How to guide: Beginner's guide to family trusts
We have prepared this Guide to assist you to learn more information about Family Trusts. This Guide is general in nature and as every Trust and the reasons for setting up a Trust are different, please do not hesitate to contact us if you require further advice and explanation.
Reasons for forming Family Trusts
In New Zealand, the main reasons for forming family trusts are:
- Asset planning between the generations;
- Creditor protection.
- There is an array of secondary reasons for forming trusts including:
- Providing some protection from relationship property claims;
- Lessening possible rest home charges;
- Tax effectiveness;
- Protecting assets from claims arising under company directors’ duties;
- Protecting assets from claims arising from statutory duties e.g. Health and Safety in Employment Act, Fair Trading Act.
Just what the trust structure should be and what assets should be transferred to the trust differs depending on your individual circumstances and the main purpose for the trust.
To find out more about trusts, please read more about that below...Common Terms Used
If you feel that a family trust might be for you, then you will need to know some of the terms used in a Trust Deed:
- Trust Deed: This is the document that forms a trust. It is signed by the Settlor and by the Trustees and sets out who is to benefit from the Trust and by what rules the Trust is going to operate.
- Memorandum of Wishes: This is like a “Will for your Trust”. The Memorandum of Wishes is from the Settlor and is like a letter to the Trustees. They provide some context and direction to whoever are the Trustees of the Trust, about what the Trust was set up for, what the Trustees should consider when the Settlors pass away, and any special consideration about assets or Beneficiaries that the Trustees should take into account when making decisions.
- Settlor: This is the name given to the person or people who establish the Trust and gives or transfers property or assets to the Trustees.
- Appointor: This is the name given to the person who has the power to remove and appoint Trustees. The Settlor or Settlors usually reserve this right for themselves.
- Trustees: These are the people who hold the property transferred to the trust on the trusts specified in the Trust Deed for the benefit of the individuals known as “beneficiaries”. In simple terms, the trustees manage the trust assets for the beneficiaries. If you would like to use an independent trustee company for one of your Trustees, ASCO Legal offers trustee companies for this purpose. We do not charge holding fees to be an independent trustee.
- Beneficiaries: We explain the concept of Beneficiaries further below.
In most Trust Deeds three types of Beneficiaries: Original Beneficiaries, Appointed Beneficiaries (Discretionary Beneficiaries) and Final Beneficiaries.
The Original and the Appointed Beneficiaries are Discretionary Beneficiaries. This means they have no right to demand any assistance from the Trust, but they do have the right to be considered for distributions of income, capital, or both, during the term of the Trust. From January 2021, beneficiaries have the right to access core documentation and information about the Trust, including the right to see the Trust Deed, to know what assets are held in the Trust, to see the financials of the Trust and records of trustees decisions and documents of appointment and removal of trustees. If this is concerning to you please let us know and we can talk through what is involved and what we can do to lessen the impact of these changes.
The Original Beneficiaries are named from the beginning of the Trust and will be the only discretionary beneficiaries of the Trust unless the trustees use their power in the Trust Deed to appoint further beneficiaries (Appointed Beneficiaries) from a range of people allowed to be appointed as described in the Trust Deed.
These days there are usually a narrow range of Discretionary Beneficiaries, but there is the ability to appoint others because this gives flexibility to the Trust which can often run well beyond the Settlors lifetime and may have to deal with situations not anticipated at the time the Trust was formed.
The Final Beneficiaries, normally the settlor’s children or grandchildren, are the beneficiaries entitled to share in any assets remaining at the time the Trust is wound up.
Wills get an honourable mention here, as these are not Trust documents, but commonly are re-done as a matter of course when someone sets up a Trust. The Will can be drafted to make best use of the Trust, often by the individual leaving their personal wealth or other assets to the Trust or forgiving any debt the Trust owes to them on their death.
Effect of the Trust
Once a Settlor has transferred the assets or property to the Trustees, the Settlor is no longer the owner of the assets or property and has no ownership rights in regard to the property or assets except to the extent of the rights the Settlor may have as one of the Trustees and/or Beneficiaries.
The Trustees are the legal owners of any property or assets gifted or transferred to the Trust. The Trustees are given a wide range of management and investment powers and the discretion to distribute income and capital to Discretionary Beneficiaries. The Trustees are obliged to act for the benefit of the Beneficiaries.
