What is a family trust? – Why have one? – asset protection and estate management - the Trust Deed –
Settlors, trustees and beneficiaries – Transfer of assets – Trustee lending, trust debt and gifting –
What asset and estate protection documents are we talking about? –
Act now to manage your asset protection and estate planning needs while there are “blue skies.”
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What is a family trust? Family trusts are designed to protect your assets during your lifetime and benefit members of our family beyond your lifetime. They work on the principle that “If I don’t own the asset, they can’t take it off me.”
The assets you choose are transferred to the trust for the benefit of the beneficiaries.
Why have a family trust? Trusts are a popular way of protecting property and managing assets.
For most people the main purpose of a family trust is to protect your family’s assets and wealth against risk.
The main reasons for a family trust are asset protection and estate planning.
These reasons include:
- To protect assets against business risk for family members – by transferring some assets to a trust, a settlor may be able to undertake a higher risk occupation or venture knowing that those assets receive protection from business risks - professional liability claims, unexpected business debts or financial disaster.
- To protect assets from personal risk to your benefit and that of your family.
- To protect assets in a second marriage/relationship situation and/or relationship breakdown.
- To provide for special family needs, such as a child’s future education or a child with a disability.
- To ensure certain assets e.g. a family business or farm – are transferred intact to the next generation without exposing inheritances to relationship property or other claims.
- To make sure some assets are retained for other family members when one or more members need rest home or hospital care.
It may protect against income and asset testing when applying for a government benefit such as a residential care subsidy.
- To protect family members or a family business from possible property or family protection (contesting a will) claims.
- To manage the assets of someone who is unable to manage their own affairs, perhaps through age or infirmity.
- To assist with estate administration by transferring assets to a trust before death.
- To assist with tax minimisation in some circumstances. It may defer tax liability for a future capital gains tax or death taxes. More or less tax may be payable. Tax liability should be reviewed regularly.
- To maintain confidentiality about your financial affairs.
- To give to the community through a charitable trust.
The trust deed:
A family trust is generally created by a document called a trust deed. There are other ways such as a will or by statutory powers e.g. Public Trust- but we are not concerned about these here.
Settlors – Trustees and Beneficiaries:
The person/s named as settlor/s then transfer property into the trust formed by the trust deed.
Often the initial transfer is say $10.00 to get things started, with say a family home, other assets, shares and money transferred later.
The settlor/s transfer ownership into the control of trustee/s. The trustees are obliged by law to use the property for the purposes that the settlor has specified. One such purpose is to hold assets and to make payments from the trust property to people called beneficiaries.
You may be a settlor, a trustee and a beneficiary. There can a single settlor (but often 2), a single trustee (preferably 2 for continuity and mutual decisions - one of whom could be a trustee company), and there must be at least 2 beneficiaries (one can be a charity).
Parent/s are often the principal primary beneficiaries during their lifetime/s and their children also named as primary beneficiaries. They can benefit at the discretion of the settlor/s/trustee/s during the parent/s lifetime/s and upon the death of the surviving parent.
Extended family such as the settlor/s parents, brothers and sisters and the settlor/s grandchildren may often be secondary beneficiaries taking assets only after the death/s of all the primary beneficiaries.
But there is no hard and fast rule here. It depends the settlor/s appointments in their trust deed or a later deed of appointment, their will/s and memoranda of wishes to the trustee/s and the powers given to the trustee/s in the trust deed.
Transfer of assets:
You decide what assets you should put in the family trust, and what their value is. In many cases this will be the family home, but other things of value like cash, bank deposits, shares, artwork, things of sentimental value etc can also be included in the trust.
Trustee/s lending, trust debt and gifting:
The family home - for example - is sold into the trust but the trust initially has no money to buy it.
How then does the family trust pay for the house? The answer to this is that you lend the family trust the money.
Initially this is a ‘paper’ transaction – you sell the house to the trust, and the trust now owes you a house-sized debt.
But the debt that the trust owes the settlor/s is still counted as their personal asset.
The settlor/s will need to get rid of the debt so you can achieve your aim of owning less in our name.
The way we do this is through ‘gifting’. Most people who form trusts ‘gift’ away the debt that the trust owes them.
Before October 2011 there was a limit of $27,000 that we could gift in one year without paying a tax called ‘gift duty’ to Inland Revenue.
But since October 2011 gift duty is abolished and there is no limit to how much we can gift in one year.
You are free to “gift the lot” right away if you wish, so that your loan to the trust and the debt owed to you by the trust is extinguished.
The trust is richer, but you are poorer, so you achieve “asset protection” because you do not own it.
The beneficiaries do, and that is you along with those you have appointed as primary beneficiaries.
As principal primary beneficiary you can still live in the family home and as settlor and trustee you are free to sell and replace the home if you wish and to take capital and income from the trust fund as a beneficiary. You still have some control over and benefit from the trust assets.
There are thousands of family trusts in New Zealand, but you may not need one. Before deciding, you must weigh up the advantages and disadvantages. You need advice specific to your needs and aspirations.
What asset and estate protection documents are we talking about?
A bare trust deed alone does not protect you fully.
You should have surrounding documents to form part of a full asset protection plan.
The trust deed contains a wide variety of powers, so the trustee/s can do what you can do separately as an individual.
It has important powers such as has the power to appoint and remove trustees.
Note that a trust doesn’t usually end with your death – it can last for a maximum of 80 years from inception, but this is likely to be extended in the future.
Documents will include the family trust deed, a special will for each settlor tailored to the trust deed, a memorandum of your wishes as to who gets what assets and money, enduring powers of attorney as to your care/welfare and your property matters,
perhaps a relationship property agreement, documents resulting from decisions regarding what assets the trust should own,
documents resulting from decisions regarding gifting of assets to your trust such as deeds of acknowledgement of debt and
deeds of forgiveness of debt, consideration of whether you should have life insurance in place,
a tax number for the trust (although you may be exempt from tax if there are no income producing assets in the trust e.g. the family home),
a directory of settlors, trustees, beneficiaries and advisors, and a set of fill-out registers and commonly used trust minutes for the management of the trust.
Want to know more?
It is well worth the time you take to decide whether a family trust is for you.
You have nothing to lose except a little time to make an informed decision.
Phone us. Find out more. Plan to succeed in life. Plan to avoid trouble. Don’t let trouble plan for you.
Act sooner rather than later.
In business, form a family trust when there are “blue skies.”
It may be too late to avoid the claims of creditors when your business is in trouble.
The courts can claw back assets from a trust deliberately set up to avoid the legitimate claims of creditors.
In your personal life, plan ahead. Look at the list of advantages above. Do you fit into one or more of these? A trust is one management tool to plan for your future. Take action now. Bad things do happen to good people.
Better to plan ahead and discuss your options with us now to put your mind at ease.
Free initial consultation:
We provide a free initial consultation to assist you with your decision as to whether or not you need a family trust and what that may involve.
Brian Geary, a senior lawyer at Wise Owl Legal Ltd specialises in family trusts. He will gladly give you that advice.
Feel free to take up our offer of “ free - no obligation ” advice to help you make a decision whether a family trust with
Wise Owl Legal is right for you.
Trusts are technical structures.
We can provide specialised advice to enable you to decide whether to proceed and if you do,
then the documents you need for a well thought out family trust and asset protection plan for your future.
We can help you to structure your affairs to give you the best chance of achieving your important goals, whether in business or when you are considering your retirement. If you just need a simple will, then a family trust is not for you. If your business or family situation is more complex, you may require a more flexible solution.
A family trust and the documents provided in a full asset protection plan is a very useful tool to reduce your business and personal exposures to risk.