Succession Planning – Case Study: John Johnson

Asset Protection & Estate Planning
Jan 30 2024

John Johnson is a 68 year old widower. He has a complying Family Trust that owns the majority of his assets (only his KiwiSaver is in his personal name). The Trust was established several years ago when John operated a business, for creditor protection. On his death, John intends for all his personal assets and the assets settled on the Trust to be divided equally between his daughters, Sandy (who lives in Sydney) and Wendy (who lives in Wellington).

John’s lawyer says it is generally not advisable for overseas family members to:

  • be the executors of your Will; or
  • be appointed as your attorney for either property or your personal care and welfare matters.

Having received advice, John has nominated Wendy alongside his solicitor, as his executors and trustees. For his Enduring Power of Attorney documents, John appoints Wendy and a family friend who are based in New Zealand.

John is also advised about the Trust Act 2019, which has placed increased obligations on trustees by introducing, amongst other things, the presumption of making basic Trust information available to all beneficiaries (whether they are likely to benefit or not) and the duty to invest Trust assets prudently.

John’s lawyer suggests that now would be a good time to review his Trust to determine whether:

  • the Trust is still needed;
  • whether trustees are meeting their obligations; and
  • whether the Trust Deed can or should be varied to reflect the changes introduced in the Trusts Act 2019.

The advice to John is that if you don’t have a Trust for a really good reason, like asset and creditor protection, a Trust may just be another unnecessary and costly complication in life.  As John no longer operates his business, he does not need the Trust for creditor protection.

However, John’s lawyer indicates that there may be benefits in keeping the Trust for residential care. In John’s case, he is likely to obtain a residential care benefit by keeping the Trust, because his personal assets fall under the threshold of $273,628, his only income is superannuation, and the Trust assets were gifted some time ago in line with MSD’s gifting rules for the residential care subsidy.

The lawyer advises that there are other estate planning options to maximise residential care benefits for couples without a Family Trust. For example, if a couple’s main asset is their home then they could consider life interest Wills so that if the survivor of them needs care, half of the equity in the property is protected. Where a single person owns a property in their personal name there are less options.

Tax is also a consideration. John is advised that in many overseas jurisdictions, distributions from Trusts are taxed more harshly than distributions from a person or from their estate. John is cautioned that if Sandy from Sydney is to receive a distribution from the Trust (rather than his estate), there may be tax consequences. He is advised to speak to his accountant about this. Ultimately, John would have to weigh up the potential benefit of keeping the Trust in the case that he went into residential care, against the potential tax consequences for Sandy.

John suddenly passes away. Wendy from Wellington receives a half share of the Trust assets and estate assets without any deduction (as generally in New Zealand there are no tax consequences for receiving a Trust capital distribution). However, in accordance with Australian tax rules Sandy from Sydney’s half share is taxed as income and she therefore receives a significantly smaller share than her sister.

Succession planning – Is it time to review your affairs?

As your circumstances change, your Will and wider estate planning (such as Family Trusts and Enduring Powers of Attorney) should be reviewed.

It may be that what once was suitable for you and your family, is no longer practical. Here are some important events that should trigger a review:

  • change in relationship status (for example, a marriage will automatically revoke your Will but a separation will not);
  • change in financial situation;
  • change in health (yours or your families);
  • sale or purchase of a property;
  • births/deaths;
  • family members moving overseas; and
  • law changes – such as the Trusts Act 2019.

If it has been a while since you last reviewed your estate planning, or if you have had a change in circumstance, we encourage you to speak to a professional about reviewing your wishes. In particular, if you have overseas family members, chat to your lawyers about your estate planning to ensure unnecessary cost and complications are avoided.

AUTHORS

You may also like ...

