A Trust is an obligation binding on one or more persons (the Trustees) to deal with property for the benefit of others (the Beneficiaries). The Trustees legally hold and deal with the property but do so for the benefit of the Trust and not in their individual capacity. The Trust is usually established by Deed of Trust.

Who Is Involved?

The Settlor

Someone must set up the Trust. Where a Trust is established by a Will, that person is known as the "Testator"; where a Trust is created by someone who is still alive, that person is known as the "Settlor". A "Trust Fund" is established by the Settlor often with an amount as small as $10.00. The Trust Fund may be added to by placing more money or assets into the Trust. You can be both a Settlor and a Beneficiary of a Trust and many Trusts are set up in this way.

The Trustees

Trustees have a number of important roles. They decide how the Trust Fund is invested and to whom income and capital are paid. We recommend that you have at least two trustees. We also provide the services of a Trustee service, through our Trustee Company OND Trustees Limited.

The Advisory Trustees

Practical control of Family Trusts is maintained by reserving the power of appointment and removal of Trustees and Beneficiaries to the Advisory Trustees. The Advisory Trustees are usually, but not always, the persons instructing us to establish the Trust.

The Beneficiaries

The Trust Deed says who the Beneficiaries are. The Trustees normally have discretion to decide which of the Beneficiaries will benefit as to capital and income. In most cases, Trusts are established for the purpose of benefiting the Principal Beneficiaries, usually a husband and wife (or partners) and their children.

The Trust Assets

The Trust Fund can be added to. It can own real estate, borrow, grant mortgages, have bank accounts, and generally hold all types of appreciating assets and investments and operate according to the powers in the Trust Deed.

If assets are being transferred into the Trust, then they must be transferred into the Trust at market value. Unless the Trust has sufficient assets to purchase the new assets outright, then the purchase price or part of it must be borrowed from the beneficiaries, and reduced by way of a gifting programme. While previously a limit of $27,000.00 per person applied, there is now no limit to the amount that can be gifted. However each person will have their own particular circumstances which need to be considered when deciding how much should be gifted.

A Trust (apart from a charitable one) cannot carry on forever. Most Trust Deeds provide that the Trust continues for a fixed number of years (usually 80 which is the maximum allowed by law). Trusts can be wound up earlier if the Trustees decide.

One effect of the establishment of a Family Trust can be to take relationship property outside the application of the Property (Relationships) Act 1976. Any such transfer of assets should be done in conjunction with a Property (Relationships) Act Agreement.

Where it is intended to transfer business assets to a Trust as well as personal assets (such as the family home) we often recommend that separate Trusts be formed so that there is no intermingling of personal and business assets. This can avoid GST or income tax complications in respect of personal assets. Careful consideration needs to be given to the use of Trading Trusts. We usually recommend a separate Trustee Company be established to act as the sole Trustee of Trading Trusts.

Why A Trust?

Trusts provide a number of benefits:

Retirement Planning and Family Provision

A Trust can be a convenient vehicle for investments that the Principal Beneficiary wishes to keep distinct from other assets and possible claims.

Split Income

A Trust can be used to split income amongst several members of a family reducing the total tax payable if the beneficiaries are on different personal tax rates.

Asset Protection

This is one of the most common reasons for setting up a Family Trust. For many people in business, their personal and/or business assets are at risk. Members of partnerships and sole traders have unlimited personal liability. In many cases limited liability protection under the Companies Act does not provide full protection. It is a common practice of Banks and major trade creditors to obtain personal guarantees. If assets are transferred to and owned by a Family Trust they can be protected from creditors or, in the extreme case of bankruptcy, the Official Assignee. There are, however, qualifications to the foregoing which we discuss with Principal Beneficiaries.

Achieving Testamentary Wishes

Some people are concerned that on their death their estate will not be dealt with in accordance with their wishes. There are a number of Statutes which confer rights of claim upon persons for whom no or inadequate testamentary provision is made. Children, spouses and partners are entitled to bring claims against your estate under the Family Protection Act 1955. Spouses and partners can also bring claims under the Property (Relationships) Act 1976. Such claims are limited to your estate however. If assets are disposed of during your lifetime to a Family Trust, they can be dealt with in accordance with the Trust's provisions, and can be put out of reach of the claims of persons disappointed at the testamentary provision made for them.

Relationship Property

We have clients who wish to make financial provision for their children. They are concerned at the possibility that their children's relationships may break up, and that their children's spouse/partner may receive half of the benefit of the financial assistance pursuant to the Property (Relationships) Act 1976. By funding the assistance via a Family Trust, the financial assistance can be protected.

Protection from User Pays Charges

There is an increasing tendency for services to be provided by the State on a user pays basis. Income and asset testing is common. Student allowance and Rest Home Subsidies are two such examples. By transferring assets to a Trust, people may still become entitled to receive state assistance.

This Article is an introduction only to Family Trusts. It is not intended to be comprehensive. Family Trusts are an area where considerable expertise is required in tailoring the Trust Deed, the transfer of assets and a gifting programme to your particular needs. Please contact us to discuss how we can establish a Trust to suit your circumstances.

Contact us

Phone: 03 477 6801
Fax: 03 479 0201
433 Princes Street, Dunedin 9016
PO Box 909, Dunedin 9054
DX: YX15043, Dunedin

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