Trusts & Tax: The Bill That Could Have Been Avoided.
When dealing with trusts involving overseas beneficiaries, even the best intentions can lead to unintended consequences. As Kathy’s story below highlights.
Kathy’s husband, Jack, had passed away three years ago. She and Jack had a trust which owned their family home, a small commercial unit which was rented out and an investment portfolio with a reputable investment advisory company. Kathy and Jack had two sons, one, Mark, who lived in Australia with his wife and children, and the other son, Glen, lived in Auckland nearby to Kathy. Glen was not that financially secure. He had some difficulties which made him very vulnerable – he was not good with money and there had been many instances over the years where he had been taken advantage of.
When Jack died, Kathy did think about winding the trust up. Their initial reason for setting the trust up was because of their business interests. Their accountant had recommended a trust to give them some tax flexibility and protection if something had gone wrong in the business that Jack had been a director of. Those reasons were no longer relevant, but Kathy really wanted to make sure that Glen was protected if she died.
She knew that if he received money directly it wouldn’t last, and given the amount that was in the trust, it would be a significant sum of money just wasted.
Kathy went to see the lawyer who she and Jack had used over the years. She said that she was going to retain the trust, but it was really just a vehicle to make sure that Glen would be protected if she died. She said that she didn’t think she needed an independent trustee and that her preference would be for Mark to be appointed as a trustee as he would be able to look after the funds for Glen if she died. The lawyer drew up the paperwork and Mark was appointed as a trustee.
After that Kathy decided that she would like to sell the commercial property. She was receiving enough income from the investment portfolio, and she thought it would be a good opportunity to use the funds to help the boys out. Mark had a large mortgage on his property in Sydney and half the value of the commercial building would be enough to buy an apartment for Glen. The property was put on the market, sold and the trust made the distribution to Mark. The trust purchased the apartment for Glen and he and his partner moved in.
A few months later Mark called Kathy, distraught. He had been issued with a large tax bill from the Australian Tax Office – the Australian equivalent of the Inland Revenue.
The distribution to him from the trust was taxable in Australia, and he was now facing a bill equal to 45% of the amount that the trust had distributed to him. Kathy got in touch with her accountant who said yes, he had heard something about distributions from NZ trusts to Australian beneficiaries, being taxable in Australia. He said that in the past some of this would have slipped through, but with the new disclosure rules in NZ and information sharing between the international revenues it is likely that these things would be picked up. He was also concerned to hear that Mark was a trustee of the trust, as this meant that the trust would also be pulled into the Australian tax net and that it was possible that there would be capital gains tax to pay in Australia on the sale of the commercial building. He also said that there could be a tax bill for the trust relating to any capital gains and/or exchange gains in the investment portfolio.
Kathy was panicking by this stage. Her accountant recommended to her to urgently go and get some specialist tax and trust advice. He said that her lawyer was obviously a general practitioner and while a nice person had overlooked the complexities around overseas beneficiaries and trustees.
The rules relating to overseas beneficiaries and trustees of trusts are changing all the time and it is imperative that you receive specialist advice before taking any action in this area. Kathy’s good intentions of protecting Glen’s inheritance ended up having huge financial consequences that could have been avoided if she had been given the right advice from those experienced in this area.
If you feel you could use some specialist advice for your personal situation contact our Trusts & Wealth Protection Team.