The law does not allow a Trust to exist indefinitely. Most trusts will have a maximum life of 80 years but after January 2021 Trust law changed so now can operate for up to 125 years. The Trustees are allowed to wind up the trust at an earlier date.
The Trust it is unaffected by the Settlor’s death unless there is express provision otherwise.
Because the assets transferred to the Trust belong to the Trust and not to you, the trust assets are not available for your unsecured creditors and do not form part of your assets.
Transferring Assets to a Trust
You may be aware that there is currently no gift duty in New Zealand as this was abolished some years ago.
It remains very common to sell assets to a Trust. Therefore, the family home, the bach, shares, etc. are sold at market value to the trust and the trustees make payment by acknowledging that the amount is owed to you or giving you a mortgage for that amount.
Whilst any part of the loan is owed by the Trust to you, that portion of the loan is still your asset not the Trust’s. The loan can then be reduced annually (you may know that as “gifting”) or as a lump sum depending on your goals and specific circumstances. The transfers are usually at market value. The transfers must be legally documented and where appropriate, registered in the applicable registries.
We can prepare your Trust Deed and any asset transfer documentation.
There are hundreds of types of assets Trusts can hold, including shares, classic cars, boats, etc. There are also many ways a Trust can obtain an asset in addition to the loan and forgiveness method described above, including simply receiving a gift, or buying an asset outright.
These are all matters we discuss further with you as your circumstances may require.
What We Need to Know from You – Your Trust
If you decide to set up a Trust, we will need to know:
- Your personal and financial circumstances and motivations for setting up a Trust and any concerns or goals that you have for yourself and any Trustees or Beneficiaries.
- Your current assets and liabilities including those owned by you personally, you and your partner, companies, other Trusts, etc.
- A family tree outlining who you are and where you sit in relation to named or relevant family and friends.
- Your Trust’s name (this is most often simply your surname plus the words “Family Trust”, e.g. Smith Family Trust, but could be something unique if you prefer, such as your initials, a street name, your pets name, etc.)
- Who the Trustees are going to be: Usually three people, or two people and a trustee company. We will need to know the full names, addresses and occupations of these people.
- Who the Beneficiaries are going to be: Usually includes the Settlor, and a few very close family or friends.
- What you would like to see happen to the Trust and the assets in it when you pass away.
- Other things we may need to know will become apparent as we work through your particular needs.
Bear in mind as you make the decisions about how your trust will be structured and what it will own, that these decisions are not necessarily final for your Trust. Many trusts and key trust documents adapt and change over the years as circumstances of individuals change and law changes are made. Most Trust Deeds are designed to allow maximum flexibility.
What We Need to Know from You – Your Will
If you are considering making a Will for the first time, you may not be familiar with what you could consider. In addition to some of the Trust elements listed above, we would also need to know:
- Who you would like to have administer your Will once you have died (this is called “Your Executors and Trustees of your Will” and is not the same as the Trustees of your Trust). Usually the Executors and Trustees of your Will include a spouse, parent, sibling, adult child or very close friend. Often people will choose up to three Executors and Trustees of their Will and may name people in substitution. Our director Alistair van Schalkwyk is happy to act as a Trustee and Executor of your Will to assist your other Trustees and Executors with the administration once you have died.
- Who you would like to give your assets to. These people are known as “Beneficiaries of your Will” and are not the same as the Beneficiaries of your Trust.
- If you have infant children: Who you would like to appoint as a Guardian or Guardians of your children.
- If you have pets: What you would like to happen to your pets.
- If you have any burial or cremation wishes, what you would like done with your remains. If you don’t have any idea, who you would like to make the decisions about your remains.
- Other things we may need to know will become apparent as we work through your particular needs.
Under anti-money Laundering legislation, we are required to verify your identity and take copies of your identification documents, proof of address as well as additional steps and documentation which will be discussed on taking instructions. We are also required to hold documentary proof of the bank account into which we deposit any payment. If we do not already hold these documents, we will ask you to bring in these documents when you meet with us.
Trusts Act 2019
If the Settlor is to be one of the appointed Trustees it’s important to bear in mind that the Trustees are required to act in the best interests of the beneficiaries and there are mandatory and default duties and obligations imposed in terms of the Trusts Act 2019. We can guide you through these when establishing or deciding whether to establish a Trust as well as assist with varying certain default duties as required for example varying the duty to act for no reward if required.