There are a number of reasons to form a Family Trust and potential benefits that arise from doing so but we do suggest you talk to us first to ensure you understand the full implication of a trust on your financial position.
Asset Protection – Assets in a Trust can be protected from creditors in the event of personal bankruptcy or the insolvency of a company of which a person is a shareholder or director. However, the extent of this protection will depend on matters such as the donor’s solvency when gifts are made to a Trust and whether dispositions of property were made that have the effect of defeating a creditor’s interest.
Continuity – Trusts can continue to operate after the death of the settlor without any immediate need to sell any assets to distribute among beneficiaries. Progressive release of funds to beneficiaries can occur and distribution to vulnerable beneficiaries can be delayed until appropriate. Family heirlooms can also be protected. Trusts can operate for limited periods, but have a maximum life of 80 years.
Government Claw-Back or ‘Surtax’ Type Taxation – Assets in a Trust can give protection when assessing future entitlement to residential care subsidies. However, as there are strict rules regarding means, income and gifting, specialist advice is recommended if a residential care subsidy application is contemplated. Historically Trusts have reduced the impact of additional personal taxation assessed against the elderly on an income / means-testing basis such as the surcharge.
Death Duty or Wealth Tax – Assets in a Trust can give protection against Death Duties or Inheritance Taxes (Note: There are no Death Duties at present in NZ. However, these cannot ever be entirely discounted). If a capital gains or capital transfer tax is introduced in the future then, provided such tax is assessed on the profit made on any sale, and provided the Trust does not dispose of property, such tax could possibly be avoided.
Property (Relationships) Act – Whether or not property transferred to a Trust will be at risk in the event of a marriage, civil union or de facto break up will depend on individual circumstances and whether any disposition to a Trust has the effect of defeating a spouse or partner’s interests or expectations.
Family Protection Act – Assets in a Trust are generally safe from family protection claims by disgruntled family members who disagree with the provisions of a deceased person’s Will.
Protection in Old Age – Trusts can be structured to reduce the risk that an elderly person will lose family assets through an unwise marriage late in life and a subsequent matrimonial settlement. They can also protect against the undue influence of other family members or poor financial decision making.
Irresponsible Children or their Spouses – Assets can be protected from being wasted by children who are still immature and not financially responsible. Income can be made available but capital retained until children reach a specified age.
Income Spreading – In some circumstances income earned by the Trust can be spread among any one or more of the beneficiaries so as to take advantage of their own lower tax rates, i.e. spouses, partners, children and grandchildren. Note that this is subject to the ‘minor beneficiary rule’, which provides that distributions to most minors (children under 16 years) must be taxed at the trustee rate.
Cost Effective Estate Administration – The costs of winding up your estate may be substantially reduced or eliminated altogether.
If you have a question or a query for Glynis please give her a call on 09 273 3682. Glynis has a wealth of experience in advising the SME sector, with a focus on property developers and investors, the use of family trusts, and a holistic approach to assist her clients to achieve their business and private goals. Watch the video where Glynis explains how she can assist you.