United States Trusts and Inbound NZ Residents

US citizens who migrate to New Zealand often have in place a US trust.

Typically these US trusts are established to avoid having to obtain a grant of probate on the death of one of the individuals.

The terms of the US trusts vary considerably and are distinctly unlike common NZ discretionary trusts.

Some US family trusts include the power for the trustor (settlor) to “withdraw” from the trust some or all of the property they settled on the trust.

Other US trusts allow the “grantor” to revoke the trust in whole or part, during their lifetime.

Many of the trusts then act rather like a will in determining life interests and beneficiary entitlements for children and grandchildren.

Some question whether such a trust is a valid trust for NZ purposes and a careful analysis of the terms of the trust deed and the powers reserved to the settlor is required in some cases. If the arrangement does not satisfy trust law requirements, the likely position is the investments will belong to the settlors themselves, and the tax treatment will be quite different.

Assuming the trust is a valid trust for NZ law purposes, from a NZ tax perspective if the settlors will acquire NZ tax residency it is important that the tax status of trust is addressed, as otherwise some very unpalatable tax implications can arise for future distributions received by NZ beneficiaries. For example, if the trust at some later stage became classified as a non-complying trust, any taxable distributions to NZ resident beneficiaries are taxed at a punitive rate of 45%. This can apply to capital gains, and to accumulated income that has already been taxed once.

There is an ability for NZ settlors/trustees to bring such foreign trusts onshore by electing the trust to be a complying trust, the benefit being that distributions that comprise accumulated income or capital gains are not taxable. There is a date by which the election has to be made, and if it is missed, there is no ability for Inland Revenue to accept a late election, and the non-complying status will apply.

There is an exhaustive list of questions to ask and information to seek from NZ bound settlors and their US advisers. Once that has been compiled, you will need to work with us to carefully assess the options and determine what steps should be undertaken to achieve the best possible tax position for the time being and for future distributions.

If you need any assistance with either the technical or practical aspects please feel free to contact Alliotts in Auckland on +64 9 520 9200.

Source nsaTax TaxBrief