Buying into a retirement village is a decision that many people consider as part of their retirement planning. Like all decisions of this size, it’s one that require careful consideration.
In the majority of situations when moving into a Village, it will involve signing an Occupation Right Agreement (ORA) with the retirement village. An ORA sets out the terms on which you can live in the village and the rights and obligations of both you and the village.
The most important thing you need to realise about buying an Occupation Right is that, unlike a freehold property, you will not “own” the unit or apartment. Instead, you simply have a contractual right to live there.
This means you must pay the retirement village a weekly or monthly fee, you will not receive any capital gain, and the amount you receive back upon termination will generally reduce by up to 30%. It also means that in most cases you cannot mortgage the property or transfer or sell it as you may be able to with a freehold property.
The terms of an ORA vary between villages, but usually contain the following:
- Cooling off period: You have 15 working days after signing the ORA to cancel if you change your mind. You should receive a refund of all payments made.
- Joint occupation: If you are buying the Occupation Right with your partner or spouse, the terms in the ORA usually apply to both of you jointly. You will both have the right to occupy the home. If one of you dies, the interest of that person automatically transfers to the other person.
If you currently own a home in equal or unequal shares, or you would like to leave you interest in the retirement village home to somebody other than your spouse, you should raise this with your lawyer before signing the ORA. - Village Fees: Most villages have a weekly or monthly fee which covers basic outgoings at the village. The fee may be fixed for your lifetime, or subject to change. Often, the villages offer additional services which can be bought at an additional cost.
- Termination and exit payments: You can terminate an ORA at any time on giving the required notice. There are limited grounds on which the retirement village can terminate an ORA, such as where you can no longer live safely in the village, or if you breach the terms of the ORA. The agreement will automatically terminate when you (and your spouse or partner if you are purchasing together) die.
On termination, most villages deduct a fee that is equivalent to around 30% of your entry payment (or 10% for each year you have lived in the village if it is less than 3 years). In addition, you (or your estate) may not receive your exit payment until the village has sold your unit to someone else.
For this reason, entry into an ORA is usually a commitment to reside in the village for the rest of your life. You should think carefully about your personal and family circumstances when deciding whether this is right for you, and make sure you choose a village that will meet your needs. If you change your mind once the cooling off period ends, you may find that you have insufficient funds to buy elsewhere. Some provide a 90 day grace period during which you can terminate the ORA without penalty. - Wills and EPAs: Before you can live in a retirement village, you will also need to ensure you have a current and valid Will and Enduring Powers of Attorney for both your property and personal care and welfare in place.
Occupation Right Agreements require you to obtain the advice of a lawyer before signing. If you are considering buying a retirement village unit or apartment, Holland Beckett can guide you through the process and provide the advice required.
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September is Wills Month.
A Will is perhaps the most important piece of paper you can leave behind to support your loved ones. Why do you need a Will, what happens if you pass without a Will, and how best should you prepare your Will for your circumstances?
Download our Wills Month Information Pack.
September is Wills Month. Holland Beckett offer a free “Simple Will” if you leave a gift to charity in your Will.
Speak to the Holland Beckett Estates team about Wills Month and what charity giving options would best suit you.
Contact the team on estates@hobec.co.nz or call our offices on 07 578 2199.
Incentives for a Trust in light of recent regulatory reforms
Safeguarding your Legacy
Trust structures have been a cornerstone of asset protection for centuries, particularly for those wishing to safeguard valuable assets like investment portfolios. However, the legal and tax landscape is constantly in flux. To ensure these structures remain effective, individuals seeking asset protection should follow four key steps on their informed decision-making journey:
First, it is crucial to grasp the basic concept of a Trust after the new Trusts Act 2019 which came into force on the 30th January 2021. This involves knowing how a Trust works and the roles of parties such as the settlors, trustees, and beneficiaries.
Establishing a Trust involves thoughtful steps, including choosing an independent trustee who is not a beneficiary. The independent trustee’s role is to act in the beneficiaries’ best interests, avoiding or managing any conflicts.
Understanding the purpose of the Trust is essential. This involves considering any specific needs or long-term goals for asset protection and aligning the Trust\'s structure and provisions to the desired outcomes.
Finally, ongoing administration by the chosen trustees is vital to safeguard the best interests of the beneficiaries over time. Regular reviews ensure that the Trust complies with evolving regulations and effectively fulfils its intended purpose.
Trustees
Being a trustee comes with significant responsibility, given its fiduciary position. Understanding the Trust Deed thoroughly and adhering strictly to its terms is crucial. Trustees must exercise care, diligence, and act in the best interests of beneficiaries when making investment decisions. Delegating duties is not sufficient; active participation is essential. Trustees should maintain accurate records and disclose information appropriately to beneficiaries. Additionally, addressing health and safety risks related to the Trust assets is part of their duty. Unanimous decision-making among trustees is mandatory unless the Trust Deed specifies otherwise.
