,000 trusts in this country. Trusts have been established for many different reasons, including estate planning, creditor protection, to ensure access to rest home subsidies, tax benefits or for protection from relationship property claims.
When the reason for a having a trust is no longer valid (there’s more on this on our article Do I still need a trust? here), it is important to bring it to an end in the most appropriate way bearing in mind the powers in the trust deed and the needs of all the beneficiaries.
This article explores the two most common ways that trusts can be brought to an end – bringing forward the date of distribution (the trust’s expiry date) and distributing all the trust assets to beneficiaries.
Bringing forward the distribution date
Trusts are not allowed to last forever. The ‘perpetuity’ rules currently state that a trust can either last for 80 years, or for ‘a life in being plus 21 years’. Given that you cannot predict how long someone will live, most New Zealand trusts are set to last for 80 years at the most. This is called the ‘perpetuity period’. The date at the end of the perpetuity period is called the ‘distribution date’.
Modern New Zealand discretionary trust deeds will also usually contain a clause that says the distribution date is the date 80 years from the date the trust was established or such earlier date as the trustees decide.
The normal New Zealand discretionary trust sets out the discretionary beneficiaries (usually the parents, children, grandchildren, and sometimes charities and wider family members) and the final beneficiaries who will receive the trust fund when it comes to an end on the distribution date (usually, children or grandchildren if children have died).
If you decide to bring a trust to an end by bringing forward the distribution date, this will usually have the effect that the trust fund will be distributed to the final beneficiaries.
If you are a trustee who is also a settlor, however, and you want to bring the trust to an end in order to put the assets back into your personal name, then simply bringing forward the date of distribution will not work. It may have the unintended consequence that your children come into an early inheritance!
Distributing the trust assets
When people say they have ‘a trust’, they usually think of the trust deed that sets out the terms of the trust. However, a trust is not a document. A trust is actually a relationship that needs to comply with three certainties:
- Certainty of intention: a clear intention to create a trust (usually recorded in a trust deed)
- Certainty of objects: who is going to benefit from the trust, and
- Certainty of subject matter: what property is owned by the trust.
If you take any one of these three things away, there is no trust.
The easiest way to bring a trust to an end is to distribute all the assets in the trust – without any assets there is no trust. Care needs to be taken to ensure that the trust assets are distributed to the correct beneficiaries. For example, there may be clauses in the trust deed specifying who can receive capital distributions from the trust. It’s therefore important to check the trust deed before deciding on any course of action.
A note of caution – check your wills
Whichever way you decide to bring a trust to an end, it is important to check all your estate planning documents. When establishing a trust, it’s common practice to sign new wills, leaving the whole of your personal estate to the trustees of the trust, as well as forgiving any debts the trustees may owe.
There can be complications if your wills are not reviewed at the same time your trust is brought to an end. You should always seek specialist advice about whether to move the distribution date forward or to distribute to nominated beneficiaries.
Bringing a trust to an end is a major decision for all involved. One size doesn’t fit all, so it may be useful for us to talk about the process, and its implications, that suit your particular personal situation.
Disclaimer: All the information published in Trust eSpeaking articles is true and accurate to the best of the author’s knowledge. It should not be substituted for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are the views of the authors individually and do not necessarily reflect the view of this firm. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit being given to the source.
Content Copyright © NZ LAW Limited, 2018. Editor Adrienne Olsen, e. adrienne@adroite.co.nz p. 029 286 3650
