Bob’s wife, Nancy, died two years ago. Bob and Nancy had run a successful interior design company which they had sold twenty years ago.
The sale proceeds of the business were invested in a share portfolio which was owned by their family trust. The trust also owned their family home and a bach on the Coromandel where their extended family liked to holiday. Bob didn’t go down to the bach as often now that Nancy had died, but still enjoyed going there over the Christmas break with his children, grandchildren and the various friends who always turned up.
Bob was seriously thinking about selling the family home and moving into a retirement village. He was finding that the maintenance on his family home was getting a bit much for him and he liked the idea of being in an easy care villa as part of a village community. He was also wanting to simplify his affairs. He and Nancy had set the trust up when they were in business, and it had done a great job over the years, not only protecting their assets, but also providing tax efficiency.
They had used the trust to their advantage, allocating income from the trust to their children while they were at university at their children’s lower tax rates to help pay for the university fees. Each year their accountant had helped the trustees decide how best to allocate the trust’s income to achieve the best tax outcome.
However, the new IRD disclosure rules coupled with the increasing requirements for trustees to be vigilant with their meetings, resolutions and record keeping, meant that Bob was seriously considering winding up the family trust. Under the new IRD disclosure rules, all trusts that earn over $200 income per annum have additional disclosure they have to provide to the IRD with their tax return. This information includes the details of anyone who has settled assets onto a trust and also the details of any beneficiaries who receive a capital distribution from the trust.
Bob went to see his lawyer about winding the trust up. She advised that winding the trust up can be a straight forward exercise, particularly given that Bob’s children, who were also beneficiaries of the trust, were supportive of the winding up of the trust, but she did flag that there could be some potential tax issues in relation to the bach.
If the trust was wound up and the bach was put into Bob’s name, that would re-set the bright-line period. This would mean that if Bob decided to sell the bach within the next ten years (even though the trust had already owned it for twenty years), then he would have to pay tax on any capital gain from the time of the winding up of the trust to the sale of the property.
His lawyer explained that if Bob had owned the bach first and then transferred it to the trust, then there are “rollover relief” rules which would mean that the transfer of the bach back to Bob on the winding up of the trust would not attract the bright-line rules. But that wasn’t the case here. Bob and Nancy’s trust had purchased the bach so the rollover relief wouldn’t apply. Bob’s lawyer said that the rules were very complex and recommended that he get advice from his accountant in any event.
Bob got the advice from his accountant and what his lawyer had said was correct. If the bach was distributed to him and he then sold it within ten years he would be taxed on the gain. As Bob wasn’t sure if he would continue to keep the bach for the next ten years, he decided with the help of his lawyer, to distribute the family home and the investment portfolio to himself and retain the trust with just the bach in it.
This did simplify things for Bob in many ways, as the trust no longer had to furnish a tax return which cut a lot of compliance and costs for Bob.
Whenever you are dealing with transferring assets in or out of a trust, it is so important to consider the tax consequences. It is also important that your accountant and lawyer work together as a team to get the best result for you and that you take specialty advice where you need to.
DAVENPORTS LAW, 331 Rosedale Road, Level 1, Building 2, Albany, T: 09 883 3284, www.davenportslaw.co.nz
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