What Benefits Would A Family Trust Have For Me? 09 Dec 2011
Parry Field Lawyers provide legal advice on a range of trust matters including entry into and operation of family trusts and charitable trusts.
What is a Trust?
A trust is a legal obligation created when a person (the settlor) gives assets into the control of another person (the trustee) for the benefit of a further third person (the beneficiary).
Those assets (the trust fund) are kept separate and do not personally belong to the trustee but are held in the name of the trustee. The trustee has the power and the duty to dispose of those assets in accordance with the terms of the Trust document (trust deed) and any duties placed upon the trustee by law. Usually the exercise of powers by the trustee is in their absolute discretion.
A trust deed is a legal document which sets out all the rules and powers for the running of that trust.
How does a Trust Operate?
- You can be a settlor. As a settlor, you may also be one of the trustees, but there are risks in that and it is not the safest decision.
- We recommend additional independent trustee(s), who are not beneficiaries of the trust. In some cases this will not be essential. Trustees must be unanimous in all decisions unless otherwise provided in the trust deed.It's not enough just to obtain consent of independent trustees after the decision is made. An independent trustee must not be treated as a 'rubber stamp'.
- You may be a beneficiary. There are sliding scales of risks if you are also a settlor and/or a trustee.
- You can decide the classes of initial potential beneficiaries.
- Trustees may later share the decisions to add new beneficiaries or take away existing ones, if those powers are needed.
- Trustees may share the power to choose which beneficiaries will receive either income or capital, and when during the term of the trust. It is flexible.
- You can decide when the Trust will wind up. By law the trust can exist for a maximum term of 80 years.
- You can advise future trustees your wishes for the trust beyond your death by a confidential list of wishes. This is not legally enforceable. however and may be later obtained by beneficiaries.
- You need professional help to ensure:(a) Proper trust administration(b) Yearly accounts and tax returns(c) Proper minute book recording of trustee meetings and decisions(d) Proper exercise by trustees of discretions(e) Proper records including cash book, asset schedule, beneficiary details(f) Proper advice for investment decision reasons
- Administration is the weak link in many family trust structures. Often, once they are created they are simply left to look after themselves.
Benefits may flow from your loss of ownership but retention of some degree of influence over assets and the beneficiaries. In law, the trustees hold legal ownership and the beneficiaries hold equitable ownership.
Essential: How assets are transferred and the method of transfer. Technical rules also apply to each of the following benefits so you must focus on the prime objective of the trust right at the beginning. This affects the specific drafting of your trust deed. One size does not fit all.
1. Estate/Death Duty Protection
Estate duty was zero rated in 1992 and then abolished in 1999. However, up until then trusts were a proven method of protection against estate duty. Technical rules will probably resurface if a government decides to reinstate Estate Duty. You need a long term plan if this is a concern of yours.
2. Family Claims Against your Estate After your Death
You may have strong reasons not to treat some family members equally after your death. However, your last Will can effectively be changed by the Court under various Acts. Further, developments in the law affecting competing interests of your surviving spouse and children are likely in the future and these may make inroads into your freedom to leave your estate as you wish. Trust ownership of assets can reduce the effect of such claims because the assets are not owned by you (your estate), but your trust, on your death.
3. Business Failure
Protecting assets from creditors is difficult to achieve due to technical rules in the Insolvency Act and also the timing of transfer to a trust. The Official Assignee or Creditor can set aside arrangements which had an intention to avoid creditors. Like most reasons for establishing a trust, they are better before the needs actually arise. Start early before there is any financial concern.
4. Matrimonial And De Facto Property Claims
The Matrimonial Property Act (now the Property (Relationships) Act) itself provides the best protection by way of written Agreement with your partner before problems arise. A Trust can help before marriage or before a de facto relationship commences (especially in second marriage situations) to minimise access to assets by a future spouse and help protect them for, say, your own children. However, there are various statutes which can allow a Court to attack such a Trust. Case law is still developing in this area, also.
5. Income Splitting for Family
Tax avoidance is not advisable or workable as the sole reason to set up a trust. However, often, an incidental result of a trust owning income earning assets is better tax efficiency for the family as a whole. This results from an ability for trustees to spread income to family members taxable at their own (lower) tax rates. Income earned by the Trust can be distributed say to a spouse or children over 16 years of age within certain time frames. Instead of the trustees paying tax at 33%, or a settlor personally paying 33%, the particular beneficiary's tax rate applies e.g. 19.5.%. The income must be used to meet the needs which are beyond legal parental obligations, e.g. private school fees, tuition fees.
6. Investment Properties - Deductibility of Interest
A Trust can help with refinancing structures to maximise borrowings on a profitable investment property and so repay borrowings on personal property (the interest on which is not deductible). This could be subject to attack by the general anti-avoidance provisions in the Income Tax Act but the method is commonly used. You can also use a loss qualifying company (LAQC) to better advantage if the investment is not making a profit. Advice before the purchase is best.
7. Rest Home Subsidies & Asset Testing
Rest home and Hospital care subsidies are discretionary payments. There are anti-avoidance provisions in New Zealand's Social Security Act to prevent the sale or gifting of assets to trusts or family Government benefits being obtained. However, current policy application (which differs from what legislation says and is subject to 'overnight' change ) is that provided that the sale and gifting programmes to trusts have been completed for over 5 years, then the assets may be regarded as outside the net of those to be taken account of in some asset tests. This area is subject to so much political change that an asset plan for this purpose alone needs to be considered carefully and fully discussed before this objective is decided upon. In the right circumstances a trust can only, at best, improve your chances of entitlement to Government support but like tax efficiency, it should be regarded as a potential incidental benefit only.This is just a very brief and general outline of some benefits of Trusts which have become relevant over the past decade. Each particular matter is subject to technical rules. There is no general application i.e. one size (trust plan) does not fit all.
The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations.