Part 3 - Questions and Answers - What information do trusts and trustees need to know?: Retail Deposit Guarantee Scheme

Questions and Answers#

3.1 Does the Crown guarantee cover a trust?#

Updated 12 Oct 2010

Trusts can be eligible depositors under the terms of the Crown guarantee if they meet the same criteria as other depositors under the guarantee scheme. Depending on the type of trust involved, the eligibility criteria apply to either the trust’s beneficiaries alone or to both the beneficiaries and the trustees:

• If the trust is a bare trust, the eligibility criteria only apply to the beneficiaries of that trust.
• If the trust is a discretionary trust, the eligibility criteria apply to both the beneficiaries and the trustees.

3.2 What is a bare trust?#

Updated 12 Oct 2010

A bare trust is a trust where the only duty of the trustee is to act on the directions of the trust’s beneficiaries. It is intended to cover situations where a person has deposited money with an investment custodian, who then deposits that money on behalf of that person. Although the investment custodian is named in the register of the deposit taking financial institution, it holds the deposit on trust for the client. Provided the investment custodian can act only on the directions of the client (who is the real depositor), it will be a bare trust.

Depositing through an investment custodian doesn’t automatically mean that that person has deposited through a bare trust. The terms of the relationship between the investment custodian and the client determine whether or not it holds deposits on bare trust for the client. These terms are set out in the legal agreements that govern the investment custodian and its relationship with the client, particularly (though not exclusively) the contract the client enters into with the investment custodian.

Investment custodians are not the only form of a bare trust recognised for the purposes of the Crown guarantee. A bare trust will also exist where the trustees of a trust have no discretion over who receives money and in what amount, and no discretion over where the trust deposits its money. This can occur when the terms of the trust direct the trustees to pay a specified amount of money to a named person (for example, in the case of a trust that exists under the terms of a deceased person’s will). It will also occur where the trustees began with a discretion over who to pay and how much to pay, but have since made a decision to pay a specified amount of money to a named person, thereby extinguishing their discretion with regard to that particular money. (The decision need not extinguish the trustees’ wider discretion altogether, just in regard to that particular money.)

Please note: the Crown will not determine whether or not a particular investment custodian is the trustee of a bare trust unless it receives a claim for payment from that investment custodian following the default of a guaranteed deposit taking institution.  It is not possible before a default for the Crown to provide any assurance that a particular investment custodian satisfies the definition of bare trust. Depositors need to obtain their own advice about their investment custodian’s status.

3.3 What is a discretionary trust?#

Updated 12 Oct 2010

All trusts that are not bare trusts are discretionary trusts. More particularly and for the purposes of the Crown guarantees, a discretionary trust is a trust where the trustee has the power to select which beneficiaries benefit from the trust, how and when beneficiaries receive that benefit, and where the trust deposits its money. This describes the normal situation for most trusts. Thus, in most cases, family trusts and charitable trusts are considered discretionary trusts for the purposes of the Crown guarantee.

3.4 How do the eligibility criteria apply to a bare trust?#

Updated 12 Oct 2010

For a bare trust, the eligibility of the trustee is not relevant. All that counts is whether the beneficiaries of the trust are eligible. To the extent that the beneficiaries are eligible, the trustee of the bare trust is itself deemed to be an eligible depositor, holding the deposit on behalf of the beneficiaries.

In practice, this is intended to cover an investment custodian who receives money from many different depositors and then invests that money on their behalf. Provided the custodial arrangement satisfies the definition of a bare trust, the investment custodian is deemed to be eligible under the Crown guarantee when depositing with an entity approved for the Crown guarantee.

If the investment custodian is the trustee of a bare trust, then the standard eligibility criteria will then apply to each depositor who makes their deposits in a guaranteed institution through that investment custodian. This applies to the beneficiaries of any bare trust, not just deposits made through an investment custodian, although this is likely to be the most common example.

