Mary Holm: Don't let the family trust create a family feud

Conversations about money can be challenging, but that's better than leaving the children to fight it out when you're dead. Photo / Getty Images

COMMENT:

Q: Being recently retired, with savings invested in a family trust, we're concerned whether new trust laws coming in next year mean we will have to tell family members what they will inherit when we die.

Everyone isn't getting the same (or even aware they're getting nothing or anything in some cases) and we're worried the new disclosure requirements will affect our relationships with family and friends.

If we have to tell them everything now and provide investment reports, we're very tempted to leave everything to charity, which would be less stressful but not really what we want to do. Can you explain the changes, please?

A: First, trust and estates lawyer Rhonda Powell says you seem to be confusing trusts and wills.

"Trusts are commonly used as a mechanism of succession planning, but in most — but not all — cases, trusts are ongoing after the settlor dies," says Powell. The settlor is the person who creates and funds a trust — in other words, you two.

"A settlor may have left directions for the trustees in the form of a memorandum of wishes, but this will not be binding on the trustees. For most family trusts, the trustees have complete discretion as to how the trust fund is used for the benefit of the beneficiaries.

"Of course, there are exceptions. The trust could have created fixed entitlements, but that is unusual for a New Zealand family trust."

In other words, the trust assets may not necessarily go to who you want them to go to.

Powell continues, "A will is the mechanism by which a person's own assets (not trust assets) are passed on after their death. Trust assets are not passed on through wills."

Moving on to your concerns, under the new law will you have to tell your heirs what they will inherit?

Powell says trustees will have to tell beneficiaries that they are beneficiaries, the trustees' contact details and that the beneficiaries have a right to request further information from the trustees, including a copy of the trust deed.

However, the new law "does not require the trustees to disclose any memorandum of wishes left by the settlor, or the trustees' plans for distribution of the trust fund".

What about investment reports?

The beneficiaries could ask for the trust's annual financial statements, says Powell. But "the trustees do not necessarily have to disclose this information. The Trusts Act includes a list of factors that the trustees must consider before deciding whether or not to disclose particular information, and this provides some flexibility."

How are you doing? Happy with some of Powell's comments, probably — but not all of them.

I then asked her, "Is there another solution — rather than leaving all the money to charity — such as winding up the trust?"

"It is often possible to wind up a trust early and distribute the trust fund," she says.

"In terms of the settlors' wills, leaving everything to charity and cutting out family members is unlikely to be the best solution. The law recognises a moral duty owed by parents to children to provide for them during their life and after the parents' death.

"If this moral duty has been breached, the children may be able to claim against their parents' estate. Claims against deceased estates are increasingly common. They are also highly divisive and expensive."

Finally, I asked Powell, "Do you have any comments about whether it's wise for a person to not tell family when they plan to leave more to some children than others?"

"In my experience," she replies, "it is preferable for families to plan their succession openly and in discussion with their children. It is better to deal with potential disagreements while they are alive, rather than wait for the children to litigate it between themselves after their death.

"There may be good reasons to treat children unequally. For example, some children may have received additional support during their parents' lives, and some children may have higher needs than others."

Time for you two to do some thinking, and perhaps to make some changes.

Time for a little risk

Q: I'm 24, single, and want to buy a house by the time I'm 30 (ideally sooner!).

I have $24,000 in KiwiSaver and about $10,000 in an online saver account. I can save about $150 a week.

What is the best investment to put that $150 into? Should I put $100 into my saver account and $50 into index funds? Or all into one or the other?

Long-term deposits seem to not have a return that is worth it. Is there an option I am missing?

A: Well done for starting a savings habit young! Many older people wish they had taken the chance to save for a home when they were your age and had no dependants. You're setting yourself up for an easier life.

On where to save, you're in an unusual situation. Normally I don't recommend investing in shares — which is what index funds hold — over periods of less than 10 years. You might be hit by a sharemarket crash with too little time to recover before you spend the money.

Instead, I normally suggest using a medium-risk fund — in or out of KiwiSaver — and switching to a low-risk fund when you're within three years of buying.

But I'm guessing that you could cope with risk.

If you put all your savings in a higher-risk fund and your returns are pretty good — which they will be more often than not — you might be able to buy a modest house even before you're 30. But if the markets struggle for a while, or crash, you could simply delay your purchase.

However, once you start thinking about house hunting, reduce your risk. You don't want to find the house of your dreams and suddenly discover your deposit has halved.

You might as well use KiwiSaver funds for all this, as you can withdraw all but $1000 to buy a first home. Choose from the low-fee providers (see the next Q&A).

