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To trust or not to trust, that is the question

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Ben Coleman
01-Aug-2016
Asset planning

To Trust or not to Trust?

Advantages and Disadvantages of creating a Family Trust

Trusts are a popular way of protecting and managing assets.  This article relates to family trusts and outlines some advantages and disadvantages to consider.

A trust is created when a person or people (the ‘settlor(s)’) place assets on trust for the benefit of certain people (the beneficiaries).   When it comes to family trusts, the beneficiaries are often children, spouses and other family members.

The settlor(s) choose people to manage the trust (the ‘trustees’).  Trustees play a fundamental role in managing the trust and have various rules and legal obligations they must abide by.

When creating a family trust there are various aspects that require consideration.  Below are some of the advantages and disadvantages that may help guide you towards making an informed decision.

Advantages of setting up a Trust

Asset Protection

Setting up a trust and placing assets into the trust may provide for asset protection from long term creditors, relationship property claims against yourself and other family members such as children and grandchildren and various other situations, in most circumstances.    It is important however that there is not an intention to defeat short term creditors or spouses otherwise the arrangement may be overturned.

Additionally, placing assets into a trust allows for higher risks to be taken in business ventures and other areas as effectively the assets form part of the trust and no longer belong to the settlor(s) personally.

Family Benefits

Transferring property into a trust allows it to be held for the benefit of family members and class of beneficiaries nominated by the settlor(s).   This can assist with retaining the allocated property within the family and ensuring it is passed on to the next generation.  It is a great way to ensure family farms or businesses remain in the family and all your hard work over time benefits your family and allows them the opportunity to carry on in your footsteps, or at least enjoy the benefit of accumulated family wealth.

There is also the ability to treat discretionary beneficiaries unequally, and by transferring property into a trust with discretionary beneficiaries, the trustees may use their discretion as to how such beneficiaries may benefit.  This can be helpful when providing for children’s education, vulnerable family members and for those who become incapable of managing their own affairs.  A family trust can help ensure your children and any beneficiaries you choose are provided for long term.

Disposition of a trust’s assets is less open to being contested than disposing of property by will and means if one beneficiary has higher needs than the others, this can be catered for without the possibility of attracting a family protection claim.  A family protection claim can arise when a family member believes the deceased has failed in their moral duty to make adequate provision for them (for further information please refer to the article below “That's it! You're out of the Will!”).

Rest Home Care Subsidy Benefits

Transferring assets into a trust can in some circumstances assist in achieving a rest home care subsidy, subject to the five (5) year claw back rules. 

When gifting property to a trust, a couple may jointly gift $27,000.00 per year without their rest home care subsidy being affected, prior to the five (5) year period when rest home care is provided.

During the five (5) year period immediately preceding the need for care, the amount permissible to gift is significantly lower.  Excess property gifted during this time can be clawed back and considered as a current asset.  The amounts permissible to gift are subject to change so it is advisable to check the current situation with your legal advisor at the time of setting up the trust.

 Tax Implications

Transferring assets into a trust may have tax implications that can be negative or positive depending on the situation and tax rates at the time.  It is a good idea to speak with an accountant to discuss this further prior to deciding what property to transfer into a trust.

Slowly But Surely

Trusts are not only for the rich, you do not need to have a lot of property to start a trust and property may be gifted at anytime (notwithstanding rest home subsidy considerations).   This means, even if you do not have many assets in the way of property at the time of setting up the trust, as you acquire more over time it may be added.

Effectively, you can ensure your family are provided for in the future by starting out small and adding to the trust as you buy more property over time.  Many start by initially developing a trust deed and then gift their first home to the trust when they acquire one.

Disadvantages of setting up a Trust

Dealing with your property

Effectively, by putting assets into a trust, you no longer personally own or control them.  As discussed above, this may offer asset protection; however, it means you cannot continue to deal with your property in any way you wish.

It is common for a settlor to also be a trustee; however, they have less element of control if there are more than two (2) trustees and effectively cannot deal with the assets unilaterally without obtaining agreement from all trustees.  This is because ownership passes to the appointed trustees who must act in accordance with the trust deed and in the best interests of the beneficiaries. 

It is therefore important that implications of transferring property to the trust are well considered in advance, this includes choosing trustees you can trust!  You can retain a limited amount of control by reserving the power to remove and appoint trustees. 

Finding Suitable Trustees

There can be disadvantages if suitable trustees are not appointed.  The trust needs to be managed well and it needs to be ensured the trust cannot be considered to be a sham.  A sham trust occurs when it appears the assets are not really the trust’s but effectively are still the settlors’ and dealt with in the manner the settlor wishes, without consideration of the beneficiaries.

It is strongly advisable to appoint an independent trustee and not just the settlor(s) themselves to avoid this perception.  It is also important the trustees are all involved and aware of what is going on with the trust so it cannot be perceived the assets are still being dealt with by the settlor(s) however they choose.

Costs involved

Costs to set up a trust are not insignificant, especially if gifting different properties to the trust. There are various fees charged by Land Information New Zealand in relation to registering the property and discharging or refinancing any current mortgages if applicable.  This needs to be considered and weighed against the benefits a trust can offer. 

Ultimately, many people often find the benefits outweigh the disadvantages, these are things you can discuss with your lawyer and accountant in order to ensure your property is managed in a way that maximises benefit to you and your family.