Articles: June - December 2009
December 2009 - Enduring Power of Attorney
November 2009 - Guarantees
October 2009 - “Make Sure You Get It Right”
September 2009 - The Five Star Retirement Dream – just how much will the Government fund?
August 2009 - Changes In Farm Ownership.
July 2009 - Where there's a Will, there's a way.
June 2009 - Successful Succession, Or Not
December 2009 - Enduring Power of Attorney
by Kathryn Williams
If you were suddenly unable to manage your own affairs, who would do so on your behalf? Your spouse? Your de facto partner? Your children? What if you were overseas and decisions needed to be made about your assets?
Unless you have an Enduring Power of Attorney (EPA), the handling of your affairs under such circumstances would be extremely problematic. Close friends and members of your family do not automatically have the right to make decisions for you, so if you want someone to have the authority to make decisions on your behalf when you can’t do so for yourself, you need to arrange for this ahead of time.
There are two types of EPA – one is particular to your financial affairs, and the other relates to your healthcare and welfare.
EPA – Property
This type of EPA deals with how your property is to be managed, if for example, you are incapacitated or unavailable. Under your EPA in relation to property, your attorney can deal with your house and your bank accounts, and will be able to pay bills and deal with service providers (such as WINZ, the IRD, and power and phone companies) on your behalf. You can choose whether this EPA comes into effect straight away or if it is only to come into effect when you lose the ability to manage your own affairs. You can appoint one person to act as your attorney, or you can appoint several people to act together.
EPA – Personal Care and Welfare
This type of EPA allows your attorney to make decisions on your behalf about your healthcare and welfare. Under your EPA in relation to personal care and welfare, your attorney can make decisions about rest home care, your medical care, and can give instructions to your doctor regarding what type of treatment you are to receive. You can only appoint one person as your attorney for your personal care and welfare, and the EPA only becomes effective when you lose the ability to make such decisions for yourself.
In September last year the law in relation to EPAs was changed to try and address concerns over the misuse and financial abuse of EPAs. The changes are designed to give more protection and peace of mind to the donor (the person giving the EPA) and are intended to stop donors being pressured into signing EPAs. The changes include a requirement for the donor to have independent legal advice before making an EPA, and the donor must have their signature witnessed by a lawyer, legal executive or an officer of a trustee company. (The attorney must have their signature witnessed by someone else). The changes also place more responsibility on the attorney and require them to be more accountable for the decisions they make on your behalf.
If you already have EPAs in place, you do not need to change them. However, because of the new protections afforded to donors under the new legislation, you may wish to change them to take advantage of this.
An EPA is just as important as a will, and everyone should consider having both types. If you don’t have them and the worst should occur, decisions about your property and your personal care and welfare will be left to the Family Court.
Because of the recent changes to the law and in particular the new witnessing requirements, it now takes more time, money and effort to get EPAs completed than what it used to. However, the cost of making EPAs will always be less than the cost of having the Family Court involved if you don’t have them and need someone appointed to manage your affairs.
November 2009 - Guarantees
by Bruce Logan
This is a boring subject, unless you’ve just received a demand from your daughter’s bank demanding repayment of a loan you guaranteed for her some years ago and which, due to the recession, she is unable to repay; or, as a joint owner of the family home, you gave a mortgage to the bank to support a guarantee of your husband’s company’s bank loans, and the company has now just gone into liquidation.
When these things happen, the subject of guarantees becomes anything but boring.
Bank’s commonly require guarantees to be signed to provide additional security for loans and mortgages. The extent and nature of the guarantor’s liability depends upon the contract of guarantee. The most common types of guarantee are:
1. All Obligations Guarantee: this includes the original obligation or debt together with any future obligations or borrowing by the borrower. The liability of the guarantor is to pay the final balance owed by the borrower, if called upon to do so.
2. Fix Sum, Term or Transaction Guarantee: the wording of this type of guarantee is specific and refers to one particular term or transaction. Once the term or transaction has been satisfied the obligation is discharged. If the guarantee is for a fixed sum the liability of the guarantor will not exceed that amount.
When a guarantee is given, the creditor or bank will most likely require a mortgage over your home or other property that you own.
As guarantees are not often limited by time or by a particular loan, it is possible that some time after you have given a guarantee for what you thought was a specific purpose, you find you are called upon to honour a debt in respect of a quite different business activity.
