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In Re Jury Family Trusts[1] the High Court was asked to ‘bless’ proposed variations of mirror trusts to avoid significant tax liabilities.
First things first, what are mirror trusts?
Mirror Trusts
Mirror trusts are two trusts which have been set up to achieve a mutual outcome, usually to benefit a couple’s family.
A typical mirror trust scenario involves two trusts established by a couple. The spouse who sets up the trust is not a beneficiary of the trust he or she sets up. Rather, just the couple’s children, grandchildren and the other spouse are appointed as beneficiaries. The arrangements are vice versa for the other spouse’s trust.
Previously, this style of trust structure was used in order to avoid taxes under the Estate and Gift Duties Act 1968, which required for the spouse who set up the trust to not be a beneficiary in order to avoid estate and gift duties when they died.
Estate duty was abolished in 1992 and with that, this type of structure was no longer deployed. However, mirror trusts established before the abolition of estate duty do still remain. The difficulty is that a surviving spouse can only benefit from the trust they did not settle. These funds may not be sufficient for them to enjoy retirement.
Background
Going back to the Re Jury Family Trusts case; the applicants are a married couple, Ian Jury and Debbie Jury. Ian and Debbie share two daughters together, Ashleigh and Kylie. Both daughters are married and have two young children each. Ashleigh had recently separated from her husband and settled all property interests between them.
The trusts involved in this case are two mirror trusts that Ian and Debbie each settled in 1992, being:
- The I K Jury Family Trust (Ian’s Trust); and
- The D L Jury Family Trust (Debbie’s Trust).
The beneficiaries of each trust are:
- Each spouse (i.e. Ian or Debbie);
- Ian and Debbie’s children (i.e. Ashleigh and Kylie); and
- Ian and Debbie’s grandchildren, including any future grandchildren.
If a beneficiary died, their spouse could be substituted as a beneficiary in their place.
Key Feature of Ian’s Trust & Debbie’s Trust
The key feature at issue in relation to both trusts was their vesting dates (i.e., the dates each trust must come to an end and distribute all assets to beneficiaries). The vesting date for each trust was 31 March 2022, which was 30 years after each trust was created.
According to the lawyer trustee of each trust, the 30-year vesting dates had been set in accordance with accounting advice received at the time the trusts were set up. Unfortunately, the exact details of that accounting advice were unavailable to the Court as the relevant legal files were very old and subsequently had been destroyed.
Critically, the vesting date for each trust could not be changed by the trustees as there was no power under each trust deed allowing them to do so.
What Happens if the Trusts Vest on 31 March 2022?
Ian and Debbie submitted to the Court that if the trusts did vest on the expiry of the 30-year vesting period, each trust would incur a $160,000 tax liability and there would be added exposure to personal creditor claims.
Variations Sought
If all beneficiaries consent, a trust can be varied. The Trusts Act 2019 enables the Court to consent to a variation on behalf of children, incapacitated beneficiaries and un-born beneficiaries. There is also a new provision in the Trusts Act which allows the Court to waive the need for the beneficiary to consent to the variation.
To assist the Court with its determination, independent counsel was engaged by the Court to provide expert advice. Incorporating the recommendations of the independent counsel engaged by the Court, some of the key variations sought by Ian and Debbie were:
- Extending the vesting date for both trusts to 2072 (the maximum 125-year lifetime of a trust allowed under the Trusts Act 2019).
- Amending the power of appointment provisions.
- Adding a new power to allow trustees to apply capital and income for the welfare of the discretionary beneficiaries.
- A provision stating that after the death of the first of Ian and Debbie, the survivor will become a discretionary beneficiary of the trust the deceased spouse settled.
- Allowing the settlor to benefit from the trust fund (i.e. essentially removing the key element which makes both trusts classic “mirror trusts”).
- To make the final beneficiaries the settlors’ children and grandchildren.
- To remove ability to substitute in spouses of deceased beneficiaries.
Debbie and Ian stated that these variations would enable each trust to avoid incurring the $160,000 tax liability and creditor asset exposure, as well as update the trust deeds so that they could continue operate in a more efficient, modern way.
