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Family Trusts

What is a Trust?
A trust is an effective way to own, manage and protect assets. It is an independent entity, created and governed by a trust deed. What is a trust deed? This is the document that sets out the terms and conditions of the trust - effectively the rules relating to running the trust. It says how assets are invested, how long the trust runs, who the beneficiaries are and what the trustees can do. There are also laws governing the management of trusts.
Who is involved in a trust?
  • Settlor - the person who establishes the trust and transfers assets into it. There can be more than one settlor
  • Trustee - the person or trust company that holds and manages the assets in the trust. There can be more than one trustee
  • Beneficiaries The person(s) or organisations who benefit from the trust.
  • Assets Property and belongings of the settlor. This may include real estate, insurance policies, investments, motor vehicles etc.
How is a trust set up?
When setting up a trust you determine what happens to your assets in the future. You decide:
  • why the trust is being created
  • what property will be transferred into the trust
  • who will benefit from the trust
  • who will act as trustees
  • the terms and conditions for administering the trust
  • a name for the trust.
When the trust deed is signed by the settlors and trustees assets are then transferred to the trustees. As a settlor, you do not have to transfer all assets straight into the trust. A small cash sum is sufficient to activate the trust. Assets can then be transferred over the life of the trust as appropriate. Assets are sold to the trust for a fair market value. As a new trust has no money to buy assets, it owns a debt (an IOU) to the settlor. This debt can be forgiven over time. If you choose to forgive the debt, it is important to do this regularly because, while the debt exists, it is still considered to be the settlor's asset and can be pursued by your creditors. The gifting programme must be properly supervised and documented to ensure there are no complications with Inland Revenue. Gifts of up to $27,000 per person in any 12 month period are free of gift duty. (see below for a full schedule)
Why should I establish a trust?
Everyone will have different reasons for creating a trust:
  • To protect your personal lifestyle assets from the risks associated with business. The use of a trust ensures your family doesn't suffer the loss of the family home and personal
investments not associated with a business if your business venture fails. The transfer of assets and any gifting programme must start before the first signs of any business failure appear.
  • You can provide for dependants such as children or grandchildren - for their education or if they have physical or other disabilities or an inability to manage money.
  • To ensure continuity of family ownership. Many New Zealand families have owned businesses or farms for several generations and want to keep these assets in the family. Transferring assets
to individuals may result in the loss of the assets.
  • To protect the assets you bring to a marriage or de facto relationship (particularly important with the introduction of the Property (Relationships) Act 1976).
  • To provide for unequal sharing of your assets, for example to provide for children of a prior marriage.
  • To provide long term support for a charity.
Who should I appoint as trustee?
This is an important decision. The trustees must be able to work with you as settlor and administer the trust to meet your intended outcomes. You could consider a professional trustee alone or with a family member or a specialist adviser.
Do I retain access to assets transferred to the trust?
Subject to the terms of the deed - yes. Usually assets are available during your lifetime before being passed to other beneficiaries. It is important to note that you cannot regain ownership of trust assets as such a situation could be viewed as a sham (where a trust has been created for deception).
What is the life-span of a trust?
Unless it is a charitable trust, or unless stated otherwise, the maximum duration of a trust is 80 years.
Do I have control over trustees' decisions?
A trustee must act independently and impartially. You can ensure that the trust is administered according to your wishes by careful drafting the trust deed. You can retain the right to hire and fire trustees you believe are not doing their job properly. You can also include a Memorandum of Wishes with the trust deed, although it isn't binding. However, a trustee cannot be made to do what the deed and the law do not permit.
What happens when I die?
You need to allow for the death of a settlor in your trust deed.
What happens if the law changes?
If a law change defeats the purpose of your trust it can be re-settled to restore the benefits of the trust, provided the terms of the deed permit it.
What are the different types of trust?
Some general terms are commonly used to describe a trust. These words have no legal status but are useful to describe the general category of the trust. Some general terms used for trusts are:
  • family trusts - simply, trusts which benefit the members of a particular family
  • discretionary trusts - such trusts give trustees power to allocate income or capital, or both, to one or more beneficiaries. In practice this is usually done in consultation with you as settlor and takes int account the circumstances of the beneficiaries
  • education trusts - trusts settled to meet the education costs of a beneficiaries, usually a child or grandchild. This is a great way to avoid a student loan.
How is trust property invested?
The trust deed will normally give investment guidance. If you have views that differ to the prudent person approach it is important they are set out in the deed.
How much does it cost to set up and run a trust?
Costs vary according to the complexity and transactions required to establish the trust. When we know what all the requirements are we can more accurately quote on both the establishment and ongoing costs.
Can I specify different roles for different trustees?
You can appoint an advisory trustee. This may be an expert in a particular field who may be useful to the other trustees, or it could be a family member to advise on the needs of the family. A custodial trustee can be appointed specifically to own trust property. You can have managing trustees who are responsible for the management decisions required in the trust. It is important that the role of the various trustees is clearly defined in the trust deed.
Gift Duty Schedule
GIFT DUTY
Up to $27,000 Nil
Exceeding Not Exceeding  
$27,000 $36,000 5% on excess over $27,000
$36,000 $54,000 $450 + 10% of excess over $36,000
$54,000 $72,000 $2,250 plus 20% of excess over $54,000
$72,000 $5,850 plus 25% of excess over $72,000

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