[OPINION] Four Steps to Preserve your Family’s Wealth and Legacy

By Patrick Gamble, Chief Executive Officer, Perpetual Guardian Group

However, unlike the progressive income tax system for individuals, trusts will continue to be subject to a flat tax rate. From the first dollar to the last, all trust income will be taxed at 39%, even where the beneficiaries are low- or middle-income and would otherwise be paying much lower tax rates.

With an estimated 500,000 trusts in New Zealand, countless people, whether trustees or beneficiaries or both, are affected. Those providing specialist services to trusts and trustees, including lawyers and accountants, are noting they are fielding enquiries from high-income taxpayers regarding alternative avenues including a shift to Portfolio Investment Entities which remain at a maximum tax rate of 28%, casting doubt on the amount of promised increased revenue from trusts that policymakers cited to justify the changes.

Amid this uncertainty, and the inevitable unintended consequences which always arise from changes of this magnitude, including significant negative effects for the everyday middle- and lower-income Kiwis who have established trusts for legitimate and important reasons, there are still solutions and rules that if applied, can help preserve and grow family wealth for generations to come. Here are four:

1.Talk within the family – then talk some more. Many of the issues people come to Perpetual Guardian to help resolve have arisen because of poor communication or misunderstandings about estate planning within families. Though estate planning offers a range of options, almost all people want to leave at least some money to their children, or available for their children’s and grandchildren’s benefit, while taking steps to ensure wealth is not avoidably diluted or wasted by poor financial management.

Take, for example, a couple in their 70s with three adult children: if they bought a large house on a full site in central Auckland in the 1980s, in what is today a well-to-do suburb, the property could be worth in the region of $4 million to $5 million. Combined with other assets they may have a net worth of seven to eight figures – so how should they structure an inheritance?

Answering this question demands open conversations between the couple, their estate planning adviser/s, and their adult children – who, if there is a family trust and they are named as beneficiaries, are already legally entitled to extensive information about the trust’s holdings, in accordance with the Trusts Act 2019.

Given that every family is unique and a broad-brush approach is not ideal, what should be considered regarding this family’s long-term needs?

• Whether the couple wants to grow their wealth beyond their lifetimes, or simply distribute assets for their inheritors to do as they wish.
• Whether the three children have equal needs, or perhaps one is much more financially comfortable or has much greater needs than the others.
• Whether the family has complications or estrangements that may require a role for an independent executor or trustee to minimise further conflict.
• The nature of the wider family structure: whether there are grandchildren, and whether the adult children are married or in long-term partnerships, and whether there are contracting out agreements to delineate individual property from relationship property.
• Whether there is a family business, such as a farm, and one child works in it and is housed on the property, so consideration must be given as to how compensation and benefits are balanced between the children and their respective contributions acknowledged.
• Whether a family trust is an appropriate vehicle to hold some or all of the wealth in perpetuity, and make distributions of specified amounts and frequency, as opposed to lump-sum inheritances.

2.Consider what a family trust has to offer. Many readers of this article are likely already settlors, trustees, and / or beneficiaries of a family trust – and some, in light of the trustee tax changes, may be considering whether they want to retain a trust at all. On that point, experts in the sector have legitimate concerns about knee-jerk decisions by trustees: that in their haste to avoid the 18.2% tax rate increase they risk losing 100% of the protections their trusts were established to create. This could be disastrous, especially for those whose ability to recover from financial loss is lesser.

In short, aside from how favourable or not the tax settings may be at a given time, for those concerned with making wealth last and preventing it from being ‘frittered away’ on activities or possessions which do not enhance value, family trusts can offer a more structured and sophisticated approach than a straightforward distribution from a Will, which can be roughly equivalent to writing a cheque. And the prospect of beneficiaries being free to use large sums of money entirely as they wish may not be a desirable prospect to the Will-maker. Unfortunately, this can be how real wealth disappears by the third generation.

In most scenarios, a well-structured family trust that takes into consideration all the variables is the best way to a) preserve wealth and b) ensure the people who matter most to the trust settlor are taken care of in the long term. Note: “taken care of” does not necessarily mean every individual will get exactly what they want or what they believe they are entitled to, but their needs will be met while the fundamental wealth is managed responsibly so it endures to help the third generation and beyond.

3.Understand how to protect the entitlements of adult children in the event of major life changes. The most important changes regarding family wealth are the birth of children and others marrying into the family. To protect entitlements of adult children it may be appropriate to seek advice on contracting out or prenuptial agreements, to ensure there is full disclosure of assets and legal status, including whether one or both parties are named as beneficiaries of a family trust. This way, in the event of divorce, there will already be a plan for distribution of relationship property and knowledge of what it and isn’t included.

4.Leave a philanthropic legacy. New Zealanders are extremely generous according to global rankings, but most of us have not formalised our giving by establishing vehicles that can support our favoured causes beyond our lifetimes. Those who choose to do so in a low-key way are often referred to as ‘everyday’ philanthropists – people who, once they have ensured their loved ones are taken care of, turn their minds to long-term support of what matters to them outside the family.

Structures such as charitable trusts and bequests in Wills can be set up with the help of a professional adviser. The right advice will ensure that existing wealth is used for maximum benefit and that it is invested to grow long-term for further distributions over time. An adviser may be able to facilitate access to tools from organisations such as the Impact Lab, which measures the impact of philanthropic giving and can calculate the return on investment of every dollar committed. Philanthropists and their supporters have the reward and motivation of seeing exactly how much good their commitment is doing.

Business leader, dealmaker, and lawyer Patrick Gamble is the CEO of the Perpetual Guardian Group, New Zealand’s leading fiduciary services provider and the largest non-Government philanthropy entity, with $2 billion in wealth under management (including $679 million in charitable funds) and supervision of over $4b in total assets. The Group’s four companies, which he was instrumental in bringing together, offer complementary specialist services to support clients at all stages of life: Perpetual Guardian, Perpetual Guardian Investments, New Zealand Trustee Services, and Givealittle.