Family trusts Kapiti Coast Paraparaumu Waikanae Otaki

Family Trusts

Trusts can be set up for different purposes and in different ways.
The most common Trust set up during your lifetime is the “Family Trust”.
Another form of Trust set up during your lifetime is the “Trading Trust’”. This is specifically tailored to hold business asssets in order to ring fence those assets so as not to mix those assets with assets owned by you personally or in your Family Trust - usually your family home and non-business investments.
Trusts can also be set up under your Will and usually where there are under age beneficiaries that is the case.

Do You Really Need a Family Trust? Yes, if:

You own your own business and wish to protect your personal assets from unsecured creditors.
You want to ensure certain assets are protected for future generations.
You are concerned that your assets are protected in case you need rest home care.
You wish to protect property from property relationship claims in the event you or your children get into a relationship which ends.
You have a higher marginal tax rate than is currently applicable to Trustees income then you may, depending on the value of your assets, consider setting up a Family Trust.

What Is The Family Trust?

The first matter you should be aware of is that a Family Trust is not a separate legal entity. Unlike a Company for example, which is created by statute law as a separate legal entity and enjoys a persona of its own and owns assets in the company name, the assets of a Trust are owned by the Trustees of the Family Trust subject however to the beneficial property interests of the beneficiaries named in the Deed of Trust.

Traditionally there are two sets of beneficiaries in the Family Trust. The first set of beneficiaries are “discretionary beneficiaries”. They are beneficiaries who are entitled to be considered by the Trustees to receive capital or income from the Trust fund. These beneficiaries cannot demand that they receive any of those funds.

Usually those discretionary beneficiaries would be you, your children, your grandchildren, any other family members you may wish to include, spouses of you, your children and your grandchildren, any Trusts of family members and any charities.

These beneficiaries may be paid capital and/or income of the Trust fund but neither they, nor any third party (e.g. a Government department) can dictate that they will receive any funds. That is a decision of the Trustees who would usually be you, together with a third party Trustee.

The second set of beneficiaries are “ultimate beneficiaries”. They are beneficiaries who you would, apart from your having set up the Family Trust, have left your real and personal Estate to in your last Will and Testament. These beneficiaries will usually be your children, grandchildren and great grandchildren. These ultimate beneficiaries are absolutely entitled to a share in the Trust fund as at the date of distribution of the Trust fund.

For this reason, once you have set up your Family Trust, it is not easy to change your Deed of Trust to change your ultimate beneficiaries as they have been given an expectation of receiving a share in the Trust fund as at the date of distribution. It is for that reason you need to think very fully and carefully before you nominate who your ultimate beneficiaries in your Family Trust will be.

It may be necessary to apply to a Court of Law to change the ultimate beneficiaries under the Deed of Trust, if you change your mind at a later date.

Parties to a Deed of Family Trust

(a) Settlor
The Settlor can be anybody, but usually you. The Trust fund is usually established by transferring $10 to the Trust fund. Thereafter anybody, but usually you, can transfer property into the Trust fund. Usually this would occur at the date, or soon after the Deed of Trust is signed. If you are seeking protection from possible property relationship claims, property should not be transferred into the Trust fund at the same time as the Trust is established. We can advise you on the reasons for this, should you so desire.

(b) Trustees
The Trustees are the legal owners of the Trust fund being all the property which is transferred into the Trust fund and accumulated from time to time. Usually you would be a Trustee together, preferably, with a third party who may be a family member, friend, or a specially set up Trustee Company. We have such a Company established for your use should it be required.

The reason for a third party Trustee is to bring an independent mind to the running of the Family Trust, so it is not seen as a “sham Trust” or an “alter ego Trust”, which the Courts may decide to strike down as being invalid. You should be aware that asking other family members, or friends, to be Trustees, places a responsibility on those persons as they may be required to sign mortgage or other loan documents which, while limiting their liability to the assets of the Trust, does place a burden on them.

(c) Beneficiaries
The third party to a Trust fund are the beneficiaries, both discretionary and ultimate which have been talked about above.

