By Hayley Boud
Why have a Family Trust? As the property transferred into the trust now belongs to the trust and no longer belongs to individuals, a family trust is an effective way of protecting your assets for family members such as yourself, your spouse and your children. A family trust can protect your assets from future creditors, IRD, relationship property claims and it can also enhance your eligibility for government entitlements such as residential care subsidy (see the Estates Planning post for further information on how a family trust can protect your assets).
Furthermore, a family trust ensures certain assets such as the family farm or business are transferred intact to your next generation. A family trust is also an excellent tool for assisting a family member who is unable to manage their own affairs for reasons such as age or disability. A family trust is an effective estate planning tool, assisting with estate administration and may save costs in the long run by transferring assets into the trust prior to passing away.
Who is Involved in a Family Trust?
The settlor: the person (or people) who set up the trust by transferring property to the trustees of the trust.
The trustees: the people who manage the trust. It is advisable to have two or three trustees that the settlor is sure will manage the trust wisely. It is also advisable to have an unrelated trustee such as the settlor’s lawyer or accountant.
The beneficiaries: the people who will benefit under the trust. They can include the settlor and/or trustees. The beneficiaries can be specifically named individuals or a class of people such as “children”.
Beneficiaries can be either final/ultimate beneficiaries or discretionary beneficiaries. Final/ultimate beneficiaries have a legal right to the trust property on the date the trust ends. Discretionary beneficiaries have a right to be considered by the trustees for trust property but do not have an automatic right.
A family trust can be set up so as to provide power to the settlor to add or remove beneficiaries at any time.
How long does a family trust exist?
A family trust cannot continue for longer than 80 years and the trust deed (the document setting up the trust) must contain the date on which the trust is to end, known as the distribution date. The trust deed may be set up in such a way so as to provide the trustees with the power to bring the trust to an end prior to the distribution date or extend the distribution date.
Appointment or removal of trustees?
The trust deed should state who has the power to appoint new trustees and the power to remove trustees. Usually this power is given to the settlor. However, if the trust deed is silent on this issue, the trustees can determine together to appoint new trustees. Where trustees cannot agree, the Court has the power to appoint.
How does a family trust operate?
Trustees are the managers of the property which has been transferred into the trust. Trustees can hold property and bank accounts, raise mortgages and invest property in accordance with the powers set out in the trust.
It is important to remember that trustees are not entitled to do what they want with trust property. The powers of trustees are restricted by the trust deed, legislation such as the Trustees Act 1956 and case law.
How to transfer assets into a family trust?
You may transfer assets into a family trust at any time by either gifting or selling to the trust. Usually the settlor will transfer the assets into the trust but trustees may also acquire assets from someone else.
How to get money out of a family trust?
Trustees have the power to decide the amount of payments, whether they will come from the income or capital and to which beneficiaries they will be paid to. Where the trust owes a debt, the creditor can demand payment for a debt (if the document recording the debt allows).
Can a claim be brought against a family trust? A court may reverse the transfer of assets to a family trust where:
- The person transferring the property has been declared bankrupt within two years of the transfer;
- The transfer was made with the intention of defeating the rights/claims of another person such as partners or spouses under the Property (Relationships) Act;
- The transfer was made with the intention of defeating creditors;
- The transfer has the effect of defeating creditors (intentional or not); and
- The settlor was unable to pay your debts at the time he/she gifted the assets.
Seek legal assistance It is important to seek legal advice from an expert in this area of law if you would like to set up a family trust. An experienced lawyer will help you choose the right structure for your family trust and ensure your particular needs are met. For further information, please feel free to contact us on 07 838 0808 or hayley@ghlaw.co.nz