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An Introduction to Trusts

Although Family Trusts have become popular recently they have been with us in one form or another for more than Four Hundred years. Their basic nature remains much the same but their role has evolved to meet the needs of each generation.

umbrella-manWhy use a Trust?

To Protect Important Assets: Assets can be put at risk in a number of different ways. These can include business failure, legal action or a relationship breakdown. We also do not know what the future holds. Government policy can change on a whim, bringing risks to the value of those assets we have strived so hard to acquire.

Will we get a Capital Gains Tax or will the Asset Testing Regime be extended to other Government Benefits? – We live in volatile times and there are no guarantees the government policies we have now will be here next year.

What is a Trust?

When someone who owns assets and perceives that these could be put at risk or could have some potential for loss that person would therefore look to divest or remove themselves from those assets, however at the same time still wishing not only to enjoy the use of these assets but also to control them. To continue to do so they will then look to transfer the assets to Trustees of their Trust. The Trustees then hold these assets on behalf of the family group, rather than the individual.

rainingIt is common in New Zealand for those who establish the Trust to be kept in total control of this new entity as most fear that they will otherwise lose control of their assets. Most would therefore agree that in order to achieve this control you must also be a Trustee.

We would agree with this advice, however, we maintain that you cannot possibly control something that you simply do not understand. This in our view is where Trusts have the potential to be challenged as the individuals that are in ‘control’ of the Trust simply do not understand the new position that they take. At New Zealand Trustee Services we look to educate as it is only with knowledge that you can successfully manage and control your Trust.

Reasons to Form a Trust

  1. For Succession Planning (passing assets from one generation to the next). Most New Zealanders wish to provide for their families. This may be done by passing on the family farm or business or even just the family home. There are many obstacles to this happening. Using a Trust is a way to plan for the smooth succession of assets from one generation to the next.
  2. To Protect Separate Property: Trusts are often used when individuals have separate property they do not wish to intermingle with their relationship property. If the separate property is placed in a Trust they no longer own this asset and it can then be kept separate from relationship property. This is particularly important to those people who have just left a relationship or have property and are forming a new relationship.
  3. To Reduce Risk of Asset Loss through Business Failure: New Zealand is a country of small businesses and unfortunately some of them do not trade successfully. Placing your house in a Trust may help protect your family in the event of a business failure.
  4. To Reduce Risk of Loss of Assets through Legal Action: As a country we seem to be becoming more litigious in nature. If your business is one that could expose you to a legal action, through advice or actions, you may wish to protect your family by placing your home into a Trust.
  5. To Gain Taxation Benefits: When income is received in a Trust the Trustees can elect to either retain income within the Trust or allocate it to a beneficiary. This decision should be made in conjunction with the Trust’s Accountant.

Note – the timing in respect to the establishment of the Trust is critical as protection takes time. There are very few immediate gains for any Trust due to the nature of the Gifting Requirements, therefore advice on forming a Trust for these or any purpose should be sought via your New Zealand Trustee Services – Trust Managers.

Content courtesy of New Zealand Trustee Services Ltd

The Last Word

Each individual client and situation requires specific personalised advice to establish the best method to achieve the desired financial protection and risk management  goals. Always seek specialist advice from a qualified adviser.

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Published on Monday, August 25th, 2014, under Latest News

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