Gift vs Loan
Due to the rising cost of living and interest rates on mortgages, it is not uncommon for families to advance money to their loved ones to help them on to the property ladder. Due to the natural relationship, these advances usually go undocumented. However, there are several factors that need to be taken into account before making such an advance. If you want to assist your child with a house deposit, you need to ensure the advance is correctly recorded. Are you expecting them to pay you back? If so, is the repayment with or without interest? Or is it a “no strings attached” gift? GiftMoney passed from parent to child is generally regarded as a gift, unless evidence proves otherwise. There is no obligation for a gift to be paid back by the recipient(s). Care needs to be taken where you are gifting money to your child and their spouse, such as to help them into a property. Should that relationship break down, the spouse would not necessarily be required to pay back any portion of the gift, therefore walking away with half of the gifted money. Gifting certificates are often required by a bank where a family member is advancing a portion of the purchase price. This is so the bank isn’t in competition with anyone to get their money back should the loan end up in default. There are ways to record a loan on terms that acceptable to the bank, while also protecting the advance. The document needs to be worded in such a way that doesn’t impede on the banks rights to be “first in line” if the loan defaults. Other considerations include whether this will affect any inheritance you may plan to leave. Are you intending for your child to receive less inheritance than their siblings due to this gift? If so, your Will also needs to be updated accordingly. LoanUnlike a gift, a loan is repayable on terms agreed at the outset. The loan can be interest free (or very low interest) and can be repayable “upon demand” rather than a specified date or loan term. However, as noted above, when banks are involved they will usually not allow a loan with interest or a specified repayment date, as this can affect the banks priority if the loan is defaulted. A loan provides protection in the scenario where you are advancing money to your child and their spouse. If this relationship later breaks down, you can “call up” the loan and have this paid back. You can then re-lend the money to your child once the separation is complete for another purchase, if you choose to. Again, estate planning comes in to play. Is the loan forgiven on your death (assuming it hasn’t already been paid back)? Or is the recipient required to pay back your estate? More considerations are needed when a Trust or other entity is involved, as well as further relationship property aspects not covered here. If you are unsure whether you should be making a gift or a loan, get in touch with us and we can assist you through the process.
Read more
Life interest Wills
In a typical family situation it is common for a couple to leave their entire estate to each other, and for their Wills to provide that after they have both died the family estate will go to their children. This is commonly known as a mirror Will. What if, however, you have children from a previous relationship? You may want to provide for your children in your Will, but also wish to make sure your new partner is looked after. A mirror Will is one option. However, these Wills do not create a legally binding agreement between couples. Either spouse or partner is therefore free to change their Will at any time during their lifetime. While a couple may be comfortable relying on their new partner to provide for their respective children in the surviving spouse or partner’s Will, these Wills frequently result in claims against the estate made by the deceased spouse or partner’s children from a previous relationship. To help avoid such claims and to offer peace of mind, a life interest Will may provide the answer. What is a life interest? In your Will you can grant to somebody a life interest in an asset. This will give that person the right to use that asset for the rest of their life. On their death, the asset will pass to the people named in your Will. A life interest can be a good way to provide for dependents while still ensuring the asset will go the named beneficiaries. A common example is where a person provides a life interest in the family home to a spouse or partner, and once their spouse or partner dies the family home will pass to the Will-maker’s children. Often the couple will own the family home in equal shares. This allows each of them to deal with their 1/2 share in their Will in the way they choose. A person may also provide a life interest in other assets such as funds in a bank account, shares or other investments. As an example, the person’s spouse or partner will have the use of the income generated by such assets during their lifetime, after which the capital remaining can be distributed to the Will-maker’s children. A life interest Will provides a basic level of asset protection. Any assets subject to a life interest will be held by the trustees appointed in the Will and do not legally belong to the person with the benefit of the life interest (such as the surviving spouse or partner). It can therefore provide peace of mind to the Will-maker that all of their loved ones will be looked after. On the other hand, a life interest can be restrictive for the surviving spouse or partner. The surviving spouse or partner effectively loses control over assets that they may have considered to be theirs if they were used by the couple to benefit both of them. Any dealings with the asset will require the trustees of the Will to consent, and will be subject to the terms of the life interest in the Will. A life interest Will can also mean the children may not see their inheritance for many years. Holland Beckett Law is here to discuss your particular circumstances to determine if a life interest Will is right for you.
Read more
Incapacitated Trustee
The Trustee Act 1956 reigned for over 60 years before the Trusts Act 2019 (“the Act”) came into force. The Act aims to simplify Trust-related issues by providing mandatory and default administrative trustee duties. One scenario under the spotlight is the process of removing an incapacitated trustee. Many Trusts that were established in the ‘Trust boom’ around 20 years ago may now be faced with a trustee who is losing capacity. This can be a tricky situation when trustees are trying to deal with Trust assets, especially in a family context. Fortunately, a Court order is no longer needed to remove a trustee. Trustees can now exercise a compulsory removal of a trustee if they lose capacity (s104 of the Act). This can apply regardless of what your Trust Deed specifies, or fails to specify, in respect of removing an incapacitated trustee. It is then the question of who has the power to remove that trustee which is a case of reviewing the Trust Deed together with the Act. Removal of an incapacitated trustee is a compulsory ground of removal available to the Appointer and if the trustee has lost the capacity to perform the functions of a trustee then it would make sense to remove them. Review your Trust Deed first Your Trust Deed may specifically nominate someone with the power to remove trustees. That person may remove a trustee in accordance with their Trust powers or by using s104 of the Act. The Act’s processes may be more suited in some circumstances. If the Trust Deed is silent on the removal of an incapacitated trustee then follow the Act The Act’s process is used to account for the situation that the Trust Deed has not anticipated. In reality this is quite common and a good incentive to review or amend your Trust Deed. The Act states if the nominated person in the Trust Deed is unwilling or unable to remove the incapacitated trustee then the remaining trustees can do so. If there are no remaining trustees or they are unwilling to act, then further individuals may be granted the power to remove. They can include: a property manager appointed under the Protection of Personal and Property Rights Act 1988 to act as manager of the trustee’s property, or; a person holding an enduring power of attorney over the property of the incapacitated trustee, or a liquidator of a corporate trustee that is in liquidation. A medical certificate confirming that the trustee of concern no longer has the capacity to carry out the role of a trustee will form the basis of the documentation required to give effect to the removal. Holland Beckett Law can guide you through this process.
Read more

Start typing and press enter to search

Scroll to Top