The Costly Consequences of Inadequate Legal Advice.
Trust Law has become very specialised over the last few years. Advice from a Trust Law expert could be invaluable.
This scenario offers an example to help explain why...
Peggy and Thomas had been in a relationship for several years. Peggy had three children from an earlier marriage and they had one child together. For the first few years, they kept their assets separate and then when they decided that this was going to be forever, they agreed to pool their assets and buy a home together. That extended to eventually a bach in Mangawhai as well.
Peggy was CFO in a large company based on the shore. When Peggy and Thomas purchased their bach, their lawyer told them it would be a good idea to think about putting their assets into a trust. He said that because of Peggy’s quasi director role and the fact that she was potentially an officer of the company for Health and Safety purposes, it was wise to ensure that their assets would be protected in a trust. Even though Peggy had more cash to put into the trust assets and children from a previous relationship, the lawyer said that just one trust between the two of them would be fine. He said that they didn’t need to over complicate things.
He also went on to say that the cash going into the trust to purchase the home and bach should be lent to the trust. He said that while we no longer had gift duty in New Zealand, it was best to be conservative and leave the amounts going into the trust owed to each of Peggy and Thomas. He said that this would mean if they separated, they would be able to get their original amounts out of the trust. He was also not a big fan of gifting.
Thomas had a nagging thought at the back of his mind that this didn’t seem to be quite right.
He wondered whether he should go and get his own independent advice but didn’t say anything as he really wanted to show unity with Peggy. But he did remember some friends talking about this and saying sometimes with blended families one big joint trust was not always a good way to go. He also wondered about whether him and Peggy needed to do new wills, but the lawyer didn’t say anything, so he didn’t raise it. Thomas knew that he and Peggy would be marrying soon anyway, and he thought that would change things when they were husband and wife.
Once the estate planning exercise was completed, Thomas was owed $250,000 by the trust, being the equity that he had brought to the relationship and Peggy was owed $1,050,000. Their wills remained the same and said that if one of them died, the other would receive all the assets and then once they both died Peggy’s children and their joint child would share in all the assets. They had also done a memorandum of wishes advising the trustees that all assets would be held until they both died and then distributed to all the children equally.
Sadly, not long after the trust was established and after Peggy and Thomas had married, Peggy had a massive heart attack.
She was on life support for three days and then died. Thomas was devastated but felt a sense of relief that they had addressed their asset planning position before they had got married.
Thomas went to see the lawyer that him and Peggy had gone to who was a bit blasé about the whole thing. One of his friends recommended he go and see a lawyer that specialised in asset planning and trusts.
When Thomas went to see the lawyer, he was horrified to find that when he and Peggy married, by law, their wills become null and void. This meant that Peggy’s will was invalid and her estate would be governed by the Administration Act. Thomas was relieved for a moment because all their assets were in the trust, until he remembered that the trust still owed Peggy $1,050,000 because the previous lawyer didn’t agree with gifting. Under the Administration Act this mean that Thomas would be assigned $150,000 of the debt owed by the trust to Peggy as well as 1/3 of the balance and the remaining 2/3 ($600,000) would be owed to Peggy’s children who could demand payment of the debt. This would mean that the trust would need to sell the bach to pay out Peggy’s children and pay tax on the increase in value given the bright-line test rules. This was far from the outcome Thomas and Peggy had envisaged when they first went to the lawyer for advice.
It is so important to seek specialist asset planning advice. Often people don’t think that their circumstances are complicated but there may be legal twists and turns that you don’t think of that a specialist will be able to help you navigate.
If you feel you could use some specialist advice, don’t hesitate to contact the Trusts & Wealth Protection Team.
