The following comments relate generally to discretionary family trusts. They are intended as general comments only. Any person considering setting up a Trust should seek specific, tailored legal advice.
WHAT IS A TRUST?
A Trust is a legal arrangement where the owner(s) of property (the Trustees) hold that property for the benefit of other people (the beneficiaries) or some object (ie. a charity). The terms of the Trust are often set out in a document known as a “Trust Deed.” Usually in the Trust Deed the Settlor appoints trustees, usually a minimum of two, often three, to hold the Trust Fund (which is usually started with a nominal sum of say, $10.00) on behalf of the Trust’s beneficiaries.
SETTLOR
The Settlor is usually the person or persons who will be transferring assets to the Trust. In case of a couple who will transfer jointly owned assets to a Trust, both would be regarded as Settlors. The Settlor usually retains the right to appoint and remove Trustees.
TRUSTEES
The trustees control the assets of a Trust and usually unanimously determine which beneficiaries will benefit from the Trust. The trustees often have the power to add discretionary beneficiaries to the Trust, usually only with the consent of the Settlor. The trustees sometimes have power to remove discretionary beneficiaries from the Trust, again sometimes only with the consent of the Settlor.
Sometimes trustees include the Settlor or Settlors and possibly other family members. We recommend that an independent trustee is also appointed – often a Lawyer or Accountant. Without an independent trustee, there is a greater risk of the Trust being defeated in a challenge by a creditor, the IRD, or WINZ. Keam Standen Limited (“Keam Standen”) offers an independent trustee service and charge an annual fee for this service. If you are interested in appointing Keam Standen as a trustee of your Trust, please ask Keam Standen for an application form.
When considering who should be appointed as trustee, the Settlor should consider the ramifications of the need to remove an independent trustee in the future. In the event you appoint a friend and need to remove that friend, it may be that not only a trustee is lost, but also a friend.
BENEFICIARIES
The beneficiaries can be whoever you choose. This may include yourself, your spouse, your children, grandchildren, charities or other organisations you wish to benefit. As a result of changes in tax law, beneficiaries should be natural persons for whom the Settlor has “natural love and affection”. A gift to a charity may trigger a tax liability for the trustees on distribution to the beneficiary outside that definition depending on how the trust fund was transferred into the Trust. The trustees will typically determine who will receive the income and capital from the Trust.
In a discretionary trust, an individual may be named as a beneficiary or come within a class of beneficiaries, but unless the trustee(s) exercise their discretion in favour of that beneficiary, the individual will not have any right or claim to any of the Trust assets.
New legislation also requires trust information be provided to beneficiaries.
PROS OF HAVING A TRUST
TO BENEFIT OTHERS
Many people want to provide for their immediate relatives. Trusts are set up to protect the long-term interests of yourself, your spouse and your children and are frequently set up to benefit spouses, children or grandchildren, but you can choose whoever you wish to benefit.
A Trust can preserve assets for successive generations and having a discretionary trust can allow great flexibility when dealing with changing circumstances of family members. With discretionary trusts, trustees can unanimously decide how much income (and capital) they distribute to each beneficiary. Trusts can also provide for charities as potential beneficiaries.
TO PROTECT ASSETS
Trusts are useful for protecting assets from future claims. Claims can arise in a number of ways:
Protection from claims by future Creditors
The ever widening field of personal liability for directors and professionals makes creditor protection ever more important. It is not necessarily enough to rely upon the limited liability of your company.
Careful planning and thinking ahead can place assets, which might otherwise be open to attack, beyond the reach of creditors.
Protection from Claims Against Estates
The Family Protection Act 1955 and the Law Reform (Testamentary Promises) Act 1949 provide fertile ground for claims against estates.
Spouses and children who feel hard done by way of inheritance are often able to bring claims against the estates of their immediate relatives. If the assets of an estate have been transferred or settled into a Trust then such assets can be protected from these claims. Trusts can also assist to avoid family disputes after your death.
Protection from Other Claims
The establishment of a discretionary trust is an effective way of avoiding your assets being lost due to:
- Matrimonial or Relationship Property Claims against future spouses in the event of separation or death of a spouse (note, this is a rapidly changing area of the law);
- Protect the interests of your own children against claims by their partner or spouse;
- Government claims – particularly in relation to residential care subsidies. Please note the use of a Trust requires careful consideration dependent on individual circumstances;
- Prosecutions under the Health & Safety at Work Act 2015;
- “Leaky Home” claims under the Weathertight Homes Resolution Service Act 2007; and
- Employment grievance claims;
PRIVACY
Trusts are generally not recorded on any public registers thereby making them a private entity. Their existence or their workings may not be known to those outside the pool of beneficiaries. Passive trusts with no income generally do not have to file tax returns.
TRUSTS FOR SPECIAL PURPOSES
You may have a need for a Trust to achieve a particular purpose; for example, it may be a single purpose Trust to provide for a child with disabilities.
INCOME PLANNING
Trusts offer the potential benefit of income splitting and consequential tax savings. In New Zealand we have a graduated tax scale. The tax rate rises as income rises. By using Trust to split income, you may be able to reduce your overall tax liability.
The income of a Trust is divided into two categories:
- Trustee Income – taxed at 33% from the first dollar of income; and
- Beneficiary Income – taxed at the marginal tax rate of the beneficiary.
SEPARATE LEGAL ENTITY
A Trust is a separate legal entity for tax purposes.
If a Trust purchases or sells property it must have an IRD number (even if it makes nil returns or is listed as ‘inactive’ for tax purposes). This is obtained free of charge from the IRD.
CONS OF HAVING A TRUST
ONGOING ADMINISTRATION AND MAINTENANCE
If a trust is not set up or managed well, there can be considerable inconvenience and cost. There is the risk of having the trust declared a ‘sham’, which would mean that the assets are not really the trustees’ but remain in your personal ownership.
If the trust is a sham you may lose all of the advantages that you were hoping to gain from the trust, and the trustees may be penalised as well.
It is very important that annual meetings are held and clear records of decisions and anything else affecting the trust are kept. This will incur additional cost.
RELINQUISHING OWNERSHIP
It is important to understand that even though you own property as a trustee, you own it on behalf of all the beneficiaries. You only benefit from the Trust’s property if you are also a beneficiary of the Trust. Although modern trust deeds are often drafted to be flexible and give the creators (or “Settlors”) of the Trust wide powers, having property in a Trust inevitably means that you will have less direct control over it.
MEMORANDUM OF WISHES/GUIDANCE
A Memorandum of Wishes is usually completed by the Settlor to indicate to the trustees how the Settlor wishes the Trust to be administered. The letter is not binding on the trustees because this would undermine the advantage of the discretionary nature of the Trust.
TERM OF THE TRUST
A Trust is usually settled for 125 years which is the maximum term permitted under the Trusts Act 2019. The term of the Trust can be shortened if the Trustees wish to shorten the Trust.
WILLS AND TRUSTS
When you establish a family trust, it usually has significant implications for your Will so we recommend you complete a new Will when you set up a family trust.
Last updated: May 2021