Introduction and scope
Part One of this article addressed the N.Z. tax implications of distributions from foreign inter vivos trusts[1] as set out in IS 25/18: Income Tax – Whether money or property received by New Zealand tax residents from overseas is income from a foreign trust.
In succession, this part explains the circumstances in which distributions to N.Z. tax residents from foreign estates must be treated, for N.Z. tax purposes, as distributions from foreign trusts.[2]
To establish this, what happens to a decedent’s assets from the date of death must be assessed, to establish whether a testamentary trust[3] might be present.
Where a testamentary trust exists for N.Z. tax purposes, distributions from that trust will be classed as distributions from foreign trusts. The implications of this are that the N.Z. tax rules for such transactions are triggered.
The above rules will apply to individuals who meet all the following conditions:
- N.Z. tax residents,
- who are not transitional residents,
- who are in receipt of a distribution of cash and/or property from a foreign estate.
Estates administered in N.Z. – the benchmark
For an estate being administered in N.Z., it is held that any trust from which distributions are made to beneficiaries can arise only once the personal representatives have discharged their legal obligations.
Such obligations include settling the estate’s debts, and reaching a point in the estate administration process called ‘assent’.
At this point the residual is either distributed to the legatees or passed into the hands of trustees. IS 25/18 explains that being an executor is not the same as being a trustee. The two roles are distinguishable, and case law refers to authority as to the time at which an executor becomes a trustee.[4]
Under the law of estate administration in N.Z. personal representatives have the legal and beneficial interest in property passing on the death of a person, but they do not hold the legal interest on a trust under which those ultimately entitled to the property have a beneficial interest.
Such a beneficial interest does not arise, whether for particular property or the residual estate, until the personal representatives have completed their duties in the administration of the estate and in some cases, transitioned to the role of trustee.[5]
To administer an estate in a country with a legal system like that in New Zealand, personal representatives identify the property available for distribution, pay expenses owed by the deceased and then either transfer the property to beneficiaries or vest it in someone acting in the capacity of trustee. Until they have assented to such transfers or vesting, the personal representatives have the legal and beneficial interests in the property which comprises the estate, and no trust arises.[6]
Effectively, the N.Z. tax treatment of a N.Z. estate, where the assets are not distributed to the legatees immediately, is the benchmark against which to identify the same situation occurring with the administration of a foreign estate.
A foreign testamentary trust will need to have the elements of a N.Z. trust present:
- Intention to create a trust or other arrangement mirroring a trust.[7]
- Trustees – there must be a person or persons charged with responsibilities and ownership of property under the trust, or arrangement.
- Certainty of trust property (there must be property capable of being held for the future benefit of beneficiaries).
- Obligations on the trustee(s) to deal with the trust property for the benefit of the beneficiaries.
Estates administrated in civil law countries
Determination of whether the distribution of assets from a foreign estate results in a foreign trust for N.Z. income tax purposes depends mostly on whether the country of the decedent’s estate is subject to civil law, or common law.
Civil law countries are typically European countries including France, Switzerland, and Germany.
Key to the following discussion is that civil law countries don’t recognize trusts. That said, some arrangements might result in what N.Z. recognizes as a foreign trust.
This becomes relevant when assessing whether distributions to legatees who are N.Z. tax residents are taxable.
The assets of a decedent which are being administered in civil law countries pass directly to the heirs immediately upon death in most cases.
It would take an intermediary transaction, where assets in the estate pass to a party other than the final legatee(s), for the future benefit of the legatees, for any such arrangement to be recognized as a trust for N.Z. income tax purposes – provided the four elements mentioned above exist in the arrangement.
Example: Usufruct and Bare Ownership in French Succession
In France, an example of this arrangement would be a “usufruct and bare ownership” structure, where assets are temporarily held by non-legatees (often surviving spouses or parents) before passing to the legatees (typically children) upon a future event like death.
Jean, a French resident, dies leaving behind:
- A will that grants his wife Marie the usufruct of his estate.
- His two children, Luc and Sophie, are named as naked owners (bare owners or “nu-propriétaires”).
What Happens?
- Marie is not a legatee in the strict sense (she doesn’t receive ownership), but she is granted usufruct—the right to use the property and receive income from it (e.g., live in the house, collect rent, use bank interest).
- Luc and Sophie, the legatees, hold bare ownership but cannot use or benefit from the assets until the usufruct ends.
- The usufruct terminates upon Marie’s death (or another specified event), at which point full ownership passes to Luc and Sophie.
This structure is common in France to protect surviving spouses while ensuring children eventually inherit. It’s legally recognized and often used in wills or through lifetime gifts.
Legal basis in french law
- French inheritance law allows this split ownership under the Civil Code.
- It’s often used to comply with forced heirship rules, which protect children’s inheritance rights.
- The arrangement is formalized by a notaire during estate administration, and the division is recorded in the succession deed.
The above example is likely to result in a trust for N.Z. income tax purposes.
Where property vests immediately in the legatee(s) under a will, no trust is otherwise created in a civil law country.
Estates administrated in common law countries
Estates administered in common law countries, including N.Z., Australia, the UK, and the US are being administered in countries with legal systems that recognize trusts.
This can, but not always, result in a trust being recognised for N.Z. tax purposes. Whether this is the case or not becomes a matter of following the sequence of events post death and prior to distribution to the legatee(s) in the will.
Key to this assessment is to distinguish transactions resulting in bare trusts, from transactions resulting in testamentary trusts.
Bare trusts
Sometimes, when an estate is being administered, there can be a delay before vesting of assets in the legatee(s) occurs. This can arise due to practical difficulties in locating a beneficiary, or transferring property to them.
Such circumstances might result in a bare trust. A trustee of a bare trust is obligated to hold the property subject to the direction and control of the beneficiary.
For N.Z. tax purposes, the beneficiary in this scenario is treated as the owner. The transfer of property to the beneficiary is not treated as a taxable distribution under the foreign trust rules. Income from the assets held by the beneficiary will need to be accounted for in N.Z.
Testamentary trusts
In other situations, where an overseas estate is administered to the point of assent, assets can pass not to the legatees, but into the hands of trustees. In some cases, the personal representatives of an estate will change hats to be trustees, once assent has occurred. At that stage the only action remaining is for the personal representative to pass legal title to the beneficiaries of the will (or to a trustee to hold for beneficiaries, who is someone other than the personal representative).[8]
If property passes to trustees, or the personal representatives hold property beyond assent without complicating factors which might create a bare trust, a testamentary trust is likely to be created.
Distributions from that testamentary trust to a N.Z. tax resident, subsequently, will be taxable distributions.
This now completes the discussion around the N.Z. tax treatment of distributions from foreign trusts and foreign estates.
Disclaimer:
The information provided in this blog post reflects current tax laws and regulations as of the date of publication. Readers should consult with a qualified tax professional or monitor official IRD guidance for updates before making any financial or tax-related decisions.
[1] A living trust, where the grantor is alive.
[2] For N.Z. tax purposes, has had no N.Z. tax resident settlor.
[3] legal arrangement established through a will, which comes into effect after the death of the person who created it.
[4] IS25/18 paragraph 107.
[5] IS25/18 paragraph 108.
[6] IS25/18 paragraph 13.
[7] Due to civil law countries not recognizing trusts, the trust might be in the form of an arrangement though not referred to, in that country, as a trust.
[8] IS 25/18 paragraph 118.
