Family Trust is a legal way to hold and protect your assets for the future.
It is a legal arrangement under which trustees hold assets for the benefit of other people and dates back centuries to medieval times.
Family Trusts are commonly used to protect against life’s uncertainties.
The Trust can safeguard all or a portion of your assets because you no longer own them yourself – the Trust does.
However, you would still able to have the benefit and use of them.
Perhaps you are thinking it is time to set up a Family Trust. Maybe your family and friends have set one up and you think it is the right thing to do.
A Family Trust can be a very useful instrument but for some people its usefulness may be outweighed by the hassle and cost of running the Trust.
Protection from Creditors
In today’s commercial environment, being in business can mean a risk to personal assets in the case of negligence or sudden financial downturn.
Even if you have run a previously safe business with considerable assets, you can run into financial difficulty. Assets held in a Family Trust, provided they have been transferred prior to any potential claims arising, may be protected against business failure, future creditors and claims arising from alleged or actual business mistakes.
Estate Planning
Trusts are often a practical way to ensure distribution of assets to family members and their spouses, following the death of the settlor(s) of the Trust.
This is particularly important for anybody in one of three situations:
If you are in a second marriage, this helps protect your estate from any claims from an ex-spouse or partner.
If a spouse or a partner has children from a previous relationship, a Family Trust helps to prevent any claims from children who may make a claim against your estate.
There are situations in which trustees may want to control the timing of the distribution of assets for the beneficiaries. This could be important to protect the capital or income of a Trust being taken by an ex-spouse or partner of a beneficiary or by creditors of a beneficiary.
A Family Trust enables your estate to be distributed as you see fit.
You may use a Family Trust to safeguard your estate for specific purposes. For example, it can be used to pay for your children’s or grandchildren’s education or help with a deposit for a first home.
Tax Purposes
When you have family members on lower income tax rates, a Family Trust may be able to distribute income to those beneficiaries. This might mean tax is paid at a lower rate.
Having a Family Trust will reduce the pool of any assets that you personally own and therefore minimise the effects of any asset testing.
This may have an impact on, for example, the residential care subsidy for long-term residential care in hospital or rest home.
If any future government considers establishing some form of estate duties or wealth tax, assets in a Family Trust may be protected from such policies.
Special Provisions
Family Trusts are a good way to ensure a family member with special needs is provided for during his or her lifetime.
Family Wealth
A Family Trust can provide an opportunity to create family or generational wealth. The Trust continues after the settlor’s death so that assets can remain without necessarily distributing them. This is often important in situations where there is a farm or business that has been built up over a lifetime and it may be uneconomic or undesirable to have them sold or divided.
The trust enables the assets to carry on in operation for the benefit of the beneficiaries while at the same time preserving the principal asset(s).
Why you may not want to establish a Family Trust:
It’s too late. Depending on your circumstances it may be too late to establish a Family Trust. It can take several years to gift assets to your Family Trust and they need to be in your Family Trust for some time before they are completely protected. With the abolition of gift duty, it is possible to gift everything at once, but this may not give you the protection you are seeking. It is better to establish your family trust as soon as possible.
Costs: The legal costs of preparing a Trust Deed and transferring assets to a Trust can be a significant investment. To run a Family Trust properly there are also some on-going accounting costs and possibly trustees’ fees. These are of course easily outweighed by what you may be saved in the future.
Administration Time
You must keep accurate records of decisions by trustees of the trust, hold trustees meetings, have annual accounts prepared, and ensure you do not mix the trusts activities with your personal activities. A good lawyer will assist you with all of these.
Not enough Need
If none of the situations above apply to you, or will not become a situation you may face in the future, there may be insufficient need for you to create a Family Trust.
In summary, Family Trusts are valuable tools for protecting your assets from risks and to ensure specific welfare and outcomes for your family. We would be happy to discuss with you your particular situation and help you identify if a Family Trust is appropriate for your circumstances.
Braden Matson is Family and Commercial Lawyer at Law & Associates (incorporating part of Wood Ruck Manukau) based in Auckland. The above is the first in a series of two articles. The concluding part will appear in our next issue.
