Having a trust gives you confidence that there will be assets left to those who are important to you, structure your affairs effectively for tax, prevent unwelcome claims against your assets, and help maintain the confidentiality of your affairs. You transfer legal ownership of the assets to the trust while continuing to use and enjoy them.
A classic example, is a family home within a trust. If the family home is in a trust, you no longer personally own the house – but you could still live in it if that’s what the trust deed states.
The format of a trust is idea for sole-traders, or professional that may unintentionally place personal liability on a guarantee on a product/project. Builder that may extend personal guarantee on the quality of the work, but find themselves liability personally at a later as a result of an expressed “life time” guarantee on work.
Benefits of a family trust
People usually set up a family trust to get some benefit from no longer personally owning an asset. A family trust may be useful in:
- Protecting selected assets against claims and creditors – protecting your family home from the potential failure of a business venture
- Set aside money for special reasons
- Ensure your children, not their partners, keep their inheritances.
- Avoid unwanted claims on your estate when you die – such as from a former partner.
The Parties involved in a trust:
- Settlor: The person or company who creates the trust
- Trustee: The people who manage the trust. Note that a settlor can also be a trustee. It is also a good idea to appoint an independent trustee like an accountant.
- Beneficiaries: The people who benefit from the trust i.e Members of your family or yourself.
Often there is more than one trustee, and, similarly there may also be more than one settlor of a trust.
It is important to note that the settlor has the power to appoint, and remove trustees, and also transfer to someone else in your will. Interestingly, a trust does not necessarily end with your death – it can last for a maximum of 80 years from inception, and span many generations.
The process involved in setting up a trust:
- Assets to be transferred into a trust, at their market value. Examples are: Family home, shares, bank deposits, cash and more.
- The ownership of these assets will then be transferred to the trust and the trust in return owes a debt back to you, the settlor. This debt can be ‘forgiven’ through a process called gifting.
- A trust deed is formally used to set up the trust. It will appoint the trustees, list the beneficiaries, and state various rules for the administration and management of the trust.
Before October 2011 there was a limit of $27,000 that you could gift in one year without paying a tax called gift duty to Inland Revenue. However gift duty has now been abolished and there is no limit to how much you can gift in one year. However, it’s always best to seek legal advice before proceeding. Note that gifts are still included in your assessment for a Residential Care Subsidy.
Cost and Risks:
Family trusts can be complex and time consuming to administer. It costs money to set them up and there are generally ongoing legal and accounting fees.
You also need to think carefully about who will be the trustees, as they will be responsible for managing the trust properly. Typically, trustees of a family trust are independent parties such as accountants or lawyers.
Risk of Trusts:
If a trust is not set up or managed well, there can be considerable inconvenience and cost. You could also run the risk of having the trust declared a ‘sham’, which would mean that the assets are not really the trust’s but are in fact still yours.
If the trust is a sham you may lose all of the advantages that you were hoping to gain from it, and you may be penalized as well.
Once you put your assets into a trust, you no longer personally own or control them. Instead, ownership passes to the appointed trustees who must act under the terms of the trust deed in the best interests of the beneficiaries.
There have been cases of family members suing other family members for a breach of the trust’s provisions. The courts treat claims of this sort quite seriously and they will normally be expensive to resolve.
Forming a trust is a big decision. If you are going to form one, make sure that it is established properly, for the right reasons, and managed well.