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July 05 newsletter

Family Trusts

Trusts have been around for a few years. Apparently, in medieval times, knights put their assets in the hands of a trusted old soul who would ensure that the knight's family was looked after should he come second in a sword fight on his latest tour of duty.

Today, family trusts are formed by people in far less dangerous occupations, but the concept is the same. You (the settlor) give your assets (through a process of gifting) to a trust. The assets are no longer owned by you. Instead, they are now held in trust, by your trustees, for the benefit of the beneficiaries of the trust.

Why would you place your assets in trust?

There are a number of very sound reasons.

  • If you're in business, it offers protection against creditors. It can also offer protection against those who sue you.
  • Your family home and other personal assets can be protected from an aggrieved ex-partner.
  • When the government assesses the level of rest home care subsidies, it will consider your personal assets (of which you don't have any - your assets are now in trust). Future governments may bring in asset testing to determine the level of government superannuation entitlement.
  • It can allow a more orderly approach to passing assets through the family. For example, keeping in the family bach safely in the hands of the family.
  • If incidental to the main purpose(s) of creating the trust, there may be tax advantages. For example, investment income could be distributed to the partner on the lower tax rate.

Costs and Concepts

But there is a cost. Firstly, there is the cost of setting up the trust. Then there are on-going costs, such as managing the gifting process and completing annual accounts, if required.

What is less well understood is that trusts can be busted. You need to understand three important concepts:

  1. You no longer own the assets; they are owned by the trust. You may be one of the trustees, but your obligations are now to beneficiaries of the trust. While it is highly likely that you'll be one of them, you won't be the only one.
  2. There is regular homework that may need to be completed. Perhaps annual reviews need to be held, resolutions documented, or financial accounts prepared.
  3. There is a level of protocol that needs to be followed. A common approach is for a couple to have a third trustee. This trustee needs to be involved in all the decisions of the trust.

Like all major financial decisions, family trusts should be considered, and not undertaken lightly. Please seek advice from your legal adviser as to whether a family trust may be appropriate for your circumstances.

A book we recommend to help in understanding this topic is Family Trusts, A New Zealand Guide, by Martin Hawes.

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