Most guarantees provide that the creditor can call on the guarantor to pay the debt in full (if it is due) without requiring payment from the borrower and without exhausting the creditor’s remedies against the borrower.
Avoid guarantees if you can. If you can’t do that, you should at least limit the guarantee to a specific sum, and get as much information as you can about the financial position of the person whose loans are being guaranteed – and get sound legal advice before agreeing to give the guarantee.
October 2009 - “Make Sure You Get It Right”
Brett Gould, Director
It is vital to ensure Clauses included in Farm Sale & Purchase Agreements are clear and technically correct, so disputes can be avoided. Their importance is greater where the property is being purchased with an extended settlement date. For example dairy farms where an Agreement may be signed by both parties in November for settlement at the end of the following May.
Under these circumstances a purchaser is placing his trust in the vendor to competently manage the asset, that is the farm, and if applicable, livestock in a Going Concern transaction, over that period, to ensure it remains well maintained and that all Clauses agreed to in the Sale & Purchase Agreement are adhered to. With the farm being settled immediately prior to the winter, the vendor also has an obligation to ensure that there are adequate reserves on hand to feed livestock over the winter period.
In many cases these provisions are relied on to be adhered to, by the inclusion in Agreements of what is known as the “good husbandry Clause” which states that what is accepted or best practice for the district should apply.
This however is not specific or definite enough for other matters that need to be specified separately.
Maintaining The Assets
Improvements
These need to be in good working order including such things as cowshed and milking plant, effluent system etc and their values specified.
Where there are open drains, if these are to be cleaned and how the cleanings are to be disposed of.
Also relating to forestry specific mention needs to be made of any agreed maintenance programmes such as pruning and/or thinning of the trees and a value of these as a crop should also be included.
Weed Control
This should be specified as to the specific weeds, for example ragwort, nodding thistle, gorse, and the spray program required and agreed to, to control these including the time the chemicals are to be applied, and the weed species to be controlled.
RegrassingOn many farms this is completed in the Autumn as part of a normal farming seasonal activity and applies particularly where cropped areas are to be regrassed. Details could include pasture species, sowing rate and seed quality. In particular a permanent perennial grass should be specified rather than an annual grass.
Some provision may also have to be included for a follow up weed spray after new grass is established, and the grazing management of the new grass areas.
Other matters that can be included in Sale & Purchase Agreements are as follows:
LivestockThese may be included as part of a Going Concern purchase, and if so, such things as an in-calf guarantee, animal health status (eg EBL, TB, dry cow therapy, etc), an agreed rejection rate, and a minimum condition score, need to be included.
It is important that all cows are adequately fed and are in good health and condition, and in calf, at settlement.
Resource ConsentsThese are needed for effluent (stipulated number of cows) and water supply, and a copy of these should preferably be obtained.
The purchaser should know when these expire. Sometimes there can be quite an expense in renewing them, and new conditions can be imposed by the Local Authority.
In summary essential items required, as a possible checklist, which the buyer and seller could be asked for, and mutually agree on, are as follows:
- Farm Map - This should be provided at a specified scale with paddock areas shown.
- Fertilise - Defined areas on the Map, fertiliser type, rate and quantity in tonnes.
- Pasture Cover - Define areas to close at stipulated dates on Map and agreed kilograms of dry matter per hectare. Use of nitrogen fertiliser could also be stipulated.
- Supplementary Feed - Quantity, type and quality of feed to be stipulated.
- Resource Consents - Details to be provided.
- Weed Control Program
- Pasture Improvement Program
- Pre-Settlement Inspections
It should also be recognised that every farm is different and therefore the above can vary between each farm, in both the same, as well as in different geographical locations.
September 2009 - The Five Star Retirement Dream – just how much will the Government fund?
By Julie Olds, Associate
Many people find out all too late that getting older is inevitable. Sooner or later some of us will require the services of a local rest home or private hospital to provide us with care. It is of great concern to many people that their life savings (also known as little Johnny’s inheritance) could be whittled away by months or sometimes years in care.
In all seriousness, it’s worthwhile having an understanding as to what you can expect the government to fund should you or your significant other need the services of an aged care facility.
The basic principle is that everyone in New Zealand is expected to meet the cost of their own residential care as far as is possible. Work and Income New Zealand administers a scheme to provide a subsidy for those who have insufficient assets and income to be able to meet the costs of their own care. The asset limits vary for single persons, couples where one is in long term care, and couples where both are in long term care. In 2009 the asset ceiling is $190,000.00 – in other words, you must have less than this amount to qualify for a subsidy.
