How to set up a family trust

By some estimates there are 200,000 family trusts in New Zealand. Clearly they are popular, but why should you have one and how do you go about setting one up?

New Zealand Trustee Corporations Association executive director David Brown Douglas said ''me too'' trusts are not a good idea.

''The fact that your friends, neighbours or family have trusts does not mean you need one. You need advice specific to your own needs and aspirations.''

Public Trust managing solicitor Henry Stokes said there are several good reasons for having a family trust and for most people the advantages outweigh the disadvantages.

Yet ''it is not easy to undo a trust if you decide later that it wasn't the right decision''.  

Janet Xuccoa, trustee services director at Gilligan Rowe and Associates said reasons to consider establishing a family trust include:

* Asset protection against professional liability claims, unexpected business debts or financial disaster

* Tax minimisation in certain circumstances, including preparation for possible capital gains or death taxes

* Preparing for the time you might need residential care

* Reducing the chance of relationship property claims by future partners

* As a mechanism for estate planning, that is, providing for your family after you're gone and ensuring your wishes are carried out the way

* Maintaining confidentiality about your financial affairs

Establishing a family trust

In creating a trust, the ''settlor'' transfers assets to the ownership of trustees, who are legally obliged to manage them according to the requirements of a document called a trust deed.

Trustees can be the settlors themselves, or professionals such as lawyers, or a combination.

The trust deed will typically say the assets must be used for the benefit of certain people, known as beneficiaries.

Douglas said people who wish to establish a trust should seek expert advice before they do so.

Most lawyers and accountants can advise on family trusts, and trustee corporations have staff who specialise in this kind of work.

''Don't do this at home,'' Douglas said, as trusts can be ''very technical structures''.  

For a trust to function well, Douglas said it needs a trustee or trustees you can rely on, people who understand the technical requirements.

It also needs a professionally drafted trust deed which sets out in clear ordinary language what the trustee can and can't do.

''If it is not authorised by the trust deed, then the trustees can't do it. And if you can't read the deed and understand it then it is not much use to you,'' Douglas said.

Among the issues to be considered is that trusts set up or run incorrectly may fail just when they are needed - poorly written deeds can allow trustees to dispose of assets in ways you did not intend, or a creditor can challenge the trust in court if it appears to be not a genuine trust arrangement.

For example, if beneficiaries are also trustees and control the assets in ways indistinguishable from personal ownership, a trust can be open to challenge, particularly if was formed to escape a claim from creditors or tax liabilities.

Xuccoa said a trust should also have a written plan for which assets would be gifted to the trust, when and how. The trust should also have a good administrative and financial record.

To set up a trust and transfer assets into it and start a gifting programme typically costs between $2,500 to $3,000 plus GST.

Stokes said the cost would depend on the complexity of the trust and he estimates that establishing one for the transfer of a home with a mortgage involved, which includes writing the trust deed and trust documents, transfer of assets, annual gifting, mortgage arrangements, cost of valuation of property, search and registration, would be between $3,000 and $3,500.   
Kiwis traditionally established family trusts early in their lives so they can transfer or gift their assets into the trust on a schedule that will not attract duty.

Gifts of up to $27,000 are duty free, so people would plan their yearly gifting accordingly, like gifting a property worth $270,000 over a period of 10 years.

But avoiding the gift duty, which can be as high as 25 per cent for assets valued more than $72,000, would no longer be a primary objective as it is expected to be abolished this October.

Family trust benefits

A goal of transferring assets to a trust is often to be asset poor, said barrister and solicitor Paulo Garcia of Garcia Law.

''The main objectives of establishing a family trust are for one to more effectively manage one's assets and to avoid user pays charges. It is common sense that owning assets personally cannot protect those assets against the risks that life presents,'' he says.

Before October last year, people often used trusts to minimise their taxes.

There were situations where people whose 39 per cent tax rates were higher than a trust's 33 per cent rate would channel their income, say dividends, through a trust and pay less tax than they would otherwise.

But Xuccoa said that the new tax scheme had removed that, ''but there is still opportunity to minimise taxes as benefits may be paid out to a beneficiary on a lower tax rate, say 10.5 per cent.

''It is not the age of the beneficiary that matters but the bracket of the income.''

Trusts are also good protection should the Government introduce means testing to state benefits, as in the case of long-term geriatric care of those over the age of 65, which is income and asset tested, Garcia said.

Being asset poor then makes one eligible for New Zealand residential care subsidy, which Xuccoa said is significant as a rest home in Auckland costs anywhere between $800 and $2000 a week, and ''if you're going to sell your home for that, it means that you've got nothing to leave your children''.

But means testing may not only be confined to geriatric care. Talks abound that superannuation and other benefits should also be subjected to means testing.

''My attitude is be smart. Put everything in a trust. Get your trust working correctly. If I am wrong then you'd end up with a great asset protection. But if I am right then you don't only get great asset protection but if you need government help, say in a rest home, then you'd get that help right away,'' Xuccoa said.
Useful websites

Trustee Corporations Association:
Public Trust:
Gilligan Rowe and Associates: