Amid the chaos, I also reflected on the broader issue: the growing inter-generational wealth gap, my hypothetical lottery win and what estate management responsibilities I’d face if I hit the jackpot.
The ‘inheritocracy’
Estate planning may not be an option for many, especially as house prices continue to outpace wages, the cost of living crisis rages on and job security becomes increasingly rare.
According to Stats NZ, for the year ending June 2021, the wealthiest 20% of households hold 69% of total household net worth.
The median individual net worth for Baby Boomers peaked at $433,000. Conversely, home ownership among 30-year-olds dropped from 79% in 1991 to 59% in 2018.
Thankfully for some, there’s the Bank of Mum and Dad, which Westpac reported as New Zealand’s sixth-largest lender in 2022, providing financial assistance to nearly half of first-time buyers.
While this perpetuates economic inequality, New Zealand’s wilfully negligent approach to taxing wealth only deepens the inter-generational wealth gap.
In comparison, the UK and US have inheritance taxes that apply to estates over £325,000 in the UK and US$13 million in the US.
In New Zealand, Business and Economic Research estimates $1.11 trillion will be transferred by people over 55 in the next 20 years.
The evolution of trusts
Which brings us to trusts. Trusts have historically been considered a tool for asset protection, estate planning and tax efficiency, providing a safeguard against creditors, personal liability, relationship property claims and future legal disputes.
That is, unless a court says otherwise.
We saw this in lengthy disputes resulting from the collapse of Hanover Finance in 2008, for example.
The Financial Markets Authority sought to hold the director personally liable for leaving investors $500m out of pocket and questioned the legitimacy of the trusts for personal assets he set up before the company’s downfall.
The courts found the trusts to be genuine while confirming their authority to scrutinise trust structures.
It also highlighted the need for trusts to be genuine and properly administered, noting that asset protection strategies involving trusts are not foolproof.
Trusts are great for privacy, insofar as financial affairs are generally under lock and key, unlike wills that become public once probated.
What’s probate, you might ask? It’s the legal process to authenticate, validate and authorise the execution of a will by the High Court.
Trusts bypass this time-consuming and costly process, allowing assets to pass to beneficiaries.
Trusts also allow for continued management of assets, which can be beneficial for vulnerable beneficiaries or youngsters.
And they’re ideal for complex estates with assets (or beneficiaries) in multiple jurisdictions. This scenario is great for lawyers, but not so great for those wanting mum and dad’s hard-earned cash.
NZ no longer the Cayman Islands of the Pacific
New Zealand may once have been considered the Cayman Islands of the inheritance tax-free Pacific, but last week the trustee tax rate increased from 33% to 39% on income retained within most trusts for income exceeding $10,000.
The new tax rate applies to business and investment trusts, too, for those holding rental properties, shares, passive-income-generating assets or business profits at traditionally lower rates.
Meaning, in most cases, it reduces the upper echelons of society in the 39% top income tax bracket from using trusts as a tax shelter of sorts.
It also incentivises trustees to distribute income to beneficiaries, which could benefit those in lower income tax brackets (10.5%-33%).
The changes are part of the IRD’s broader crackdown to prevent abuse of trusts and increase transparency.
Since 2022, under the Taxation (Income Tax Rate and Other Amendments) Act 2020, trustees must disclose more financial details, including assets, income and beneficiary information.
As a result, trusts now face higher compliance costs, including accounting and legal fees, which may make them less appealing for smaller estates.
Trustees now have a fiduciary duty to ensure full compliance with the changes. Failing to do so could result in penalties, audits or legal challenges.
Where does that leave us?
For the “nepo babies” among us, these changes mean you may see trust-related income landing in your bank account. But as the “Great Generational Wealth Handover” unfolds, it also means more to fight over in court.
As for me, I’ll be channelling my energy into making my Powerball dreams a reality, comforted by the fact that trustees will handle the paperwork, the IRD will be watching – and I might finally set fire to those damned receipts.
