Background
Family trust established for Kumiko’s house
Kumiko is an elderly Japanese woman. Although Kumiko has lived in New Zealand for many years, English is her second language. Following Kumiko’s divorce from her husband about 15 years ago, Kumiko set up a family trust through a trustee company to protect her home for her children.
Kumiko inherits money
During an annual trust meeting, about 8 years ago, the trustee company’s relationship adviser, Stephen, asked if anything had changed for Kumiko in the last year. Kumiko replied that her father had died leaving her an inheritance. Kumiko had placed the inheritance into a bank investment in her own name.
Kumiko considers transferring inheritance into the trust
Kumiko says Stephen asked her every year if she wanted to place the inheritance investment in the trust. To begin with Kumiko was happy to keep the investment in her own name, but over time she decided she had little need for the money. In 2012, when Stephen asked her if she would like to transfer the investment into the trust she started to think more seriously about the idea.
Conversation about tax implications
At the 2013 annual meeting, of which there are no records, Kumiko says they discussed the possibility in more detail. Kumiko was paying tax on her investment at the 17.5% rate and was aware the top tax rate was 33%. Kumiko said she asked Stephen what the tax rate would be if she transferred the inheritance into the trust and Stephen said the tax rate would remain the same: 17.5%.
At the 2014 annual trust meeting Stephen and Kumiko transferred the inheritance into the trust.
Increased tax obligation discovered
When the trustee company prepared the trust’s tax return it discovered the bank had deducted tax at 17.5%, when the PIE tax rate of 28% should have applied. As a result, the inheritance investment had to be included in the trust’s tax return, and was taxed at the top tax rate of 33%.
Kumiko’s view
Kumiko complained to FSCL that Stephen told her there would be no change to her tax liability if she transferred the inheritance investment into the trust. Kumiko decided to transfer the inheritance back into her name. Kumiko asked the trustee company to refund the difference between tax paid at 17.5% and 33%: $1,257.61. The trustee company did not charge anything to transfer the investment into or out of the trust.
The trustee company’s view
The trustee company did not accept that Stephen recommended Kumiko transfer the investment into the trust or gave any advice about the applicable tax rate. The trustee company considered the bank caused the complaint by deducting tax at 17.5% instead of the PIE 28% rate.
Information from the bank
We contacted the bank for comment. A bank diary note recorded that the trustee company had suggested Kumiko transfer the investment into the trust. The bank explained its role was to make sure the investment selected by Stephen and Kumiko was suitable for the trust. We accepted the bank was not responsible for Kumiko’s loss.
Review
It is always difficult to determine what has been said in a conversation where there are no diary notes. The trustee company’s notes were either non-existent or inadequate, affecting our assessment of its credibility.
Preferred Kumiko’s recollection
We wondered whether Kumiko’s language difficulties may have contributed to her misunderstanding. However, on balance we preferred Kumiko’s advice that she understood Stephen’s advice to be that by transferring the investment into the trust there would be no change to the 17.5% tax rate. We were satisfied that if Kumiko had been told that by transferring the investment into the trust she would be taxed at a higher rate, she would have left the investment in her own name.
We proposed to recommend the trustee company compensate Kumiko for the difference between tax paid at 17.5% and 33% and refund the costs associated with moving the inheritance into and out of the trust ($1,257.06).
Outcome
Kumiko and the trustee company accepted our proposed recommendation and the complaint was resolved.
Our insight
It is very important for all participants to keep complete records of advice given to customers. It would have been very helpful to see a written record of the trustee company’s advice to Kumiko to understand how the misunderstanding came about.