The assessment looks at a person’s assets and their income. Assets are treated differently depending on what they are. The family home is considered separately and will not be included as an asset if the individual who owns it is over 65 and has a partner or dependent child living in it. Assets like household furniture are not included, although any boats, caravans or investments usually are. Your home will be included in your asset assessment if you do not have a partner or if both of you are in long term residential care.
The other assessment is on your income. This will be assessed to determine the amount you need to contribute towards the cost of your care (up to a maximum weekly amount). This will include income from the pension, 50% of private superannuation, contributions from relatives and interest on investments, although this list is not exhaustive.
If you or your partner gift assets in the five years prior to you requiring care, these gifts could be considered as part of your financial means assessment. In the five years prior you are currently only allowed to gift $5,500.00 per year to stay within the limitations. If you are gifting to a trust as part of a gifting programme these gifts could be compromised.
For those who are concerned, a family trust is the best protection that we can suggest to clients now, and we encourage clients to set up this structure early on to provide the best assurance when age does finally catch up with them. This may not always be the case though as time and legislation change.
August 2009 - Changes In Farm Ownership
by Brett Gould, Principal
It is interesting to reflect on the changes in discernible trends in farm ownership over the years. In each case the changes can be traced to a change in legislation, taxation policies or prevailing societal attitudes.
Historically, farm titles, as a matter of tradition, were in the names of the males only. The Partnership Act 1908 and graduated taxation rates encouraged the entry into the names of both spouses, either jointly or as tenants in common.
Stamp duty, prior to its removal in 1999, encouraged multiple ownership subject to a controlling interest, to be eligible for the first farm exemption.
The Land Settlement Promotion Act 1952, intended to combat undue aggregation of land in the name of one owner, had an impact with ten man companies used to circumvent the legislation.
Trusts proved popular as a means to avoid death duties (prior to their repeal in 1992) and for the flexibility and protection they can provide. Trading trusts with corporate trustees have achieved only limited acceptance because of uncertainties that arise from their use.
Companies, often in conjunction with trusts, are popular in providing:
- A flat tax rate currently 30c in the $
- Separate control (directors) from ownership (shareholders/managers) and capital growth
- A recognised means to plan for succession
Companies are common when there are two or more separate parties –common for the economies of scale and syndication’s appeal to both existing farmers and city folk. The company structure (commonly with a collateral Shareholders Agreement that provides greater detail and confidentiality) provides defined rules of operation, can mix equity with control by the use of voting and non-voting shares. Any exit by way of share sales in such cases will not usually raise any tax consequences.
In more recent times, following dramatic growth in farm and dairy company share values, many farmers have taken the opportunity to review their affairs and current operating structures.
Some farmers express a wish, as their children grow older and make greater contributions on the farm, to reflect such contributions. This can be achieved by adjusting the levels of ownership or shares in the company and provide children with a defined ownership as against an expectation under a discretionary trust. What is clear is that maintaining ownership in one’s own name can lead to taxation issues on death.
Limited Liability Partnerships are now another ownership option that is preferred particularly by overseas investors familiar with this type of structure.
While there are many benefits in restructuring there are also consequences, especially of a taxation nature with the increase in values of farms and stock. The creation of Forestry Rights prior to sale should also be considered. Often such negative factors can be mitigated, or are outweighed by the benefits of restructuring. Often any such plan will have to be implemented in stages, and the parties’ respective advisors need to work together to ensure that understanding, efficiency and effectiveness prevail.
July 2009 - Where there's a Will, there's a way.
by Kathryn Williams
We all die. We don't know how or when, but one thing's for sure – our property is left behind. We make Wills in the hope our Wills adequately deal with this property. But will they?
In this day and age where people often have more than one partner in their lifetime, a Will on its own won't necessarily do the job we intended. Whilst a current, valid Will is a fundamental tool in our succession planning toolbox, it is not the only useful tool we can use to ensure our property is disposed in the appropriate way. In conjunction with our Will, careful consideration needs to be given to the benefits of entering into a Contracting Out Agreement or forming a Trust.
The Contracting Out Agreement
Under the Property (Relationships) Act, if you're married, in a civil union or have been in a de facto relationship for three years or longer, the presumption is that all assets owned by both parties are split equally if the relationship ends due to separation or death. Many people see this as grossly unfair, especially where one party owns substantially more assets than the other or where one party is trying to protect their assets for children from a former relationship.
