Family trusts have become a popular way of conducting small business operations in New Zealand.\u00a0 There are a number of persons who form and operate the trust.<\/p>\n
This is the person who establishes the trust and signs the trust document. \u00a0They may transfer property other than the initial settlement to the trustee to be held on trust.<\/p>\n
The initial settlement amount is usually relatively small (usually less than $100) with more substantial assets being transferred or loaned after the trust has been settled.<\/p>\n
It is important that the initial settlement is actually paid to the trustee.<\/p>\n
The trustees are responsible for all aspects of the day-to-day management, investment of monies etc., relating to the trust.\u00a0 Subject to the terms of the deed of trust the trustee can be a natural person or a company.\u00a0 The number of trustees will usually be determined by the deed of trust.\u00a0 The trustees have extremely wide legal and trust responsibilities for the administration of the trust.<\/p>\n
The trustee holds assets for the benefit of the beneficiaries of the trust.\u00a0 The trustee of a discretionary trust generally has the power to make distributions of profits and capital to any beneficiary or beneficiaries.<\/p>\n
Trustees are governed by the Trustees Act 1956 and owe significant obligations to the beneficiaries of the trust.\u00a0 A trustee should be fully aware of its, his or her obligations before accepting any appointment as a trustee.<\/p>\n
Trustees (including corporate trustees) are liable for debts of the trust.\u00a0 Directors of corporate trustees need to ensure they fulfill their duties under the Companies Act, otherwise they may become personally liable for debts of the trust.<\/p>\n
The trust deed is prepared by a solicitor or administered by an accountant or other person using a suitable precedent.\u00a0 It sets out:<\/p>\n
Beneficiaries are those people for whom the trust was created.\u00a0 The beneficiaries of a trust can be divided into a number of groups:<\/p>\n
The trust, through the trustees, can conduct virtually any type of business activity that is approved by the trust deed in basically the same way as any other business activity operates.<\/p>\n
The persons who have the powers of appointment are stated in the trust deed.\u00a0 Subject to the terms of the deed of trust the appointor(s) have the right to add and remove trustees and beneficiaries, and to approve permitted changes provided for in the trust deed.\u00a0 The extent of these powers can be customised to suit individual circumstances.<\/p>\n
The trustees of a discretionary trust decide how to distribute profits and capital.\u00a0 The trustee is not bound by any fixed or predetermined percentage of distribution.<\/p>\n
The trustee of a family trust pays income tax on taxable income that is not distributed to any beneficiaries.\u00a0 The trustee rate of tax is currently 33%.<\/p>\n
Income distributed to beneficiaries (other than minor children) is taxed at the beneficiary\u2019s marginal rate.<\/p>\n
Family trusts are a very effective structure for those people entering into a business who do not have existing creditor exposure, but wish to protect assets against future risks.<\/p>\n
The reasons for settling a trust include protecting assets from future creditors; protecting assets from future relationship breakups; preserving assets for a single limb of a blended family; and inter-generational asset protection.<\/p>\n
In the majority of cases any distribution from a trust to a child under the age of 16 will be taxed at the trustee\u2019s tax rate.<\/p>\n
Any net loss derived by a trustee cannot be distributed to beneficiaries of a trust in order to be offset against other income derived by them.\u00a0 The losses are carried forward to be offset against future earnings of the trustee.<\/p>\n
The advantages of a trust include:<\/p>\n
Disadvantages include:<\/p>\n
Net losses incurred by the trustee in one year are generally available to carry forward against net income in subsequent income years.\u00a0 Losses cannot be passed on to beneficiaries.<\/p>\n
Where the trust is a shareholder in a look through company (LTC), any losses from that LTC can be used against the trustee\u2019s net income.<\/p>\n
Property and investment assets can be segregated from any business venture of significant risk into separate trusts.\u00a0 Assets can be protected:<\/p>\n
The basic idea is for you to gift your assets to the trust.\u00a0 This can be done in a lump sum or progressively.\u00a0 Say for example you sell an asset (your family home) to the trust.\u00a0 Prior to the abolition of gift duty the usual arrangement was for an interest free loan to be made by you to the trust.\u00a0 The loan to the trust was then \u2018forgiven\u2019 by way of gift at the rate of $27,000 per annum per person without incurring any gift duty.\u00a0 A husband and wife or de facto or civil union partners can jointly reduce the loan at a rate of $54,000 per year.<\/p>\n
A benefit here is that when John and Mary\u2019s house is sold to the trust for $500,000 any increase in value belongs to the trust, not to John and Mary.<\/p>\n
Provided the trust is a fully compliant discretionary trust, the house should be protected.\u00a0 The debt owing to John and Mary of course will not be protected until forgiven (gifted).\u00a0 The couple could suffer a business disaster but the trust assets can be legally separate, if the basic legal principles have been followed correctly.<\/p>\n
Now that gift duty has been abolished, it is possible for assets to be gifted directly to a Trust without a gifting program.\u00a0 Whether assets should be gifted immediately or progressively will depend on the donors\u2019 circumstances.\u00a0 However, advice should be taken before any significant gifts are made to ensure there are no adverse consequences from the gift.<\/p>\n
Matters to take into consideration before a significant gift include:<\/p>\n
Once the trustee has made a distribution to a beneficiary (the distribution does not have to be by cheque – it can be a journal entry), then that money legally belongs to the beneficiary.\u00a0 The trustee may be empowered by the trust deed to utilise beneficiaries\u2019 current accounts for the benefit of the trust – with or without interest.\u00a0 However, any balance attributed to a beneficiary, together with any gains, remains that beneficiary\u2019s property.<\/p>\n
The trustee may have the discretion to distribute capital to various beneficiaries.<\/p>\n
A beneficiary who is \u2018sui juris\u2019 (20 years old), can claim the balance in his\/her name in the beneficiary\u2019s account.\u00a0 He or she is also entitled to request a copy of the financial report each year together with other trust documents.<\/p>\n
A trustee\u2019s role is not necessarily onerous but does carry particular legal significance and specific responsibilities.<\/p>\n
A beneficiary can sue a trustee for a wrong-doing whilst acting as trustee that constitutes a breach of trust.<\/p>\n
Trustees may wish to notify beneficiaries of their status when each beneficiary attains the age of 20 years.\u00a0 However, in the absence of any provision in the deed of trust, there is no obligation at present to do so.<\/p>\n
Trustee\u2019s decisions, whether made formally or not are called Trustee Resolutions.\u00a0 Good practice requires that each trustee resolution is recorded.\u00a0 Where a contemporaneous record of a decision is not made, the trustees should ensure that the minutes of the next trustee meeting record the resolution that was made.<\/p>\n
Trustees\u2019 meetings should be minuted and the trust documentation should be carefully maintained.\u00a0 Some examples can be found in the section on trust minutes.<\/p>\n
It is also imperative Trustees are aware of the extent of their liability for debts of the trust (including directors of corporate trustees)<\/p>\n
If you would like to discuss what a trust would entail or what your responsibilities might be as a trustee, please contact us.\u00a0 And, of course, your solicitor can also advise you in this matter.<\/p>\n","protected":false},"excerpt":{"rendered":"
Introduction Family trusts have become a popular way of conducting small business operations in New Zealand.\u00a0 There are a number of persons who form and operate the trust. Settlor This is the person who establishes the trust and signs the trust document. \u00a0They may transfer property other than the initial settlement to the trustee to …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0},"categories":[103,135,74],"tags":[],"yst_prominent_words":[],"yoast_head":"\n