Trust Busting: a new Inheritance Act and Property at Death

On 28 May 2022, the New Zealand Herald published an article titled, “Trust busting: Inheritance, divorce law changes mean assets will no longer be safe.” It reported on the New Zealand Law Commission’s “Review of Succession Law Report.” The key question addressed by the Law Commission was: Who has rights to a person’s property on death?

How far-reaching are the proposed changes?

Current laws

A Will maker is free to decide how he or she makes a Will (testamentary freedom). But this freedom is subject to limits imposed by law. The current laws include the Family Protection Act 1955 and the Property (Relationships) Act 1976, Part 8.

A new Inheritance Act

The Law Commission wants the law to be changed.

It has recommended that Parliament enact a new Inheritance Act, which should:

o be simple, clear and accessible; and

o appropriately balance testamentary freedom with obligations to family and whanau; and

o replace the current laws.

Family Provision Awards

The new Act would introduce the concept of “Family Provision Awards”.

Spouses and partners who have not been adequately provided for would be able to bring a Family Provision Claim against the deceased’s estate.

Children: the Commission has left the final decision to Parliament in relation to claims permitted by children, proposing two options; either:

1. Enhancing testamentary freedom so that Will makers are able to make limited or no provision for children over the age of 25 in their Will, but must make adequate provision for children of under 25 years and disabled children; OR

2. Allowing claims for Family Provision Awards by all children of the deceased, including adult children who are financially independent.

The Law Commission appears to prefer a new law with greater testamentary freedom (option 1 above), coupled with more robust protection of such claims (for example, greater ability to access assets for a disabled child who has been cut out of a Will).

Legal teeth

The Law Commission says that the new law needs legal teeth. Where behaviour occurs with “intent to defeat an entitlement or claim under the new Act”, the Law Commission states, “intervention is justified”. It has recommended that in some circumstances, the Courts should have power to restore assets to an estate. For example, if a Will maker could avoid a disabled child’s claim by transferring all assets to a trust, the Will maker could undermine the new Act.

Trust busting?

The NZ Herald article stated that “Trusts may be rendered useless…”. This is likely an exaggeration because there are a huge variety of ways in which trusts are used in estate planning. However, reform in this important area of law makes it imperative that people actively manage Trusts and put in place a robust succession plan.