Fiona and Clarke had been in a relationship for several years. Clarke had three children from an earlier marriage, and they had one child together.
For the first few years they kept their assets separate and then when they decided that this was going to be forever, they agreed to pool their assets and buy a home together. That extended to eventually a bach in Mangawhai as well.
Clarke was CFO in a large company based in Auckland. When Fiona and Clarke purchased their bach, their lawyer told them it would be a good idea to think about putting their assets into a trust.
He said that because of Clarke’s quasi director role and the fact that he was potentially an officer of the company for health and safety purposes, it was wise to ensure that their assets would be protected in a trust. Even though Clarke had more cash to put into the trust assets and children from a previous relationship, the lawyer said that just one trust between the two of them would be fine. He said that they didn’t need to overcomplicate things.
He also went on to say that the cash going into the trust to purchase the home and bach should be lent to the trust. He said that while we no longer had gift duty in New Zealand, it was best to be conservative and leave the amounts going into the trust owed to each of Fiona and Clarke. He said that this would mean if they separated, they would be able to get their original amounts out of the trust and he wasn’t a big fan of gifting anyway.
Fiona had a nagging thought at the back of her mind that this didn’t seem to be quite right.
She wondered whether she should go and get her own independent advice but didn’t say anything as she really wanted to show unity with Clarke. But she did remember some friends talking about this and saying sometimes with blended families one big joint trust was not always a good way to go.
She also wondered about whether she and Clarke needed to do new wills, but the lawyer didn’t say anything, so she didn’t raise it. Fiona knew that she and Clarke would be marrying soon anyway, and she thought that would change things when they were husband and wife.
Once the estate planning exercise was completed, Fiona was owed $250,000 by the trust, being the equity that she had brought to the relationship and Clarke was owed $1,050,000.
Their wills remained the same and said that if one of them died, the other would receive all the assets and then once they both died Clarke’s children and their joint child would share in all the assets. They had also completed a memorandum of wishes advising the trustees that all assets would be held until they both died and then distributed to all the children equally.
Sadly, not long after the trust was established and after Fiona and Clarke had married, Clarke had a massive heart attack. He was on life support for three days and then passed away. Fiona was devastated but felt a sense of relief that they had addressed their asset planning position before they had got married.
Fiona went to see the lawyer that she and Clarke had gone to. He seemed to be a bit blasé about the whole thing and one of her friends recommended she go and see a lawyer that specialised in asset planning and trusts.
When Fiona went to see the new lawyer, she was horrified to find that when she and Clarke married, by law, their wills become null and void. This meant that Clarke’s will was invalid, and his estate would be governed by the Administration Act.
Fiona was relieved for a moment because all their assets were in the trust, until she remembered that the trust still owed Clarke $1,050,000 because the previous lawyer didn’t agree with gifting. Under the Administration Act this meant that Fiona would be assigned $150,000 of the debt owed by the trust to Clarke as well as 1/3 of the balance and the remaining 2/3 ($600,000) would be owed to Clarke’s children who could demand payment of the debt.
This would mean that the trust would need to sell the bach to pay out Clarke’s children and pay tax on the increase in value given the Bright-line test rules. This was far from the outcome Clarke and Fiona had envisaged when they first went to the lawyer for advice.
It is so important to seek specialist asset planning advice. Often people don’t think that their circumstances are complicated but there may be legal twists and turns that you don’t think of and that a specialist will be able to help you navigate.
DAVENPORTS LAW, 331 Rosedale Road, Level 1, Building 2, Albany, T: 09 883 3284, www.davenportslaw.co.nz
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