Have you got a trust?

Bill and Petra were at a neighbourhood BBQ at the Hodgson's house. Everyone was admiring the Hodgson’s new additions when Trevor Hodgson said with a hint of pride: “Of course the house is in a family trust”. Several of the neighbours nodded in approval – their houses were owned by a family trust as well. The conversation turned to the advantages of trusts, and the best lawyers to see about them.

When Bill and Petra got home, they started to discuss trusts – they knew almost nothing about them but wondered what they were missing out on. After all, nearly everyone seemed to have formed a trust.

Bill and Petra approached a lawyer (the same one the Hodgsons had used). He enthusiastically pointed out the advantages of trusts and said he could have the trust formed within a week. Bill and Petra did not properly understand much of what the lawyer was saying, but the whole thing seemed to be a good idea so they told the lawyer to go ahead.

A week later the trust was formed with Bill and Petra as trustees, and the house and their small share portfolio were sold into it. The lawyer gave them all of the documents, said that he would register the trust with the IRD and wished them good luck.

For some months nothing much happened. Then the IRD wrote asking for a tax return for the trust. Bill and Petra had to find an accountant to help with this. They had never needed an accountant before, but got a referral from Petra’s brother.

The accountant told them that the tax return would not be a problem and should cost $300. Then she asked to see the trust’s minute book. Bill and Petra knew nothing about this and the accountant explained why it was necessary that they record all of their decisions. The accountant also asked about gifting – Bill and Petra planned to continue to gift to the trust but did not know how to go about this. The accountant said she would do this for them each year – for a fee.

It became clear to the accountant that Bill and Petra did not know much about the trust that they had formed and were trustees of. She asked why they had set it up. Again, they were not sure – in their late 40s they were too young to be worried about Rest Home care, were not in business, and both earned under $60,000 a year. The accountant could not see any compelling reason for their trust, and said so.

Bill and Petra now found themselves with a trust that they did not really need. They had paid the lawyer $2,000 to form it and could see management time and money being spent in the future. They realized that the mistake that they had made was that they had only gone ahead with the trust because other people were forming trusts and not investigated the idea from their own position.