3.5 How do the eligibility criteria apply to a discretionary trust?#

Updated 12 Oct 2010

The trust’s eligibility depends on the status of both the trustees and the beneficiaries of the trust:

• With respect to the trustees, every trustee must be eligible in their own right. In this regard, the standard eligibility criteria apply except that, where the Crown so chooses, a trustee may still be eligible even if he or she is neither a New Zealand citizen, nor a New Zealand tax resident, and even if he or she is acting as a trustee for a person who is not eligible (for example, where one of the beneficiaries isn’t eligible).
• With respect to the beneficiaries, if every beneficiary is eligible in their own right, then the trust will also be eligible (assuming the trustee requirements are satisfied). If even one beneficiary is not eligible, then the trust will also not be eligible. However, to provide some flexibility in particular cases, the Crown has the discretion to decide that the trust is eligible, even though some of the beneficiaries may be ineligible in their own right.

When deciding whether or not to extend the benefit of the guarantee to a trust that has one or more beneficiaries who are not eligible, the Crown will have regard to the identity of the beneficiaries and how many of those beneficiaries would have been eligible if they had been able to claim in their own right.

3.6 How do the eligibility criteria apply to a trust that has deposited through an investment custodian (i.e. a trust that has deposited through the trustee of a bare trust)?#

Updated 12 Oct 2010

Two trusts are involved in this situation. The first trust (Trust “A”) is a bare trust between the investment custodian and the trust from whom the deposit originates. The second trust (Trust “B”) is between the trustees of the trust from whom the deposit originates  and the beneficiaries of that trust. Trust B could itself be either a bare trust or a discretionary trust.

Before the trust from whom the deposit originates (Trust “B”) can be eligible, the investment custodian through which it is making that deposit must be eligible. The investment custodian can be eligible only if it receives the trust’s money as the trustee of a bare trust (Trust “A”).

Provided the investment custodian is eligible because a bare trust relationship exists between it and Trust­ B, the eligibility criteria are then applied to the trust from whom the deposit originates (Trust “B”).

• If Trust B is also a bare trust, then its trustees will also be deemed to be eligible, meaning that eligibility will depend solely on whether the beneficiaries of that bare trust (Trust “B”) are themselves eligible under the standard criteria.
• If Trust B is a discretionary trust, then the eligibility criteria apply to both the beneficiaries and the trustees (discussed elsewhere in this section).

3.7 How does the cap on payments work when investments are made through a bare trust (such as through an investment custodian)?#

Updated 12 Oct 2010

The Crown’s liability is capped under the Crown guarantees. Please read question 1.8 for guidance about the maximum amounts payable under the Crown guarantee.

If an investment custodian deposits money with a Crown guaranteed institution on behalf of a client under a bare trust relationship with that client, then each client that is an eligible depositor will be entitled to receive up to the maximum amount payable under the Crown guarantee. The cap does not apply at the level of the investment custodian. The cap applies separately to each of the underlying depositors. Thus, even if a single investment custodian is the registered holder of deposits worth tens of millions of dollars deposited with a single Crown guaranteed financial institution, that investment custodian will be entitled to repayment of the combined total of the amounts payable to each of the underlying depositors, each of whom is entitled to receive up to the maximum.

In contrast, if the investment custodian has not received the money from its clients under a bare trust relationship, then none of its clients will be eligible for repayment under the Crown guarantee.

3.8 Can a trust be eligible if one of its trustees is a professional (such as a lawyer or accountant)?#

Updated 12 Oct 2010

Trustees who are paid for their work as trustee (i.e. professional trustees) are not eligible under the Crown guarantee, because they fall within the wide definition of financial institution. However, trustees who happen to be professionals (such as a lawyer or accountant) are not automatically ineligible.

In certain circumstances, a trustee whose primary job happens to be as an accountant or lawyer, or whose primary job involves providing services in the financial sector, can still be eligible. There is no single test to determine eligibility in these circumstances. A key question in each case will be whether the trustee is being paid to act as trustee. Any trustee who receives a fee for working as a trustee of the relevant trust is ineligible under the Crown guarantee. However, if payments to the relevant trustee are solely to reimburse expenses the trustee has incurred when acting as trustee, that in itself will not make the trustee ineligible. The starting point is the definition of financial institution, which includes:

• 3.8a  any person who carries on the business of providing financial services, to the extent that person is acting in that capacity; and
• 3.8b  a person carrying on business as a sharebroker, an investment adviser or a fund manager, to the extent that person is acting in that capacity.

With regard to 3.8a above, a trustee who is a professional will not be providing financial services solely because of their position as a trustee. Although trustees manage money on behalf of other persons, the Crown does not consider that, as a result, the trustee is carrying on the business of providing financial services, unless the person’s business is to act as a professional trustee. In other words, the relevant trustee would not be eligible if he or she is being paid to work as a trustee, but remains eligible if they work as an accountant, lawyer or other professional, but happen to act as trustee of one or more trusts for their clients.

