Many countries have forced heirship rules whereby the law dictates the distribution of the estate of the deceased, regardless of any contrary provisions in the will. In some countries gifts made during the deceased’s lifetime can be clawed back into the estate in order to satisfy the forced heirship rules.

A New Zealand foreign trust can be a useful tool in avoiding the application of such rules. A New Zealand foreign trust has an overseas resident settlor who transfers assets to the trust. The assets are held by the trustees on behalf of people chosen by the settlor (this can include the settlor, however, sometimes, for tax and jurisdictional reasons, it is necessary to exclude the settlor from any direct benefit under the trust).

By settling assets on to a New Zealand foreign trust, those assets are likely to be effectively removed from any claim based on forced heirship provisions. Even if a claim could be made, the claim would be against the deceased settlor, which is not likely to assist the advancement of the claim given that the assets would be held in the names of the trustees.

A high degree of privacy is provided to trusts under New Zealand law. Usually the trustee of a foreign trust would be a New Zealand registered company. Although companies are publicly registered in New Zealand, because the shareholders can be nominees this means that, combined with the secrecy surrounding most New Zealand based trusts, that the settlor’s dealings have an added layer of confidentiality and protection.

A New Zealand foreign trust provides an opportunity to pay no tax on income earned outside New Zealand, and it also provides an effective means of ensuring testamentary freedom. 

We have some case studies for you to consider. They are based on actual cases, however, all identifying details have been changed:

Case Study 1

John and Mary were a business couple in their 60s who had worked hard all their lives to afford a nice family home and investments. Their only child, Ethan, was a concern to them. Aged 35, he had been in and out of rehab for drug and mental health issues. He had had a number of de facto relationships. Ethan was unable to hold a job for long and led a transient lifestyle. The one bright note was that Ethan had a son, Jacob, aged 3, from a previous relationship. Jacob’s mother had had issues and, for a time, Jacob had been taken out of her care, however, she had managed to turn her life around and was now doing a good job as a mother.

As good parents, John and Mary wanted to provide for their son but they were concerned that any money given to him would be wasted.

If John and Mary left money to their son under their wills, it is likely that there would be nothing to stop him spending the money as quickly as he wanted on drugs and unsuitable girlfriends. It wouldn’t take much for those girlfriends to have a claim to the inherited money.

If John and Mary left their money by will to an inheritance trust, or something similar, as a way to protect the money from Ethan, Ethan would be able to take a Family Protection Act claim to seek to overturn the will and have the money given to him outright.

John and Mary decided to set up a trust during their lifetimes. They transferred the home and their investments into the trust. Through careful wording of the trust deed they were able to ensure that Ethan’s reasonable needs would be provided for, but that he would have no ability to waste money or to use it to buy drugs. His girlfriends would have no claim on the money either. Because nothing was left via John and Mary’s wills there was nothing for a Family Protection Act claim to be made against. John and Mary were able to securely provide for Jacob - and more fully for Ethan if his situation improved.

The Public Trust offers a product called an “Inheritance Trust”. You set up a trust during your lifetime but property doesn’t get transferred to your trust until after your death.  The Public Trust says that, “An inheritance trust will help your beneficiary enjoy what you leave them, no matter what the future holds.” We consider that this statement may be misleading. 

Property that you leave in your will (whether to a trust or anyone else) can be claimed by a surviving spouse or de factor partner. Anyone who feels that they have not been left what they should have (children and others) can take a Family Protection Act claim against your estate. The end result after these common claims is that very little may be left over for transfer to the inheritance trust. It is far safer to transfer property to a trust during your lifetime. If done correctly there is little likelihood of a claim after your death. If you are seeking to ensure that your beneficiary will really get to enjoy what you leave them, the answer is not an inheritance trust.

Andersen Accountants Limited provides expertise in trust creation and management. Please contact us if you have any questions.