You might also be eligible for a KiwiSaver first-home grant of up to $5000 — or $10,000 if you buy a newly built home or land to build on.

Realistic returns?

Q: I'm an AFA (authorised financial adviser) and I don't sell or advise on KiwiSaver. But the other day a client showed me her KiwiSaver statement for March.

As she is in a growth fund, the forecast sum for her at retirement uses a 4.5 per cent annual after-tax, after-fee return, mandated by MBIE. This seems very high.

About 20 per cent of her growth fund is in bonds with an average yield of 1.5 per cent, and her fees are 2.3 per cent a year. So if you work backwards, MBIE is assuming shares return 9 per cent a year, before fees and tax, to get to that 4.5 per cent.

Don't let MBIE tell you that forecast returns are always open to debate. In the short term, share returns are impacted by whether the market gets more or less expensive. But in the long term it is the initial dividend yield that you purchase at, and long-term profit growth, that drives returns.

Most unconflicted experts are forecasting long-term returns from global shares of just 5 to 6 per cent a year, before fees and tax.

I ran the numbers for my client through our KiwiSaver model (aged 24, earning $60,000 a year, and started KiwiSaver last month). I got, using realistic assumptions, a terminal sum of $208,000 in real (inflation-adjusted) terms.

Her KiwiSaver provider is forecasting $285,000, also in real terms, a difference of more than one third.

Given I believe the MBIE numbers are too high, the risk is that KiwiSavers will not be saving nearly enough to achieve their objectives. I calculate that she would need to roughly increase her contributions to about 5 per cent of her salary to get to the MBIE figure.

Any thoughts?

A: Oh dear. Last week a reader was worried that the $253,000 his KiwiSaver provider estimates he will have at retirement will be too little. I hope I comforted him. But now you're saying that these estimates are too high!

Every KiwiSaver provider has to use the same returns when calculating members' balances at 65. MBIE (the Ministry of Business, Innovation and Employment) has set the returns — after fees and tax — at 1.5 per cent for the lowest-risk defensive funds, 2.5 on conservative funds, 3.5 on balanced funds, 4.5 on growth funds and 5.5 on aggressive funds.

"The projected rates of return are based on actuarial advice, making long-term predictions based on past aggregate data," says an MBIE spokesperson.

She adds, "MBIE will periodically review the prescribed rates and update them based on actuarial advice on changes to long-term predictions due to prevailing market conditions."

I'm sure that response won't satisfy you. And you might well turn out to be right — that growth funds grow more slowly than the MBIE rate.

I'm not sure, though, that there's anything sinister going on here.

I would expect KiwiSaver providers to have pushed for a low return, not a high return. That would make estimated retirement savings lower, and perhaps encourage members to increase their savings rates, giving providers more fees.

Anyway, there are several things readers can do if they worry that their returns won't be as high as predicted:

•Invest more riskily. If you don't expect to spend the money for 10 years or more, move to a riskier fund. There'll be more ups and downs, but stick with it and your balance is highly likely to grow more.

•Increase your savings rate. Employees can contribute 3, 4, 6, 8 or 10 per cent of their pay, and everyone can increase contributions directly to their provider.

•Plan to work past 65, so your KiwiSaver contributions keep growing.

•The easiest step of all — move to a low-fee provider. The KiwiSaver Fund Finder on sorted.org.nz ranks funds by fees.

Our correspondent's client pays 2.3 per cent in fees — the highest of any growth fund in the Fund Finder. The lowest fee is 0.35 per cent. If you use one of the low-fee funds, that should make a huge difference to your retirement total.

NZ Super is enough

Q: I read with interest the correspondence on "how much is enough" to retire on. It seems some people expect to live in a way that exceeds most of us during our working lives!

A major key is home ownership, of course. Without that or a comfortable motor home, perhaps, all bets are off.

At 85, with a debt-free house and by myself in Auckland, I find that NZ Super covers my everyday costs including rates and car, with a very small other income to handle any extras — but that's often added to a modest nest egg.

Until my wife and best friend died, we largely roamed the world for about 16 years. Yes, this cost a lot, but was worth every penny, and when better to do so than when we could?

Now I know I can live comfortably and securely, if not extravagantly, on little more than Super.

A: Thanks for confirming what others say — that NZ Super is enough later in retirement.

You're also encouraging people to spend on travel earlier in retirement. That might worry some people. What if they need more money than expected later on — perhaps for extra medical care or major house repairs?

But, as discussed last week, if you have a mortgage-free home, a reverse mortgage could cover that. There's a lot to be said for travelling while the sun shines — Covid permitting, of course!

Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.