(d) Appointor
The ultimate power in a Deed of Trust is the person or persons in whom the power to remove and appoint new Trustee is reposed. Usually that would be you. If you and your spouse/partner are setting up a joint Trust the power of dismissal and appointment of Trustees would repose in both of you and a unanimous decision would be required to effect such a dismissal and/or reappointment of Trustee.

Life of a Trust

By law, under the Perpetuities Act, a Trust has a maximum life of 80 years from the date of inception. The Trust can, by earlier resolution, be wound up by the Trustees. This may be on your death or on the death of the survivor of you and your spouse/partner.

It may however be desirable that the Trust is not distributed before the expiry of 80 years. For instance one of the beneficiaries may have a property relationship claim against them and they would not want their share in the Trust fund distributed to them only to see half of it go to a departing spouse/partner.

Property Owned by the Trustees

Property, either personal or real, can be transferred into the Trust by any party. The general rule is that any capital accreting asset, especially real estate, should be transferred into the Trust as soon as possible.

The reason for this is that the Trust, and not the person transferring the asset to the Trust, then receives the benefit of any capital increase in the value of the assets. This equity increase may occur because of the rise of property values or because of mortgage principal being paid off loans advanced against property.

It may not be appropriate to transfer fixed interest investments into the Trust as your marginal tax rate may be lower than the Trustees tax rate of 33%.As these investments are generally not capital accreting their immediate transfer is not essential. The law does not allow property to be transferred into the Trust without consideration being paid for the asset.

As there is no money changing hands from the Trustees of the Family Trust to you, this is dealt with by the Trustees acknowledging a debt to you of the net equity value of the property transferred.

That debt is then forgiven by you to the Trustees of the Family Trust at the rate of $27,000 per year for each person until the debt is fully forgiven over a number of years. A gifting year runs from the date that the first gift is made and subsequent gifts of $27,000 each year are made on the anniversary of that first gift. As a consequence of this arrangement no gift duty becomes payable to the Inland Revenue Department. This is a legitimate and recognised procedure.

If you are a couple and are transferring unequal amounts of property into the Trust it may first be necessary to enter into a Property Relationships Agreement under the Property (Relationships) Act. This agreement allows you to transfer up to 50% of relationship property from one spouse/partner to the other without incurring gift duty in respect of the inequality of the consideration.

In turn this then allows each person to gift that property to the Trust over the same number of years rather than having the spouse/partner transferring the larger value of property taking longer to gift their share of the property to the Trust than the other spouse/partner with the lesser value of property being transferred.

Operation of the Trust

The Trustees of the Trust can own property in the same way as you personally can. They can raise mortgages, sell property and buy new property and own any property you can own in your own name . The Trustees, as noted above, can pay money to the beneficiaries in the form of either capital or income. Any debt which has not been forgiven by you to the Trust can be repaid to you upon demand by you giving notice to the Trustees.

You should be aware that the ultimate purpose of establishing a Trust fund is for the benefit of the ultimate beneficiaries. You should note that the Trustees’ operation of the Trust is governed by the terms of the Deed of Trust and general Trust law, both common law and statute law. Trustees cannot just do anything they want without regard to those requirements.

Claw Back

In certain circumstances the Trust fund may be able to be attacked by the Courts if it can be shown that you established the Trust fund in order to defeat your spouse/partner’s rights under the Property (Relationships) Act, or if you are endeavouring to circumvent rest home subsidy requirements, or you are trying to defeat creditors. Basically the earlier in your life you set up a Trust, the better.

Will

A specialised Will is required if you set up a Family Trust. We can advise you in this respect.

Is a Trust for You?

A Trust does not always fit all circumstances. You assets may be of such a size, or your age may be such, that the establishment of a Family Trust would not achieve your goals. You should consult us to talk about your particular circumstances.

It may be that if a Trust is not suitable to your particular needs, then we many be able to help you establish a last Will and Testament in such a manner that will protect up to 1/2 of your assets (if you are a couple) in case you need rest home care, creditor protection or protection from property relationship claims. Please see the information on Wills on our website under “what you should think about”.