With regard to 3.8b above, if a trustee happens to work as a sharebroker, an investment adviser or a fund manager, that in itself will not automatically make them ineligible in their role as a trustee. Although their primary employment would make them ineligible as an depositor when acting in their capacity as a sharebroker, investment adviser or fund manager, in the absence of evidence to the contrary, the Crown assumes that a trustee who happens to be an investment adviser is not acting in that capacity in their role as a trustee, meaning they would remain eligible as a trustee. However, if, in the course of their duties as a trustee, the trust pays that trustee to provide services to the trust as an investment adviser, that would make the trustee ineligible.

3.9 How do eligibility criteria apply to charitable trusts?#

Updated 12 Oct 2010

Charitable trusts are not automatically eligible under the Crown guarantee simply by virtue of being charitable trusts. There are no special rules or exceptions for charitable trusts. In general, charitable trusts are treated the same way as other trusts, so the eligibility of both trustees and beneficiaries must be considered.

The eligibility criteria for trustees of charitable trusts apply in the same way as they do for any other trusts, as do the eligibility criteria for beneficiaries (where the charitable trust has any identifiable beneficiaries).

However, because many charitable trusts don’t name particular beneficiaries (or even describe classes of beneficiaries), what will count in these cases is the purposes of the charitable trust, as described in the trust deed (or other founding document).

In general, provided the purposes of the charitable trust do not specifically refer to an ineligible person or group of people, the fact that the proceeds of the trust might happen to benefit an ineligible person will not render the trust as a whole ineligible under the Crown guarantee. For example, if the sole purpose of a charitable trust is to promote the relief of poverty in an overseas country, it will not be eligible under the Crown guarantee, because the charitable purpose for which the trust was established specifically refers to non-New Zealanders (who are not eligible under the standard criteria). In contrast, assuming the trustees are eligible, a charitable trust whose sole purpose is to promote the relief of poverty somewhere in New Zealand will be eligible, even though it’s possible that non-citizens (who won’t be eligible in their own right) might happen to benefit from the trust.

Similarly, a charitable trust whose purpose is to support New Zealand cultural and sporting groups may end up benefitting individuals who are each personally ineligible under the standard criteria, but the fact that these ineligible people might benefit will not prevent the trust from being eligible.

Please note: the Crown will not determine whether or not a particular charitable trust is eligible unless it has received a claim for payment from the trustees of that trust following the default of a financial institution covered by the Crown guarantee scheme. It is not possible before a default for the Crown to provide assurance that a particular charitable trust satisfies the eligibility criteria. Trustees will need to obtain their own advice as to the status of their charitable trust.

3.10 How do the eligibility criteria apply to an incorporated charitable trust?#

Updated 12 Oct 2010

Any charitable trust that has incorporated under the terms of the Charitable Trusts Act 1957 (or under any other statute, such as the Companies Act 1993 or the Incorporated Societies Act 1908) is itself a “person” under the terms of the Crown guarantee.  If that incorporated charitable trust has deposited money with a guaranteed deposit taking institution, its eligibility to make a claim will be determined in the same way as any other person.  In other words, the test is whether the charitable trust as an entity is New Zealand tax resident, a financial institution, a related party or controlled by a related party, or a nominee or trustee for any of the same.

Considerations relating to trusts apply only if the incorporated charitable trust as an entity is a trustee for another person.  In that case, the eligibility of the incorporated charitable trust as a trustee, and the eligibility of the beneficiaries for whom the incorporated charitable trust is acting, will be determined in the manner described in these guidance notes.

When determining whether an incorporated charitable trust is New Zealand tax resident, what counts is whether or not it is tax resident, not whether or not it actually pays tax. Under the Income Tax Act 2007 (Legislation website), an incorporated charitable trust is defined as a “company”; and a “company” is New Zealand resident for the purposes of that Act if;

• it is incorporated in New Zealand; or
• its head office is in New Zealand; or
• its centre of management is in New Zealand; or
• its directors, in their capacity as directors, exercise control of the company in New Zealand, even if the directors’ decision-making also occurs outside New Zealand.