OF FAMILY TRUSTS
There are a number of very good reasons why we all owe
it to not only ourselves but more particularly to our
family to explore family trusts. At the end of the day
you may say a family trust is "not for me"
but there are a number of very good reasons why we should
all look very seriously at setting up a family trust.
Some of the benefits of forming a family
- Income Tax
Family Trusts are taxed at the same rate as companies.
However, they are a good means of income-splitting.
The income from the assets owned by a family trust
may be channelled off to children who are beneficiaries
at lower tax rates.
- Protection Against Future Capital Taxes
New Zealand is one of the few countries that does
not have any form of capital gains tax, estate duty,
inheritance tax or capital transfer tax (“capital
gains tax”). It is possible that some form
of capital gains tax will be introduced at some
time in the future. We do no have any way of knowing
what might be in any future capital gains tax. However,
exposure to a capital gains tax may be minimised
through a family trust depending upon the relevant
legislation at the time.
- Income and Asset Testing / Superannuation
When the superannuation surcharge was in existence,
a family trust was an excellent vehicle for reducing
exposure to the New Zealand Superannuation surcharge
for superannuitants. It allowed elimination of the
surcharge without limiting investment access to
capital growth investments, life insurance, bonds
and superannuation funds. We do not know if this
may become an issue again in the future.
The use of a family trust can also be a means of
protecting oneself from the income and asset means
testing when it comes to rest-home subsidies and
long term healthcare.
- Asset Protection
One of the primary purposes for businesspeople having
a family trust is protection from creditors. Assets
that are validly sold and transferred to a trust
are generally unavailable to creditors in the event
of business difficulties or failures.
A family trust can also be used to protect assets
from matrimonial property claims. Assets can be
protected from claims by partners/ spouses of children
by the use of a Family Trust.
Some of the basic concepts of a trust include:
A trust is like a separate legal entity. A trust allows
various assets to be owned by someone else. However,
the assets that are owned by a trust are available for
the use and enjoyment of all the people specified in
the trust and known as the beneficiaries. A trust could
be compared with forming say a company to run a business
but it is generally easier to form a trust and usually
less expensive to maintain although annual accounts
may be required.
A trust is established by preparing a document known
as a Trust Deed. It is signed by the parties involved
in establishing and running the trust.
There are three parties involved in establishing a trust.
The Settlor is the person wanting to establish the trust
by settling / transferring an asset or assets into the
These are the people who hold ownership of the various
assets that are transferred to the trust and look after
them for the beneficiaries.
It is normally prudent to have say a husband and wife,
as the case may be, as trustees as well as say one or
two other people who are not related to either the husband
or the wife.
All assets owned by the trust are registered and held
in the name of the trustees. For example, any land that
is transferred to the trust is registered in the trustees’
names so that their names appear on the Certificates
of Title (title deeds). There is no mention on the Certificates
of Title that the trustees hold the property in trust
for other people.
At all times the trustees must follow the terms of the
Trust Deed and take into account the interests of the
beneficiaries of the trust. The Trust Deed sets out
the responsibilities and powers of the trustees.
Generally, a Trust Deed specifies that the trustees
have the power to deal with the assets of the trust,
control them and sell them if they wish. They can decide
which beneficiaries will benefit from the trust and
by how much, subject at all times to the provisions
of the Trust Deed. It follows that it is important to
set out in the Trust Deed the width of the trustee’s
powers and how the trustees have the right to make decisions
- is it unanimous, is it by majority decision, etc.
Beneficiaries are the people who will ultimately get
the assets or the benefit of them. For example, the
beneficiaries could well be your children, grandchildren
Beneficiaries as such have limited rights under a trust.
It should be remembered that a trust we would contemplate
forming is normally ‘discretionary’. This
means that the trustees have the absolute discretion
as to which beneficiary will benefit, when and by what
amount - depending on the provisions as set out in the
Trust Deed. If a beneficiary misses out on a payment
because the trustees have elected not to make a payment
to the particular beneficiary, for example, the beneficiary
generally has no claim against the trust and could not
bring an action against it.
CONTROL OVER TRUSTEES
Once a person sells his and/or her assets to the trust
and has been paid for them they have what is called
in a legal sense, ‘alienated’ themselves
from the assets. They no longer own them. In order for
that person to retain some control of the assets it
is important that he and/or she, as the person transferring
assets to the trust, has some mechanism of control over
If you are going to transfer various assets to the trust
you may want to retain the right both to dismiss existing
trustees and to hire new trustees. The right of dismissing
and hiring new trustees must be specified in the Trust
Deed. In other words, it gives the person transferring
the assets to the trust a measure of control over the
trustees and therefore over the assets the trustees
TRANSFERRING ASSETS TO THE TRUST
Unfortunately, assets can not simply be either ‘transferred’
or ‘given’ to the trust. They must be ‘sold’
to the trust. If assets are simply transferred or given
to the trust the Inland Revenue Department could claim
that gift duty (tax) is payable on the transaction.
The Inland Revenue Department could claim gift duty
(tax) on the difference between the actual value of
the property and the value it is gifted or sold to the
However, there are legitimate ways to avoid the problem
of gift duty and giving property to the trust. The property
must be “sold” to the trust at current market
value. The owner of the property being sold to the trust
then simply lends the trust the money to buy the property
- a sort of vendor finance arrangement.
The person who has sold the assets to the trust and
who is owed the money by the trust can immediately enter
a planned gifting program whereby he and/or she gradually
forgives/gifts the trust the money owing him and/or
her by the trust. This is normally done at the rate
of $27,000.00 per person in any one twelve month period.
Up to $27,000.00 can be gifted in any one twelve month
period by any one person without incurring gift duty
The trustees must manage the trust and its assets properly,
investing any money and running any business diligently
and carefully. They are required to invest trust assets
and money as any prudent person of business would invest
another person’s assets.
The trustees are obliged to run the trust under the
terms of the Trust Deed. Trustees can be liable for
any actions where they have not acted prudently or if
they ignore specific provisions in the Trust Deed.
Trustees are not permitted to delegate their duties
to other people. In other words, they can not pass responsibilities
on to other people. Furthermore, a trustee is not permitted
to profit from his or her duties as a trustee or from
the activities of the trust. For example, if a trustee
buys assets from a trust or sells assets to the trust
they must be bought or sold, as the case may be, at
a fair value. If a property is not sold at a fair value,
the trustee could leave himself or herself open to a
legal action from a beneficiary - who may not even be
born at the time the transaction is concluded!
It is important that the tax ramifications are considered
as well as on-going accountancy requirements. It is
very important that you take professional tax/ accountancy
advice before you take the development of your trust
and asset restructuring too far.