Trust-busting cases such as Clayton v Clayton, increased trustee obligations as a result of the Trusts Act 2019, onerous Inland Revenue disclosure obligations, and the potential increase in the trustee tax rate to 39%, have left many people pondering the questions of “Do I still need my trust?” and “Have trusts become obsolete?”.

While many of the recent changes have drastically increased the compliance burden associated with trusts, it would be unduly dramatic to declare that trusts are outdated. In fact, trusts continue to offer a range of benefits that make them an essential component of effective asset planning and wealth management strategies. However, determining whether you actually need a trust requires a comprehensive understanding of the benefits and how these may apply to your circumstances. 

Asset protection

Trusts are renowned for their ability to safeguard assets from various risks, including potential claims from creditors, litigants or family disputes. By placing assets in a trust, individuals can create a legal separation between themselves and the assets they seek to protect. While a trust structure does not guarantee protection (as evidenced by the recent trust-busting cases), they can provide a robust shield for assets if the trust is appropriately administered.

While many business owners seek the protections of a corporate structure and the legal separation it can provide, the recent decision in Mitchell v Murphy provides a timely reminder that the corporate veil can be pierced, and business owners can find themselves personally liable. In such cases, a trust structure may provide a helpful defence of last resort against unexpected personal liability. 

Flexibility and control

Trusts offer a great deal of flexibility in managing how trustees and beneficiaries are to behave with respect to trust assets. Given each trust deed can be tailored to the unique circumstances at hand, the settlors are able to provide specific guidance as to how the trust is to operate.

Trusts can be set up with abundant flexibility to adapt to changes in the future (for example, catering to changes in trust’s beneficiaries as a result of blended families) or they can be designed to be rigid (for example, to protect against changes that may disadvantage a vulnerable beneficiary). 

Asset management and wealth preservation

Having a trust can be particularly effective in managing inter-generational wealth or the preservation of specific assets for the benefit of certain individuals or groups of individuals. Trusts can also help avoid bitter family disputes, especially where the settlors’ intentions are clearly documented.

As stated earlier, trust structures can also help protect vulnerable individuals from being taken advantage of financially. Whether it’s an elderly person, someone with a disability or an individual who isn’t ready to manage the family wealth, a trustee can help manage the assets for a period of time in a manner that best caters to the needs of the beneficiaries. 

Privacy and confidentiality

Trusts can also be beneficial in this age where privacy is increasingly eroded. The separation of legal ownership from the beneficial use and enjoyment of assets can help preserve some anonymity. It’s also worth mentioning that a desire to retain privacy does not necessarily correspond to illicit activities (as is often the perception portrayed in the media). The recent Inland Revenue disclosure rules seek to provide IR with better understanding as to who the key parties are within a trust. While certain information requirements are unnecessarily onerous, the general intention has some merit. Tax authorities need to understand who the beneficiaries, trustees and appointors of a trust are, and what they are receiving from trusts. However, this does not mean that friends and family, the media and other strangers should know what you own.  

Tax planning

Despite the proposed increase in the trustee tax rate, trusts can still offer tax advantages when structured and managed appropriately. While there is currently some debate as to where the tax avoidance line should be drawn in the context of beneficiary income distributions, it is unlikely (in the absence of drastic legislative changes) that all of the tax planning opportunities would be removed. It’s worth noting that tax planning and tax avoidance are not the same thing and should not be confused. If the sole motivation behind having a trust is to reduce the overall tax payable, then it’s a good indicator that perhaps a trust structure is not appropriate. 

Conclusion

Despite the increased compliance obligations and myriad legislative changes, trust structures remain relevant in the modern business and financial landscape. However, not everyone requires a trust and the increased compliance burden will likely see the winding up of trusts that have either served their purpose or never really had a purpose in the first place. Any structuring decisions need to be made in the context of the circumstances at hand, but there are still ample benefits to having a trust and they will keep being used by certain individuals and professions.  

Our experts can answer all of your trusteeships and trust administration questions, from their advantages to disadvantages, to whether they’re the right fit for your circumstances. Contact us or scroll down to see our trust specialists if you’d like assistance.