Beneficiary Consent
Written consent to the proposed variations was given by all adult beneficiaries of each trust, with the exception of Ashleigh’s husband (who she had separated from). As the grandchildren were minors (under 18 years of age), they could not consent. Of course, it was likewise impossible for unborn beneficiaries to consent.
As a result, the Court was asked by Ian and Debbie to consent to the proposed trust variations on behalf of Ashleigh’s husband, the grandchildren and all unborn future grandchildren.
Court’s Considerations
Nature of the Interests
The first consideration made by the Court was the nature of the interests that would be implicated. The Court stated that the minor grandchildren (Ashleigh and Kylie’s children) and unborn grandchildren were discretionary and contingent final beneficiaries of the trust. Collectively referring to the minor grandchildren and unborn grandchildren as “the minors”, it was their interests, the Court said, that were mainly impacted by Ian and Debbie’s application.
Weighing out the pros and cons, the Court noted that the minors would only benefit directly on the vesting day of each trust if the trustees exercised their discretion in favour of each of them. Further, Ian and Debbie had indicated that if the trusts did vest, they would give the entirety of each trust fund to each other anyway, making the chance the minors would benefit from either trust low.
The variations also would provide powers to pay capital to both Ian and Debbie. The Court said that while this would reduce the size of the trust fund the minors would receive on the vesting day, any new trust set up would likely have the same powers in any event.
Turning to the spouses of children and grandchildren, the Court stated that they could only be interested as potential final beneficiaries, therefore the chance they would be impacted by the variations was also low.
Regarding the variation seeking to remove the trustee’s discretion to substitute spouses of deceased beneficiaries on the vesting day, the Court noted it was arguable that allowing a minor’s spouse to receive from the trust would be in their interests. The Court ultimately sided with the independent counsel’s submission, which was that the modern practice is to generally exclude spouses from inter-generational trust arrangements to protect them against relationship property claims.
After taking into account these considerations, the Court determined that if the trusts vested on the expiry of their respective 30-year lifetimes, the interests of the entire family (but in particular the interests of the minors) would be disadvantaged.
Settlor’s Intention
The second consideration made by the Court was the settlor’s intention. The Court stated that there was no doubt that Ian and Debbie each intended for their trusts to provide asset protection and financial security during their lifetimes, and eventually pass the same benefits to their children and future generations after they had died. The Court agreed that the trust structures in place plainly failed to achieve this intention.
The Court agreed to consent to the variations on behalf of the minors, citing section 124 of the Trusts Act which provides the Court with a power to approve the variation of a trust deed on behalf of beneficiaries who lack capacity, or a person (now or in the future) who might benefit from the trust.
Turning to Ashleigh’s husband, the Court stated that as he was an adult with capacity, section 124 of the Trusts Act could not apply to him, and so the Court had no power to consent to the proposed variations on his behalf. The only possible avenue, it said, was to apply section 125 of the Trusts Act, which allows the Court to waive the requirement of consent.
The Court decided that as Ashleigh and her husband had separated and settled the division of their property interests, there was no real possibility that he could benefit from the trustees of either trust exercising their discretion in his favour. The Court decided the appropriate step would be to exercise its discretionary power to waive the requirement for consent from Ashleigh’s husband under section 125 of the Trusts Act accordingly.
Conclusion
Ian and Debbie’s application was ultimately granted, with the Court agreeing that the tax liability and potential creditor exposure, which would arise if the trusts vested, should be avoided and the necessary consent to the variations was given.
In addition to being a good example of a case where the Court’s ‘blessing’ was required to proposed variations of trust deeds, Re Jury Family Trusts highlights the kind of issues which are likely to become more and more common as older trusts near their vesting dates – where terms that were set based on advice and laws that were relevant at the time, are no longer suitable to achieve a trust’s original purpose.
This case also exhibits that the Court will utilise its discretionary powers under the Trusts Act 2019 to achieve practical, modern outcomes for applicants, and the importance of timely trust reviews from both a trust and accounting perspective.
If you have any questions about this article, please get in touch with our Private Wealth Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
[1] Re Jury Family Trusts [2022] NZHC 568.
