The need to rethink traditional wealth planning in New Zealand

Private wealth management is principally about preserving and enhancing the value of assets for the sustained benefit of current and future generations of a family. There are two key elements to this – investment and structure.

Banks and other financial institutions provide investment expertise in various forms. Nowadays, investors in New Zealand have ready access to world class investment advice, brokerage and management services.

Lawyers and accountants typically provide the second essential service by wrapping up assets in structures intended to protect them from risk. Risk to private wealth can manifest itself in many forms but in a New Zealand context it often arises from:

• Business activities (e.g. creditors and statutory liabilities)
• Family disharmony (e.g. relationship breakdowns and sibling rivalries)
• Fragmentation (e.g. farmland and family businesses)
• ?Death and incapacity of family members
• ?Inflation, taxes, regulations and other economic forces
• Family members who are spendthrifts, have harmful addictions or are financially uninformed
• Lack of cash flow and/or liquidity

Private wealth is typically structured, governed and administered in New Zealand in a manner which is quite unique to this country.

In other countries, trusts are typically utilised by the wealthy or the vulnerable. In New Zealand, family trusts are ubiquitous and it is common for people of quite modest means to hold assets in a trust. Sometimes a family will have several trusts, each of which warehouse a single asset class or only a few assets.

Trusts have become a default setting and, furthermore, it seems to be the norm in New Zealand for trusts to be governed by the very same people who set them up and benefit from them. Often trusts are laden with bank debts (secured and guaranteed by the family) and have only minimal net asset valuations. It is common for family members to reserve powers which give them effective control over the assets.

This is all rather unusual when compared with international best practise.

Many people in New Zealand have assets held in trusts in circumstances where they receive only limited benefit from the arrangements. In many cases the trusts may just add unnecessary complexity and expense to people’s lives. This soon becomes apparent when the family is refinancing, buying and selling property, preparing tax returns or adjusting succession planning settings. Some of these trusts may not withstand scrutiny from the Court because of the way they are set up and/or operated.

Another unique aspect of New Zealand asset planning is the distinct lack of genuine independent governance of trusts and family investment holding entities. Internationally there is an entire industry dedicated to the proper governance of family wealth. In New Zealand, most clients would not contemplate appointing an independent professional trustee who is not also the family lawyer or accountant. A problem with that approach is that the family lawyer or accountant could be conflicted by a long-standing relationship with the people who set up the trust and unaware of, or unable to, fulfil fiduciary duties to the wider family.

Historically, these idiosyncrasies were probably of only academic relevance in New Zealand. However, there are consequences to this way of doing things. Thousands of trusts in New Zealand have been set up by Baby Boomers. These trusts are often now pregnant with substantial wealth which the next generation of the family are or will be keen to get their hands on. It is possible that well advised children of Baby Boomers will scrutinise the decisions of the trustees and may find defects in governance which could lead to legal challenges and, ultimately, transactions being invalidated and trustees being found personally liable. This also presents potential?issues for lenders and other counterparties to transactions with these trusts.

New Zealanders are now starting to enjoy the benefits of private wealth which has been aggregated over several generations. Many new migrants are bringing substantial wealth into our economy. Whilst much emphasis is rightly placed on investment performance, more considered thought needs to be given to ensuring assets are appropriately structured and administered. Often succession planning and asset protection objectives can be achieved through other legal devices such as wills, relationship property agreements, limited liability companies and financial products such as insurance and annuities. Where a trust is appropriate, good governance and administration are critical.