Opening a Window on Trusts
Are you a trustee or settlor of a trust? Who wants to know? Just about everyone it seems. The Trustees Act 2019 requires trustees to keep track of core records and inform beneficiaries. The Taxation (Income Tax Rate and Other Amendments) Act 2020 introduces a far greater level of transparency for IRD to understand the finances of a trust.
This is a follow-on article from our previous article, An Inconvenient Trust, and enlarges on the new disclosure requirements.
Core Documents to Keep
Every trustee is required to keep a copy of the trust deed and any amendments, at minimum. At least one trustee should also have records:
- To identify trust property, income, expenses, assets and liabilities, accounting records, financial statements.
- Of decisions and contracts made during their trusteeship.
- Documenting appointment, removal, and discharge of trustees.
- Any letter or memorandum of wishes from the settlor, and other administration documents.
- Including those documents passed to them from former trustees.
Trustees cannot rely on leaving the trust records with a trusted professional such as a lawyer or accountant. The new Act firmly establishes that it is the trustees' responsibility to hold and maintain these records.
Information for Beneficiaries
Every adult beneficiary (18 years and over) now has the right be informed that they are beneficiaries of a trustee and some basic trust information so they can hold trustees responsible for good trust management.
The basic trust information is the fact they are a beneficiary, name and contact details of the trustees, the right to request a copy of the terms of the trust or trust information. When a trustee is appointed, removed or retired, the beneficiaries should be informed the details as they occur.
Other trust information must be supplied within a reasonable period of time after the request, but the trustees must decide if it is appropriate to disclose the information and may refuse the request.
As a trustee you would need to consider the degree and extent of the beneficiary's interest in the trust and their likelihood of receiving trust property via distribution in the future. Look at the nature and context of the information request, and what are the settlor's wishes. Relative ages and circumstances of the beneficiaries must be considered and the effect on all beneficiaries, trustees and third parties of giving the information.
This is particularly relevant in regard to family relationships. For instance, the settlor may have stated in her Memorandum of Wishes that she doesn't want her youngest son to get more than $10,000 a year as "he will only spend it all on drugs and booze". This disclosure may cause jealousy or resentment amongst the sibling beneficiaries, so the trustees may choose to withhold disclosure of the Memorandum of Wishes. On the other hand, a degree of transparency may actually help to deal with a particularly difficult beneficiary, who thinks that he is getting left out of the loop.
If the information is personally or commercially confidential, then the trustees can refuse to disclose. For instance, if a beneficiary is an employee of a competing business, then the trustees could refuse to disclose financial data, like gross margins, due to confidentiality. The trustees can also ask beneficiaries to pay reasonable costs for providing the trust information requested.
If you would like a copy of JDW's beneficiary letter template, please email the author.
Information for IRD
The new Trust Disclosure rules for IRD were passed under urgency and without robust consultation in December 2020. In Bill Patterson's view[i], "it seems to reflect a view of officials that trusts are somehow "bad" and are often misused." The Government did not increase the trust income tax rate from 33% when it introduced the top individual marginal tax rate of 39% on 1 April 2021, but IRD has been tasked to brief Government if they notice odd patterns of behaviour around the use of trusts.
For the 2021-2022 income year, trustees will be required to disclose financial accounting information, additional information about loans and related parties, distributions and settlements made during the year.
The format for disclosures has not been finalised yet. We expect the financial accounting information to be similar to the current IR10 return which is used for other entities, a compressed profit and loss statement and balance sheet report. But it could also include transfers to the trust from related persons.
For distributions, trustees will be expected to disclose name, IRD number and date of birth of beneficiaries, for capital distributions as well as revenue distributions. This could have wider tax consequences for non-resident beneficiaries who receive distributions which are taxable in their country or tax residency, as IR will be able to pass on details through tax information exchange agreements.
For settlements on the trust, trustees will be expected to disclose name, IRD number and date of birth of settlors and the amount and nature of the settlement. For the 2021-2022 year, IRD will be looking for details of settlors from prior years.
How are you maintaining your records?
At JDW, we have a document portal in the cloud which holds trust information. Other trustees, keep their information in a shared folder in Google Drive, Dropbox or Sharepoint. If you are using a cloud storage folder, you need to be able to manage security, to give trustees full access, but beneficiaries only get access to files that trustees have allowed them to see. Other trustees keep only paper copies of documents, which helps with controlling who sees the information, but this can make it difficult for sharing across multiple people.
Who to ask for guidance?
Talk with your fellow trustees and your trust's lawyer for dealing with requests for information from beneficiaries. If you can't come to a clear decision, you can apply to the court for a ruling.
Discuss the IRD disclosure requirements with your accountant, and be prepared for them to ask you for more detailed information in next year's tax return questionnaire.
The Trustees Act 2019 and Taxation (Income Tax Rate and Other Amendments) Act 2020 have opened the window on trusts, making it easier for beneficiaries and IRD to see what is going on inside trusts. This can place a larger administrative burden on trustees, but it will also encourage them to look after trust property in their beneficiaries' best interests.
We don't yet know what IRD plans to use all this additional trust information for, but given the wide scope of the disclosures, we can imagine that it may lead to different ways of taxing trust distributions and data matching for related parties. Watch this space.
- Serena Irving
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Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.