Family Trusts and Asset Planning

Two Articles on Family Trusts  (1.  Family Trusts and Asset Planning and 2.  New Zealand Trust and Gifting Law under Review including our YOU TUBE presentation)

1 October 2009

Legal article by Ian Mellet (Auckland lawyer and principal of Quay Law NZ Barrister and Solicitor)

As you embark on your journey together as husband and wife, now is the opportune time to review your situation and meet with a solicitor, to “set your future platform” in place so to speak. In a previous article I discussed Wills and the impact of a marriage on existing wills. In this article I intend to cover Family Trusts and the value that such an entity can provide to you during the course of your years ahead.

At the outset, it should be borne in mind that the reasons for implementing a trust structure are extremely important. Your family circumstances clearly play a pivotal role in this regard.

Outlined below are a number of reasons why implementing a trust structure could possibly be of benefit to you and your family:

Protection of core family assets for present and future generations (this has been the traditional use of family trusts and should be the prime consideration when any trust is established).
Protection from business creditors (separation of core family assets such as the family home from business risks).

• Protection of particular beneficiaries (example, children with special needs, educational trusts).
• Protection from matrimonial property claims and de facto claims.
• Protection against possible income tax consequences and future taxes.
• Protection against the likely consequences of inflation.
• Incidental benefits in relation to means testing and rest home subsidies.

Background

The prime purpose of the trust would be to protect core family assets which you have built up for the benefit of your children and grandchildren, but at the same time ensuring that you have the use and access to trust funds during your lifetime without interference from others. The primary concern of the trust would, in the interim, be your well being, but in due course you may provide for your children and grandchildren who ultimately will have the control and benefit of the trust fund. Transferring any assets at this stage would be prudent in the sense that you can cap the value, and any increase in value of the assets after the date of transfer to the trust would be an increase in the hands of the trustees. This is particularly pertinent in the event of the re-introduction of estate duty at some later stage.

When acquiring an asset such as a property, it is important that you make provision for the trust to purchase the property at the onset. You are able to do this by stipulating that the property is to be purchased by yourself “and / or nominee” This will allow you to set up a family trust or other legal vehicle and for that entity to complete the purchase. You should also consult with your professional advisors regarding the structuring of any borrowing that is required.

It is important that the administration of the trust is properly attended to. This includes performing the annual gifting programme wherein yearly gifts of $27,000 each are filed with the Inland Revenue Department. Keeping an adequate “paper trail” will ensure that the trust records are up to date for any audit purposes.

(As published in My Wedding Magazine – Summer 2009) Download the PDF

So where does this leave Trusts as we focus on 2011?

The proposed abolition of gift duty together with major changes to the qualifying companies regime and the Law Commission’s re-examination of trust law means this will be a momentous year for those with trusts.

Of current concern to the Law Commission is the transferring of assets into trusts to avoid obligations to, for example, creditors and / or spouses or partners under the Relationships (Property) Act 1976. The Law Commission is considering whether:

• legislation should address the need to look through trusts in certain circumstances in order that trust property can be made available to a creditor, spouse or partner or for government asset testing.
• legislation should address sham trusts and the problem of trusts that are not really trusts.

With specific reference to treating trusts as “look through” entities, the Law Commission is evaluating if it should allow trust assets to be made available to creditors, spouses and partners, and to be considered as a part of the assets of the settler or a person with control over the trust for assessing eligibility for government assistance. As an alternative, the law could continue to leave it to individual statutes to address how a disposition of property or income to a trust is to be treated in a context where such a disposition defeats a government policy. Because of the difficulties in creating look-through provisions that meet the needs of the various contexts to which they must be applied, the latter may be the preferred approach.