Closing Trusts' equity loopholes
Trusts are popular in Aotearoa New Zealand, but research at Te Herenga Waka—Victoria University of Wellington’s Te Kauhanganui Tātai Ture—Faculty of Law is focusing on how one problematic loophole can be tightened without forgoing their wider benefits.
Trusts are a legal mechanism that enable one person (the settlor) to give the benefits of property to a group of individuals (the beneficiaries), while legal ownership, control, and decisions about the administration of the assets lie with others (trustees).
Common examples are pension schemes, like KiwiSaver, and family trusts, which often hold a home or other assets for the benefit of a family.
Associate Professor Mark Bennett says family trusts are often used to protect people from creditors, minimise tax liabilities, access government benefits, and avoid the Property (Relationships) Act 1976 in the event of a domestic partnership breakdown. While these are simply the consequences of the transfer of property into the trust, this is problematic when the settlor—the party that creates a trust—does not give up a significant amount of their control over and benefits from the property.
“Trusts serve many useful purposes in commercial practice, investment and pensions, and managing family assets. But the settlor can retain so much control through powers and roles within the trust that the property effectively remains under their control and available for their benefit. This means that although the property ‘formally’ no longer belongs to them and cannot be claimed by creditors or former relationship partners, in ‘substance’ the property is theirs,” says Dr Bennett.
But ‘look-through’ mechanisms — which attribute property ownership to individuals who have such excessive control—can catch the inequitable use of settlor-controlled trusts, while allowing the beneficial uses of trusts to remain.
“I have compared New Zealand’s rules with stronger ‘look-through’ mechanisms in other jurisdictions— Australia, Canada, England, and the United States—where if a settlor retains significant control or benefit from trust property, it may be regarded as theirs. What’s important is to calibrate ‘look-through’ mechanisms so that the purposes of, for example, relationship property law, are upheld, but you have not prevented appropriate trust use.”
“...the settlor can retain so much control through powers and roles within the trust that the property effectively remains under their control and available for their benefit.”
Dr Bennett says it is possible to tighten the loophole, but it would be a question for the legislature. “There’s a reluctance in New Zealand to make big changes to trusts because of their popularity. That makes it a controversial topic—as does the complexity of getting the calibration right. But I don’t think that justifies our current weak approach to ‘look-through’.”
With his recent work on illusory trusts being cited in the New Zealand Court of Appeal, and his normative arguments against settlor-controlled trusts discussed in academic journals, Dr Bennett is looking forward to publishing his work on ‘look-through’, and the debates it might generate. He’s eager to talk to trust lawyers about the issue, so get in touch with him if you’re interested.
This article previously appeared in V.Alum 2023.