What is a Trust and Why Have One?
For some years trusts have been increasingly popular but there is, it is suggested, little point in having a trust if you do not know how it works and what it is intended to achieve. To help out, the following is a simple guide to understanding a trust.
A trust is a legal relationship or a structure involving three parties:
- The Settlor — The person establishing the trust and transferring assets (e.g., a rental property) to the trust.
- The Trustees — There will usually be at least two trustees (typically three). These are the people who have the power and duties of operating the trust. As a result of transferring assets to the trust, the trustees become the legal owners of the assets (e.g., in the case of land, they are the persons registered on the Certificate of Title). The trustees then have the power and duty, for which they are accountable, to deal with the assets in accordance with the terms of the Trust Deed (the written document establishing the trust and setting out the way it is to operate). That is, they decide how the property will be invested, who should receive the benefits and so on.
- The Beneficiaries — These are the persons who will or may benefit under the trust. Typically, in a family trust, these may be children, grandchildren, spouse etc. of the settlor. However, there are no restrictions on who can be a beneficiary as long as there is certainty as to who they are.
How Does a Trust Work?
Typically there will be a Trust Deed which establishes the trust and which sets out the terms on which the trustees are to operate the trust. In addition, the settlor may write a Memorandum of Wishes — a document recording the wishes of the settlor as to, for example, who should receive benefits and how much.
The trustees then hold the assets in accordance with the Trust Deed and may distribute income/capital to beneficiaries either during the term of the trust or on its winding up.
Why Have a Trust?
A trust is designed to protect the trust assets from challenges of the sort described below by removing them from your ownership though you may retain an influence over their control.
Where do the threats to your assets come from?
- Business creditors. If you are in business then by definition you are taking a risk. With the deregulation in the last ten or fifteen years that risk has increased.
- Personal creditors such as those incurred in terms of any guarantee can also be a threat.
- Company Officers. Under the Companies Act, company officers have much greater liability and responsibility than they once had - particularly those people who are officers of large public companies. Usually the company will carry insurance to protect you. Directors of smaller companies, however, can still be at risk.
- Rest Home subsidies — When you enter a rest home your financial assets are used up until, depending on your circumstances, you have $180,000 left. Only then will the Government pay the subsidy to you. Since the cost can be between $500 and $700 per week your capital will be dissipated very quickly.
- Other asset or income testing schemes such as the community health card and surcharge (if re-introduced).
- Re-imposition of death duties or possible capital gains tax.
- Tax — while New Zealand retains scaled tax rates, there are legitimate ways of reducing the incidence of tax across your family.
Matrimonial and de facto marriage claims.
- There are ways of protecting against failure in marriage, which by statutory definition includes de facto marriage. If a person inherits under a Will then the Property (Relationships) Act may give the spouse of the recipient a claim against the asset. A trust can be used to remove that possibility.
- A trust will also assist to protect assets accumulated before marriage or from a previous relationship, and furthermore, without detriment to the spouse. This might apply more to your children than to yourselves. A trust can sometimes be of more benefit to the following generation(s) by giving them flexibility and protection while still giving them a real benefit.
- On the early death of either of you, a Trust will protect your accumulated assets against a claim arising out of any subsequent relationship by the survivor. Such a claim could arise during the survivor’s life or on their death by way of a claim for half the Estate assets.
Claims against the Estate of a deceased person.
- There is always the danger that a disgruntled family member may claim against your estate under the Family Protection Act or the Testamentary Promises Act. Under the Property (Relationships) Act, that may include a spouse or defacto marriage partner who feels he or she should have received a greater share of your estate.
Personal and family reasons
- A trust can provide you with protection for or control over family members. It can give you the cloak of confidentiality in your family and personal life. It can provide a mechanism to manage the affairs of a family member who through age or infirmity is unable to cope. It can make it cheaper and quicker to administer your estate after your death.
- A trust can also be used to delay devolution of assets to family members who, for many varied reasons, may not want assets in their hands. They can still receive the benefit of those assets but without putting them at risk of dissipation through death, divorce, asset or income testing, insolvency or family dispute.
There are numerous advantages of having a trust, which will differ in importance depending on your reasons for setting up the trust. These include:
- Flexibility — A discretionary trust (the most common of form of trust) can allow flexibility in dealing with changing circumstances of family members. For example, if a family member is ill and needs extra income or capital — the trustees may decide to provide additional assistance for that particular person. With discretionary trusts, the trustees can decide how much money to distribute to each beneficiary.
- Tax Advantages — The ability to distribute income to a number of different persons, as for example, young or financially disadvantaged beneficiaries on lower tax brackets, can provide tax savings.
Trusts can appear complex and confusing. If you wish to establish a trust, always ensure that your advisor explains to you, in plain English, what a trust is and how it operates.
We have intentionally developed an expertise in Trusts and asset protection. We have a large and expanding practice in this area. We insist on keeping up to date as it is an ever changing area of the law.
We are happy to discuss such things with our clients on a no obligation basis. It is often the case that we can advise that a Trust isn’t necessary but there are usually some simple and nowhere near as expensive alternatives to protect your assets.
Martin Hawes has written various books on the subject in a clear and sensible manner. They are available from the library.
We welcome enquiries.
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