Property that can fall into this category includes the family home, the cars, Kiwisaver, life insurance and possibly any other property either of you own at the time the relationship ends.
A Contracting Out Agreement (commonly referred to as a Pre-Nuptial Agreement) allows you to “contract out” of the equal sharing provisions of the Property (Relationships) Act. In the Agreement you can list the property you will keep as your own separate property if the relationship ends (in this case, due to the death of one or both parties). Without a Contracting Out Agreement clearly stating what is separate property and what is relationship property, people in second relationships with children to a former partner could find that on their death, their children and their surviving partner have competing claims to the property disposed of in their Will.
The Trust
Trusts can also be invaluable in keeping your property safe from the provisions of the Property (Relationships) Act. As a general rule, property that is transferred to a Trust is no longer owned by either of you so is no longer in the pool of property that would otherwise be split equally if your relationship ends. Therefore, people sometimes transfer their property to a Trust to try to keep the property unavailable to their partner or potential partner, and to protect it for their children.
However, the situation is not quite so simple. The person transferring the property may still have property in the form of a debt owing by the Trust which could then be subject to the equal sharing provisions. So, before considering the formation of a Trust as part of your succession plan, you should seek professional advice to ensure the Trust will work for you.
Throughout the succession planning process, transparency, communication and careful consideration of all the issues are key. In today's modern world, effective succession planning has become a must, so you can rest easy, knowing the arrangements you have made for your property in your Will will stand the test of time.
June 2009 - Successful Succession, or Not
by Bruce K. Logan
Partner
One-third of NZ marriages end in divorce. Many of the people in those marriages subsequently enter into new de facto relationships, new marriages or civil unions.
A potentially serious problem can arise where those involved do not then make new Wills. Except in the case of a Will made in contemplation of marriage or civil union, when a person enters into a marriage or civil union their existing Will is automatically revoked by the Wills Act.
Even if a person does not enter into a new marriage or civil union, the entry into a new de facto relationship can give rise to serious problems if the person does not make a new Will.
We are aware of at least two situations in the past 12 months where people have died leaving subsequent marriage or de facto partners but without also leaving valid, current Wills. This has lead to unnecessary ill-feeling between family members, and considerable additional expense in the administration of their estates.
If a person does not have a Will, or has a Will that has been automatically revoked, the statutory formula set out in the Administration Act for division of a person’s estate generally applies, regardless of the circumstances. For example, when someone dies intestate (with no valid Will) leaving a spouse or civil union partner, and also leaving children, the Administration Act provides that the surviving spouse or civil union partner is to receive the personal chattels plus the first $120,500.00 in the estate, plus one-third of the remainder of the estate. The other two-thirds of the estate goes to the children in equal shares.
The above is subject to the Property (Relationships) Act which gives the surviving spouse or civil union partner the choice to either:
- Apply to have all relationship property divided between the estate of the deceased and the surviving spouse or civil union partner in accordance with the Property (Relationships) Act; or
- Accept the benefits conferred by the Will, or if there is no Will, the entitlement under the Administration Act.
Wills may become out of date or ineffective in circumstances other than when a new relationship, marriage or civil union is entered into. This can occur, for example:
- If an executor dies or becomes unsuitable due to age or ill health.
- If a beneficiary dies.
- Where a change of name occurs for the testator, a trustee or beneficiary.
- If property specifically bequeathed is sold or otherwise disposed of.
- Where significant changes in property ownership have occurred.
- Where legislation is enacted which may impact on the provisions of a Will.
The consequences imposed by the Wills Act, the Administration Act and the Property (Relationships) Act emphasise the importance of ensuring that people have valid, current and carefully considered Wills. Making a Will requires care, time and skill. A well drafted Will is a valuable document. As such, there should be no expectation of a quick cheap job. When seeing your solicitor regarding a new Will it is important that detailed instructions be given.
Just as it can be tempting to put off having a health check-up, it can also be tempting to put off reviewing and updating your Will. The consequences of both will be painful for those left behind.
Effective succession planning requires that, in many cases, people should not only review their Wills but also have their assets owned by a family trust and/or contract out of the provisions of the Property (Relationships) Act. This is the case now, more so than ever, because of the competing claims of children of a former relationship and those of a surviving second spouse or partner. In next month’s article these themes will be developed further by Kathryn Williams.