Tax
Effective 1st April 2024, the tax rate for Trust income has increased from 33% to 39%, aligning with New Zealand’s top personal income tax rate. This change aims to create a more balanced system. However, there are exceptions:
Trusts earning less than $10,000 annually will maintain the old 33% tax rate.
Estates will benefit from a lower 33% tax rate in the year of death and the subsequent three years before transitioning to the new 39% rate.
Trusts specifically supporting disabled beneficiaries, energy consumers, and legacy retirement funds will continue to be taxed at the lower 33% rate.
With the recent increase in Trust tax rates, trustees have shown concerns about their ordinary actions being misconstrued as tax avoidance. To address this, Inland Revenue has issued guidance on permissible actions that, when devoid of artificial or planned elements, are unlikely to be construed as tax avoidance. These actions include:
Adjusting a Trust-owned company’s dividend pay-out policy (for example, distributing retained earnings before the new rate or reducing dividends afterward).
Directly distributing income to beneficiaries in lower tax brackets.
Incorporating companies within the Trust for asset transfers at the 28% company tax rate.
Investing in Portfolio Investment Entities (PIEs) with a 28% tax rate as a tax-efficient alternative to investments subject to the full 39% trustee tax rate.
Winding up the Trust as a valid option in all these potential scenarios.
Seeking ongoing legal, financial and tax advice in this respect is crucial.
AML
Effective 1st June 2024, New Zealand\'s Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) regulations introduce stricter Trust verification procedures. The key changes affect customer due diligence (CDD) requirements. Reporting entities must now obtain and verify specific details related to trusts:
The Trust\'s legal structure and proof of existence (i.e. The Trust Deed).
Ownership and control structure (identifying who ultimately controls the Trust).
Governing powers that bind and regulate the Trust.
Identity of the settlor(s) (person who established the Trust) and protector(s) (if applicable).
It is important to note that, for AML/CFT purposes, the Trust itself is considered the \"customer\", not the individual trustees. Despite this, a Trust is legally classified as an “arrangement,” not a “person.” Consequently, CDD requirements also apply to the individuals who ultimately control the Trust—the beneficial owners. These individuals, including trustees, hold significant direct or indirect ownership or control over the Trust. While a settlor creates a Trust, they qualify as a beneficial owner only if they maintain substantial control, such as the power to appoint trustees amongst others.
Key Conclusion
Trust structures serve as powerful tools for managing wealth across generations. Generally, they offer significant advantages, including asset protection from creditors and streamlined wealth transfer to future generations. However, it is essential to weigh the costs, complexities and benefits. A thorough analysis of your specific circumstances will help determine whether a Trust remains the best approach, especially considering the changing tax landscape and increased administrative burden.
Our team at Holland Beckett specialises in estate planning and trust matters and is ready to assist you.
Why do I need an Independent Trustee?
Many people question, what is an independent trustee, what do they do and what value do they bring to my trust?
What is an independent trustee?
An independent trustee is a person or entity who act as a trustee of a Trust where that person or entity has no interest in the assets of the Trust - meaning they are not a beneficiary of the Trust and are not entitled to share in the assets of the Trust.
An independent trustee is often a ‘professional trustee’ such as a lawyer or an accountant. However, a trustee does not have to be a ‘professional’ to be independent, they just have to be a person who is not a beneficiary of the Trust.
Why should you have an independent trustee?
Having an independent trustee is not a legal requirement under the Trust Act 2019, however is recommended for the following reasons:
More credibility for the Trust and is less likely to be susceptible to any successful legal challenge in the future;
Adds an element of transparency to the Trust, so if any third party is looking at the Trust they can see that there is an independent person who is moderating the decisions of the trustees and ensuring the Trust is not regarded as a ‘Sham Trust’ and therefore losing any protection the Trust was intended to provide;
Assists in the better management and administration of the Trust. As outlined above, often the independent trustee is a solicitor or accountant who is familiar with trust legislation and can ensure that the Trust is complying with the Trusts Act 2019. They also may have an ongoing relationship with the family which supports an understanding of the underlying reasons for the Trust; and
Some trust deeds require the Trust to have at least one independent trustee.
Having a Trust to protect assets will only work if the trustees carry out their functions correctly, which includes administering the Trust properly. This is where an independent trustee can assist the other trustees by ensuring the Trust and trustees meet their legal duties and responsibilities.
The implementation of the Trusts Act 2019 has increased the scrutiny on Trusts, trustees’ duties and increased potential liability. These changes require independent trustee(s) and independent trustee companies to be more active in the administration of and record keeping for your Trust. As a result, there are a number of independent trustees who are either resigning, declining to take on new Trusts, or are charging an annual fee on the basis of the independent trustee services.
Now is as good a time as any to consider whether an independent trustee is required for your Trust, and to review your trust deed and individual situation to make sure your Trust is fit for purpose and complying with current requirements under the Trusts Act 2019.