Trusts

How Do Trusts Work?

You want to own less. 

You want to do this by passing your assets over to someone else but still retain use of them. 

This can be achieved by drawing up and executing a trust deed, then settling an asset upon the trust. This involves:

  • Settlor - person looking to set up the trust by settling an asset upon it.
  • Trustees – the people who hold the ownership of the asset and look after it for the beneficiaries.
  • Beneficiaries – the people who will ultimately get the assets or the benefit of them.

If more than $27,000 is gifted, by any donor in the 12-month period gift duty will have to be calculated. 

It is extremely important that the gifting programme is actioned as this reduces the asset you have which is what you are often trying to achieve by setting up a trust. 

Trustees

There are a number of ways to have control over the trustees, from protection in the trust deed, which should be clearly spelt out, to give the settlor the ability to hire and fire trustees. The settlor also has the ability to be a trustee but it is important that the settlor is not the sole trustee so to give the arrangement separation from personal activities. We also recommend that the settlor draw up a memorandum of wishes which although not a legally binding document expresses your wishes at the time the trust was established. 

The trustees must manage a trust and its assets properly, investing with diligence and prudence. Trustees can clearly be held liable for any actions where he or she has not acted prudently or has ignored specific provisions of the trust deed, or has not acted in the best interests of the beneficiaries.

Beneficiaries

Beneficiaries as such have very few rights. A family trust is usually discretionary, meaning the trustees have total discretion as to which beneficiary will benefit, when and by what amount.

Reasons for a Trust

  • Asset Protection – When we think of asset protection we generally think of people in business needing protection from creditors but more people may be vulnerable than might first appear. Assets owned in a trust may not necessarily be subject to a matrimonial dispute and therefore can offer protection to you and even to your children.
  • Asset Testing – Asset testing has often been viewed as unfair and to avoid laws that may have this perception many people place assets in a family trust to take advantage of a benefit or subsidy they would otherwise be denied. It should be noted however that the Social Welfare Department has a wide range of powers and they may decline a benefit or subsidy for anyone who has deprived themselves of an asset.
  • Personal and Family Reasons – A trust allows control over the distribution of income and capital to family members. You may decide children must attain a certain age, qualification or other such thing deemed to be important before they receive the capital of the trust.
  • Taxation – A trust allows income to be spread amongst beneficiaries and thus take advantage of the lower tax rates. However a recent change to this law has eliminated the ability to utilise a beneficiaries lower tax rate if they are considered a minor. It should be remembered that tax law forbids someone arranging his or her affairs with the intention to avoid tax, therefore this could never be the sole purpose for establishing a trust.

Potential Disadvantages

There are a number of potential disadvantages of a trust, which may negate the perceived benefits. These include:

  • Reliance on Trustees – You no longer own your assets so you have to rely on the goodwill of the trustees. Difficulties can arise if the trustees are uncooperative and have little regard to the settlors wishes.
  • Cost – There are obviously costs involved in having a trust, from establishment, conveyance of property, mortgage transfer, annual running costs to annual gifting costs.
  • Administration – Often you are required to run a separate bank account, keep separate financial records, ensure all major transactions are authorised by all trustees and ensure that minutes are kept for trustees meetings which should be at least annually.
  • Losses – Any losses during an income year cannot be distributed to beneficiaries. These losses will accumulate in the trust until profits can be offset against them.
  • Law Changes – Without a crystal ball it is difficult to say what might happen but any changes are unlikely to make you worse off than if you had never established a trust, a law change might just mean you do not achieve the objective you began with.

Administration

While the administration of a trust may be described as a disadvantage it is extremely important that it is completed efficiently. Trusts can be challenged and although a trust may have the correct form, the actions of the parties may lack the substance necessary to establish a genuine trust. Poor administration could be interpreted as negating the intention to establish a trust or as rendering the trust ineffective.

Do You Really Need A Trust?

You must ask yourself, what am I trying to achieve? Will a trust help me achieve this objective? Am I prepared to pay for this? Do I have the time to administer a trust efficiently?

You must decide that the benefits outweigh the perceived disadvantages of having a trust and be committed to ensuring the administration of the trust is run correctly.

If you are interested in further advice, please arrange an appointment to see Steve by phoning 07 871 3430 or emailing steve@sgca.co.nz

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