As a business owner, could a family trust be important for you?
If you’re a business person, owning or running your own business, and if you carry any kind of debt related to your business undertaking, it’s very important to separate, or at least protect, your personal assets. The last thing you want is for your business to fail and your home and other assets to fall prey to your business creditors as a result. One smart way to ring-fence your personal assets from business risks or business creditors is with a family trust.
When you set up a trust, the assets you place in it are no longer personally owned or controlled by you. Instead, they are owned by the trust. The idea behind a family trust is to help protect the ownership of assets for people in business, as well as provide a range of other benefits. For example, if you create a family trust as a way to pass your primary residence to your spouse and/or children, business creditors cannot lay claim to it for repayment because the house is no longer your personal asset – it’s owned by the trust.
First up, get advice from your Auckland family trust lawyer
Forming a family trust is a big decision. Trusts can be quite complex, cost money to set up and usually involve ongoing legal and accounting fees. So, always make sure the trust is set up properly and for the right reasons – and that it’s managed well. If you don’t, then you could be facing considerable inconvenience and cost, and, in a worst case scenario, the trust could even be declared to be a ‘sham’. If that happened, the assets you wanted the trust to own will no longer be owned by the trust but will still be owned by you. In that case, those assets would be unprotected against the very risk that may have caused you to try to set up the trust to begin with.
New Zealand Trust law is also constantly under review, so it’s important to get up-to-date expert help from your Auckland family trust lawyer. Lawyers specialize in different aspects of law, which means not all lawyers are experienced in trusts, so make sure you get the necessary professional guidance from your Auckland family trust lawyer right from the start.
How does a family trust work?
The people who set up the family trust are called the ‘settlors’. The people who hold the trust property and run the trust are called the ‘trustees’. The settlor can also be a trustee. It’s also a good idea to appoint your Auckland family trust lawyer as an independent trustee.
While the trustees become the nominal owners of the property transferred to the trust, they have a legal obligation to deal with the property as set out in the trust deed for the on-going benefit of the people who ultimately benefit from the trust, namely, the ‘beneficiaries’.
Any asset, such as a home, shares, investments, cash, bank deposits or artwork, can be transferred to a trust.
A trust can last for a maximum of 80 years from its inception, at which time the trust has to be wound up and the assets distributed to the beneficiaries.
A legal document, known as a ‘trust deed’, will formally set up the trust. It will appoint the trustees, list the beneficiaries, and state the rules for managing the trust. It’s very important that the trust deed be written very carefully, preferably by your Auckland family trust lawyer.
Get you Auckland family trust lawyer to explain the benefits of a trust
As mentioned, the transfer of family assets into the ownership of a trust is useful for people involved in business. If your business should fail and you’re pursued personally for the debts of the business, your home, and any other assets that have been transferred to the trust, will be safe because they are owned by the trust, not you.
In addition to protecting specific assets against creditors, a family trust may be useful for:
- Setting aside assets for a special purpose, such as your child’s education.
- Ensuring your children and not their partners get to control their inheritances.
- Managing the risk of unwanted claims on your estate when you die, for example from a former partner.
As is the case with every family, every family trust is also unique. So, the really important thing is to ensure you get expert advice from your Auckland family trust lawyer as to whether a trust will suit your particular needs and what you can use the trust to achieve.
Transferring your assets to your family trust
Once you’ve formed your family trust, you ‘sell’ specific assets into the trust. Of course, the trust doesn’t really have any money to buy the assets you want it to hold. So, you have to lend the trust the money it needs to be able to buy the specific assets off you.
However, what this means is that the resulting debt that the trust will then owe you will be counted as a personal asset, which is what you’re trying to avoid. So, in order for the trust to work properly as an asset-protection mechanism, you will have to get rid of that debt so you can achieve your goal of having fewer assets in your name. You accomplish this by ‘gifting’ your assets to your trust.
Prior to October 2011, no one could gift more than $27,000 per year without paying a ‘gift duty’ or tax to the Department of Inland Revenue. That meant that the value of the assets being transferred to the trust could only be ‘gifted’ in relatively small amounts each year, until the entire value had been transferred.
In October 2011, however, gift duty was abolished and there’s now no limit to how much you can gift in a year. That said, however, New Zealand trust law changes all the time, so it’s still very important to get expert professional advice from your Auckland family trust lawyer before proceeding with any asset transfer.
Need help protecting your assets? Talk to you Auckland family trust lawyer
It’s essential that you protect your most important assets during your lifetime and on your death. A family trust can be one of the best ways to do so.
However, setting up a trust can be complex and it takes time and money to manage, so it’s important to make sure it’s all worth it. The best way to do so is to talk to your Auckland family trust lawyer. Our family trust lawyers at Quay Law specialize in establishing trusts and supporting the ongoing management of trusts along with their trustees. Contact your lawyer today for expert advice as to how a trust can help you protect your assets.