WHAT IS A FAMILY TRUST & WHY HAVE A TRUST?
Individuals can sometimes find their personal assets threatened by unexpected changes in circumstances. Such threats may include claims by creditors, claims against your estate upon death and relationship break-ups. Creation of a family trust can protect your assets for the benefit of you and your family for years to come.
What is a Family Trust?
A trust is a legal relationship where a trustee holds an interest in your properly for the benefit of you and your family.
When a family trust is formed, you (the "settlor") vest your property and assets in the trust. The trustees then own the trust properly for the benefit of the beneficiaries. The trustees would usually be you and an independent professional trustee.
The "beneficiaries" are the class of people, among whom, the trustees can (at their discretion) decide to distribute the income and capital of the trust. The trustees do not have the discretion to make any such distribution outside of this group of people. In a family trust the main beneficiaries would usually be you, your children and your grandchildren.
The "trust deed" is the document that sets up the legal framework of the trust. It should give the trustees a broad discretion on how they are to distribute the assets of the trust.
A document called a "memorandum of wishes" indicates to the trustees how you, as the settlor of the trust, would like the trust assets to be distributed. The terms of a memorandum of wishes will be similar to what your Will would otherwise say.
Why should I have a Trust?
The main reasons to form a family trust include
- Continuity - The trust can continue to operate after the death of a settlor without any need to wind up the estate or sell any assets to distribute among beneficiaries.
- Asset Protection - Assets in the trust will be safe from creditors (so long as the property has not been settled into the trust with the direct intention of defrauding creditors that exist at the time the transfer is completed).
- Property (Relationships) Act - Generally, assets of the trust will not be at risk in the event of a marriage or de facto break-up. (Except if the property has been transferred so as to defeat the interests of the partner at the time of transfer.)
- Rest Home Subsidies - Assets in a trust may not be taken into account when assessing subsidies. The transfer of assets and the completion of any gutting etc. must be completed five years before any application to Work and Income New Zealand under present policy. Work and Income New Zealand’s present guideline is however under review and it may be that transactions/activities outside the five year period are subsequently scrutinised.
- Income spreading - Income to the trust can be spread among the beneficiaries who may take advantage of their own lower tax rates if they are, for example, spouses earning under the present 33% threshold.
- Tax Efficiencies - There are a number of situations where the existence of a trust provides opportunities for tax efficiencies. These opportunities depend on each individual’s situation and should be considered on a case by case basis.
- Control - A trust can be established in such a way that people do not lose ultimate control of assets or the ability to enjoy the benefit of those assets. For example the settlors can reserve the right to hire and fire the trustees and to wind up the trust and distribute the assets. It is even possible for the settlors to be trustees and also beneficiaries, To avoid scrutiny it is preferable that there are always one or two actively involved independent trustees so that the IRD cannot assert that the trust is purely a tax avoidance mechanism.
- Cost Effective - The cost of winding up your estate on death may be substantially reduced or eliminated altogether.
- Avoid Family Disputes - Family members cannot demand a particular share of family assets.
This information is in general terms and should not be relied upon without taking legal advice particular to each situation.