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. . . general practice   

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 trust include:

  • 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 Surcharge
    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. They are:

1. Settlor
The Settlor is the person wanting to establish the trust by settling / transferring an asset or assets into the trust.

2. Trustees
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.

3. Beneficiaries
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 and you.

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.

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 the trustees.

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 hold.

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 trust.

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 (tax).

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.
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