Family Trusts
General Information (not legal advice)
A "Trust" involves a situation where the legal ownership of an asset is held by a person or persons ("the trustees") subject to conditions requiring them to apply the asset for the benefit of another person or class of persons ("the beneficiaries"). The Trustees are given directions and discretions, by which they can control the distribution of income and capital from the Trust.
A Family Trust is established by a document known as a "Trust Deed" and there are three parties to this, namely:
The Settlor is the person establishing the Trust and who will be transferring the bulk of the assets to it (this does not stop other persons gifting or selling assets to the Trust).
The Trustees oversee the running of the Trust (and dealings with the Trust assets) for as long as the Trust exists (which can be up to 80 years). Their role is essentially as custodian of the assets, for the benefit of the beneficiaries. The Trustees can include the Settlor. It is also common to appoint a Trustee who is independent of the family and who may be, for example, an accountant, solicitor, financial advisor or other trusted professional. The Trustees are usually empowered to allocate income in each year amongst the beneficiaries and to decide on capital distributions, and the date the Trust is terminated.
The Beneficiaries are commonly in two classes - discretionary beneficiaries, and final beneficiaries:
(a) Discretionary beneficiaries have no entitlement to benefit from the Trust, but the Trustees are able, in their discretion, to make distributions of capital and income to them while the trust remains in existence.
Final beneficiaries are the people who get what's left in the Trust, when it reaches its end-date.
A "Trust" involves a situation where the legal ownership of an asset is held by a person or persons ("the trustees") subject to conditions requiring them to apply the asset for the benefit of another person or class of persons ("the beneficiaries"). The Trustees are given directions and discretions, by which they can control the distribution of income and capital from the Trust.
A Family Trust is established by a document known as a "Trust Deed" and there are three parties to this, namely:
- The Settlor
- The Trustees
- The Beneficiaries
The Settlor is the person establishing the Trust and who will be transferring the bulk of the assets to it (this does not stop other persons gifting or selling assets to the Trust).
The Trustees oversee the running of the Trust (and dealings with the Trust assets) for as long as the Trust exists (which can be up to 80 years). Their role is essentially as custodian of the assets, for the benefit of the beneficiaries. The Trustees can include the Settlor. It is also common to appoint a Trustee who is independent of the family and who may be, for example, an accountant, solicitor, financial advisor or other trusted professional. The Trustees are usually empowered to allocate income in each year amongst the beneficiaries and to decide on capital distributions, and the date the Trust is terminated.
The Beneficiaries are commonly in two classes - discretionary beneficiaries, and final beneficiaries:
(a) Discretionary beneficiaries have no entitlement to benefit from the Trust, but the Trustees are able, in their discretion, to make distributions of capital and income to them while the trust remains in existence.
Final beneficiaries are the people who get what's left in the Trust, when it reaches its end-date.
Why have a Trust (or, do you actually need one??)
Trusts are not for everyone. There needs to be a sound reason for having one, as once assets are put into a Trust, they are no longer "yours" to deal with - other than on terms consistent with the Trust Deed (i.e. decisions need to be made in the context of whether there is benefit to the beneficiaries, not just benefit to the former owners of the asset).
Instances where having assets in-Trust can be useful include:
Asset Protection: People who may be personally liable for business debts and those in professional practice who might be subject to negligence claims, may well think it prudent to keep a minimum of assets in their own names.
Family Protection / Planning: Trusts can be useful in providing for family members who are not capable of managing their own assets or investments. Income can be made available on a regular basis, but the Trustees can retain and safe-guard the capital (or at least make sure it is not frittered away on silly things).
Taxation: Income earned by a Trust can enable Trustees to put money into the hands of Beneficiaries in a variety of ways: they can lend it, pay it out of income, or pay it out of capital - all of which may have the result of legitimate / legal savings in taxation. For example, it might be possible for income to be paid to a non-working spouse or child, and taxed at a lower rate of income than the Settlor would have paid if the funds had been invested in his or her own name.
Income paid to beneficiaries from a Trust is called "beneficiary income" and tax is paid at the rate attributable to the beneficiary.
If, however, income is retained by the Trustees it is regarded as "trustee income" and (currently) is taxed at 33%. Once tax has been paid by the Trustees on any Trustee income, it is not taxed further when it is paid to beneficiaries.
Relationship Property: A Trust can provide some protection against the vagaries of future relationships - although there is an increasing volume of case law in this area, involving notions of "trust busting". Timing of establishing the Trust and transfer of assets are important things to consider in this regard.
Trusts are not for everyone. There needs to be a sound reason for having one, as once assets are put into a Trust, they are no longer "yours" to deal with - other than on terms consistent with the Trust Deed (i.e. decisions need to be made in the context of whether there is benefit to the beneficiaries, not just benefit to the former owners of the asset).
Instances where having assets in-Trust can be useful include:
Asset Protection: People who may be personally liable for business debts and those in professional practice who might be subject to negligence claims, may well think it prudent to keep a minimum of assets in their own names.
Family Protection / Planning: Trusts can be useful in providing for family members who are not capable of managing their own assets or investments. Income can be made available on a regular basis, but the Trustees can retain and safe-guard the capital (or at least make sure it is not frittered away on silly things).
Taxation: Income earned by a Trust can enable Trustees to put money into the hands of Beneficiaries in a variety of ways: they can lend it, pay it out of income, or pay it out of capital - all of which may have the result of legitimate / legal savings in taxation. For example, it might be possible for income to be paid to a non-working spouse or child, and taxed at a lower rate of income than the Settlor would have paid if the funds had been invested in his or her own name.
Income paid to beneficiaries from a Trust is called "beneficiary income" and tax is paid at the rate attributable to the beneficiary.
If, however, income is retained by the Trustees it is regarded as "trustee income" and (currently) is taxed at 33%. Once tax has been paid by the Trustees on any Trustee income, it is not taxed further when it is paid to beneficiaries.
Relationship Property: A Trust can provide some protection against the vagaries of future relationships - although there is an increasing volume of case law in this area, involving notions of "trust busting". Timing of establishing the Trust and transfer of assets are important things to consider in this regard.
Some bad reasons for setting up a Trust
There is no point in setting up a Trust with the sole intention of:
There is no point in setting up a Trust with the sole intention of:
- Defeating tax laws, current relationship property or creditors' claims. A Court would likely ignore the Trust structure if it determined this was intention behind the Trust's settlement.
- Divesting assets from your own name, so you can receive a Residential Care subsidy (a government payment to assist with the costs of your retirement / rest home care). Government policy is clear - they will treat assets transferred to a Family Trust as being your assets, when calculating whether you need the threshold for subsidy.
More Information:
An excellent downloadable brochure can be found on the New Zealand Law Society's website by clicking HERE
An excellent downloadable brochure can be found on the New Zealand Law Society's website by clicking HERE
