Is a Family Trust the right option for you?

4 February 2016
Several recent experiences and client discussions with their accountants regarding whether to put their properties in Trusts made us think that perhaps we should put something together on this option and how they work. While we won’t go over everything, it is useful to cover some interesting points as to the pros and cons of setting up a Trust and some of the reasons that it needs to be set up and administered correctly. There are three different types of trusts which can be set up for different types of protection.
Family Trusts are the ones that we will focus on here as they are the ones set up for the protection of a family home, investment property and retirement savings. Business and Investments trusts are more specialised and are generally dealt with separately from the assets held in the family trust.
 
What are the reasons to set up a Trust?
 
The first thing to establish is the reason that you want the Trust to be set up. Most people say, “It’s to protect my assets”, but from what? There are three key areas of asset protection that a Trust may be set up for.
1. To separate property from personal assets. This is particularly important to people who own property and have left or are just starting a new relationship. As the property is owned by the trust, the individual no longer owns the asset and it can then be kept separate from relationship property.
2. To reduce the risk of the loss of your home in the event of a business failure.
3. To reduce the risk of loss of your home if you are liable for costs due to legal action.
 
The other reasons often given for the establishment of a trust are to gain taxation benefits and to provide succession planning. 
The decision around Taxation benefits is definitely one that needs to be addressed with the help of an accountant as there can be expensive implications if you structure the allocation of funds incorrectly.
 
Succession planning is probably one of the main reasons that New Zealanders set up trusts. This allows the passing on of family owned property to children and grandchildren without the risk of new partners being able to take a share of any value that is held in the property. While we may think of events such as divorce as being the only reason that the issue of children inheriting the fruits of the parents hard labour comes up for consideration, it should also be remembered that sometimes there are more tragic events that split families. If the thought of your spouse getting their life back together and meeting somebody else after your demise is not bad enough, how about the idea that their new partner will probably have an influence on the decisions that could shape your children’s life in years to come. That’s the reason that any valued adviser putting your trust requirements together will also cover any issues that need to be covered in your will or a separate document called a “memorandum of wishes”. Although not a legally recognized document it gives instructions to the remaining trustees of what you wish to happen after your death or permanent disability. 
 
The structure of the Trust
 
The idea behind the setting up of a Trust is to give control and protection to those setting it up (The Settlor) for the benefit of those who will have access to the assets of the trust at a later date (Beneficiaries). The Trustees who are usually those setting the Trust up along with an independent adviser such as a solicitor or accountant are responsible for the administration of the Trust and its assets. This is often where the structure fails. It is estimated that over 75% of the Trusts currently set up in New Zealand (There are over 200,000 at present) could be challenged and found to be wanting if there were any dispute regarding their validity. It is important therefore to constantly review your Trust details and records and make sure that you have the support of an adviser who has experience in current Trust law. For peace of mind, you need to know that the Trustees are able to effectively manage the requirements of the Trust in order for it to fulfill the requirements it has been set up for. However, it is important that the trustees know the reasons or motivation behind the trust set-up, as we recently had a situation where a client wished to purchase a share of a property with their child and wanted to put their part of the ownership and borrowing into an already established trust. The professional trustee decided this was not in the best interest and refused to sign any documents, meaning that the purchase had to be done under a personal name instead.
 
Nobody can know for certain what the future holds, but the key thing is the importance of not just protecting your assets, but just the same as when we recommend a review of personal insurance, making sure that you have the right protection/cover in place. Speak to your accountant or solicitor to determine whether a Trust may be the right option for you.
 

Published In Whakatane Beacon

This post was written by

John White - who has written 90 posts

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