Covid 19 Implications for Estate Planning & Wealth Management
The Covid-19 pandemic is causing significant challenge and stress to the economic environment and the imperative to respond and adapt to this event has brought estate planning and trusts back into the spotlight. Of key relevance are:
- Implications of the new Trusts Act;
- Trusts as a creditor protection vehicle; and
- Possible future tax changes.
By now you may have heard of the Trusts Act 2019 due to come into force in January 2021. This law replaces the existing trust legislation and introduces some key changes and requirements which trustees and settlors of trusts must be aware of. A summary of these changes is available here.
Under the Trusts Act beneficiaries will have greater rights to obtain trust information and call trustees to account. The obligation on trustees to disclose information to beneficiaries is placing more demands on trustees to ‘front up’ and be more transparent. This is causing some settlors or trustees to consider reducing the number or classes of beneficiaries able to benefit from the trust. In addition, we are seeing the wind up of some trusts and the creation of more bespoke wills. This needs to be approached with caution as removing a beneficiary is not in their best interests (which the trustees are obliged to take into account).
Trusts continue to play a vital role in mitigating the exposure of family assets to outside or third-party risks and ensuring the wealth which the settlors have accumulated is preserved throughout family generations. Those risks can include business risks such as guarantees to banks, lessors of business premises and the continuing expansion of claims under the Property (Relationships) Act.
The need for trusts to be able to demonstrate independence from the Settlor including good administration practices and thorough documentation of decisions needs to be maintained and is a form of protection in itself.
A result of a downturn in the economy is that creditors may be more inclined to call in their loans or demand repayment This will increase pressure on business and the structure that owns the business. Trusts with business interests should be checked for water tightness in terms of protection from creditors so that unpaid and overdue debts of the business are not sheeted home to the trust or the settlors. Outstanding current accounts or debts back to the settlors and/or beneficiaries should be reviewed and possibly forgiven. This must be done in the correct way and at the right time.
It is also predictable that the New Zealand tax landscape may change for the worse. It is realistically possible that income tax rates or tax brackets will change to pay for the Government’s financial rescue packages. Other impacts on estate planning include the Government potentially widening the capital gains tax net or reintroducing gift duty and estate duty (both currently 0%).
There is no more important time than now to review your personal estate planning and wealth management. This process needs to be responsive, not reactive. Your trust or other asset owning structure needs to be sound and fit for purpose. We would like our clients to be as protected as far as possible for the economic climate we are entering and the new trust law ahead.
Should you wish to discuss any aspect of the above, please contact one of our specialists below.