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Family trusts

A trust can protect the ownership of your assets while you are alive. You transfer the legal ownership of the assets to the trust while continuing to use and enjoy them. For example, if the family home is in a trust, you no longer personally own the house - but you could still live in it if that's what the trust deed states.

Benefits of a family trust

People usually set up a family trust to get some benefit from no longer personally owning an asset. A family trust may be useful to:

  • Protect selected assets against claims and creditors – for example, to protect your family home from the potential failure of a business venture.
  • Set aside money for special reasons, such as a child or grandchild’s education.
  • Ensure your children, not their partners, keep their inheritances.
  • Avoid unwanted claims on your estate when you die – such as from a former partner.

Who’s involved

  • A settlor: The person or company who creates the trust, e.g. you.
  • Trustees: The people who manage the trust. If you are the settlor you can also be a trustee. It’s also a good idea to appoint an independent trustee like a lawyer or accountant.
  • Beneficiaries: The people who benefit from the trust, for example you or members of your family.

Often there is more than one trustee. There may also be more than one settlor of a trust.

The settlor can have the power to appoint and remove trustees. This is an important power that you can also transfer to someone else in your will.

Note that a trust doesn’t necessarily end with your death – it can last for a maximum of 80 years from inception.

What’s involved

First you will need to decide what things you own should be put into the trust, and what their value is.  In most cases this will be the family home, but other things of value like cash, bank deposits, shares, artwork etc. can also be included.

The ownership of these assets will then be transferred to the trust and the trust then owes a debt back to you, the settlor. This debt can then be ‘forgiven’ through a process called gifting.

A legal document called a ‘trust deed’ will formally set up the trust. It will appoint the trustees, list the beneficiaries, and state various rules for the administration and management of the trust. The trust deed needs to be very carefully written, preferably by a lawyer.

Asset transfer

Once the trust is formed assets can be sold into the trust, at market value. However, although the trust wants to buy, say, your house (and you want to sell it to the trust) the trust has no money to buy it. How then does the trust pay for the house?

The answer to this is that you lend the trust the money. Initially this is a ‘paper’ transaction - you sell the house to the trust, and the trust now owes you a house-sized debt.

However the debt that the trust owes you is still counted as a personal asset. So you will need to get rid of the debt so you can achieve your aim of owning less in your name.

The way you do this is through ‘gifting’.

Gifting

Most people who form trusts ‘gift’ away the debt that the trust owes them. Before October 2011 there was a limit of $27,000 that you could gift in one year without paying a tax called gift duty to Inland Revenue. However gift duty has now been abolished and there is  no limit to how much you can gift in one year.

This means that where previously it would have taken 14 years to gift the value of a house worth $400,000 to a family trust without paying gift duty, you can now gift the whole amount of the debt straight away. However, it’s always best to seek legal advice before proceeding.

Note that gifts are still included in your assessment for a Residential Care Subsidy.

For more information visit the Work and Income website.

Costs and risks

Costs of trusts

Tip: A family trust can be costly, complex and take time to manage. Make sure it is worth it!

Family trusts can be complex and time consuming to administer. It costs money to set them up and there are generally ongoing legal and accounting fees.

It’s worth shopping around, as different organisations charge different amounts both for the establishment and ongoing management of a trust.

You also need to think carefully about who will be the trustees, as they will be responsible for managing the trust properly. Your will should nominate people to be trustees after you die.

Risks of trusts

If a trust is not set up or managed well, there can be considerable inconvenience and cost.

You could also run the risk of having the trust declared a ‘sham’, which would mean that the assets are not really the trust’s but are in fact still yours.

If the trust is a sham you may lose all of the advantages that you were hoping to gain from it, and you may be penalised as well.

Once you put your assets into a trust, you no longer personally own or control them. Instead, ownership passes to the appointed trustees who must act under the terms of the trust deed in the best interests of the beneficiaries.

There have been cases of family members suing other family members for a breach of the trust’s provisions. The courts treat claims of this sort quite seriously and they will normally be expensive to resolve.

Forming a trust is a big decision. If you are going to form one, make sure that it is established properly, for the right reasons, and managed well.

Getting advice

Family trusts can be quite technical and need legal, and sometimes accounting, expertise. They should usually be formed by a lawyer or a professional trustee company.

If you use a lawyer, check that they are experienced in trust work (lawyers have different specialties and not all of them are experienced with trusts).

If you are putting property that could qualify as relationship property in a trust, then both you and your partner should get independent legal advice on the implication and effects of that transaction, before proceeding.

Good advice on trusts is important. Get professional advice right from the start.

It may seem a large cost to get an expert, but it may cost even more if things are not done well. Just think about the possibility of your children suing you!

mightymouse