Most practitioners will likely see – and need to grapple with – significant changes to New Zealand’s succession law.
The Te Aka Matua o te Ture | Law Commission has recommended changes, summarised in Report 145 Review of succession law: rights to a person’s property on death. We know the likely shape of these changes but not when they will come into force, or even if the government will accept all the proposals.
This means advisers cannot give clear guidance to clients as to how to respond to these changes. But despite this uncertainty, it is important for advisers to understand that changes are coming, and they need a clear idea of what they will probably look like as there will be significant impacts on their clients’ asset planning.
The proposals also reflect a change in the attitude of the courts and the public to certain asset-planning strategies and issues. Cases like A v D and E Limited as Trustees of the Z Trust already indicate that courts may be willing in certain cases to unwind asset-planning arrangements to ensure people meet familial obligations.
Wealth transfer
It is important to consider the context in which the commission undertook its review. New Zealand is on the cusp of an enormous transfer of wealth from baby boomers to the younger generations which will likely constitute the greatest wealth transfer in history.
Statistics New Zealand data shows 63% of net household wealth was held by individuals aged 55 and over in mid-2018. These individuals will likely transfer to the younger generations, or donate to charity, around $1.15 trillion in wealth during the next few decades.
This massive wealth transfer will have an enormous impact on investment trends, the financial sector and the global economy. It will likely contribute to societal issues, increasing wealth inequality.
The significant increase in wealth in recent years, driven in part by the property market, makes asset-planning more difficult, and often more contentious. The wealthy – and their advisers – are using increasingly sophisticated asset-planning structures to protect their wealth.
This has created issues where, for example, the structures used effectively disinherit family members. Given the increase in wealth, there is more at stake and a greater incentive to challenge the wealth planning of family members. Anecdotally, there has been an increase in trust and estate litigation in recent years.
Further, societal attitudes have changed since our succession laws were drafted in the mid-20th century. There is a much greater diversity of family arrangements, including blended families, multiple concurrent partners and much less social stigma surrounding adoption and separation.
In part, this is due to New Zealand becoming a more secular society. It is also increasingly multi-cultural, with greater recognition of other cultures’ traditional family units. Families are also increasingly global, with family members living around the world.
The commission’s underlying approach to the review was that succession law should be fit for purpose and should represent the values and principles that modern New Zealanders have about concepts of family, fairness and the network of obligations that people have to each other.
Initially, the commission conducted a review of the Property (Relationships) Act 1976 (PRA), which sets out the entitlements of parties to a relationship to the property owned by each and by both of them. The report from that review, Review of the Property (Relationships) Act 1976 (Report 143), proposed the introduction of a new Act governing relationship property law.
Report 143 prompted the government to commission a broader review of succession law, so the reviews of relationship property and succession law could be considered concurrently.
Recommendations
The commission conducted the review and released Report 145 in November 2021. More than 400 pages long, the report makes 140 recommendations, concluding that reform of succession law is needed to produce simple and clear law that reflects the attitudes of contemporary New Zealand.
In summary, the recommendations are:
- to enact a new Inheritance (Claims Against Estates) Act (the ‘new Act’) to replace Part 8 of the PRA, the Family Protection Act 1955 (FPA) and the Law Reform (Testamentary Promises) Act 1949 (TPA), which currently form the body of rules setting out the rights of family and others to the assets of the deceased;
- that the provisions relating to intestacy should be reformed and modernised, but should remain in the Administration Act 1969, which is the key legislation relating to the administration of estates;
- that state law should not determine substantive questions of succession to taonga which instead should be determined by the tikanga of the relevant whanau or hāpu, and that taonga should not be available to meet entitlements and claims under the new Act or intestacy;
- that relationship property entitlements should be dealt with in the same way as other claims under the new Act and that the ‘option A/option B’ election under the PRA should be repealed (under the PRA, a surviving spouse or partner can either elect for a division of relationship property, being ‘option A’, or do nothing and be deemed to accept his or her entitlement under the deceased’s will or the intestacy regime, being ‘option B’);
- that a surviving spouse or partner should keep the gifts made to him or her under the deceased’s will and then be ‘topped up’ to his or her full relationship property entitlement (rather than the current position under the PRA, which is that gifts under a will to a surviving spouse or partner fail if the survivor chooses option A, unless the deceased expresses a contrary intention in the will);
- that spouses or partners should continue to be eligible to claim for family provision where they have insufficient resources to maintain a reasonable, independent standard of living;
- that in relation to family provision claims (replacing claims under the FPA) by children of the deceased, the government should decide whether:
- all children and grandchildren; or
- only those children who are disabled or under the age of 25, should be eligible to claim;
- that a testamentary promise cause of action (replacing claims under the TPA), which would apply only where the claimant has provided substantial work for or services to the deceased, be included in the new Act;
- that other claims arising under common law or in equity should continue to operate outside the new Act;
- that the court should have new anti-avoidance powers to:
- recover property disposed of by the deceased with the intent to defeat an entitlement or claim under the new Act; and
- recover property owned by the deceased jointly as a joint tenant where the property interest has accrued to the surviving owner with the effect of defeating an entitlement or claim;
- that awards under the testamentary promise cause of action should be recovered from the net estate;
- that the court should have powers to make use and occupation orders in relation to certain real estate owned by the deceased or trusts associated with the deceased;
- that adults should have the ability to contract out of estate entitlements and claims;
- that adults should have the ability to settle entitlement or claims disputes without having to resort to the courts;
- that the 12-month limitation period for bringing a claim against an estate remains broadly the same;
- that there should be an express duty on personal representatives to disclose certain information to those who might bring a claim and to disclose all relevant information to the court;
- that affidavit evidence should be preferred in court and that the court should retain a flexible approach to awarding costs; and
- that the law to be applied to the succession of a deceased’s estate should be the law of the deceased’s last habitual residence.
Government priorities
On 15 June 2022 the government issued its response to Report 145. It acknowledges the recommendations contained in the report and accepts, in principle, the necessity of reform. However, it also notes that reform will be a significant undertaking, will take a “period of years” and will need to be balanced against other government priorities.
If ultimately enacted, the new Act would address some fundamental issues with the current law. It would bring together several related issues and claims into one, modern piece of legislation. This would, hopefully, increase clarity and certainty and improve access to the law for interested parties.
There are some issues with the commission’s proposals, and it remains to be seen how they will apply in practice. However, Report 145 largely represents a balancing of property rights and testamentary freedom on one hand, and meeting obligations to family and whānau on the other.
Most limits on testamentary freedom proposed by the commission appear well reasoned and justifiable, although there will be those who disagree.
Given the uncertainty as to when (and even if) the law will change, it is difficult to provide much guidance to clients as to how to take the proposals into account. However, it is important that advisers and their clients are aware that the law will almost certainly change and in a way that may impact how clients wish to structure their affairs.
Once the new Act is in force, it will likely be harder for clients to structure their affairs to avoid obligations to their families. In the meantime, it is the courts that will likely plug any gaps they identify, to ensure justice is done.
Report 145 can be found here.
Silvia McPherson is a partner and Daniel McLaughlin is a senior associate at Dentons Kensington Swan.
Connor Seddon, a solicitor at the same firm, also contributed to this article.
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