Trusts - The Practical Things

In my Blog ‘Trusts - The Technical Things’ I outlined some of the technical things you should know about Trusts. This Blog looks at the advantages and disadvantages of setting up a Trust and provides you with an outline of some of the things you should consider in answering the question “should I set up a Trust?”.

Trusts are not for everyone. They require time, effort and cost to operate and you do not own the assets yourself but with other people - trustees. They are, however, an excellent way to protect your assets for yourself and your family. Everyone’s circumstances will be different so it is very important that you have a very clear understanding as to why you have set up a Trust and the benefits it will provide.

Advantages of a Trust

1. Asset Protection

   An asset can be gifted or sold by you to a Trust. If it is gifted to the Trust, then there is no debt due back to you. Currently there is no gift duty in New Zealand. If the asset is sold to the Trust then there is a debt due back to you which can be repaid over time or gifted to the Trust. Once the debt has been gifted or repaid to you then the Trust owns and controls that asset. Any increase in value takes place within the Trust and your personal asset base has decreased. Any assets held in a Trust are usually protected from your creditors.

2. Protection for and from your Children

   In most cases your children will be beneficiaries of your Trust. The trustees can manage the assets for the beneficiaries who may be unable to manage the assets themselves. There may be beneficiaries with special needs, vulnerable beneficiaries or beneficiaries with difficult personal and financial circumstances. Distributions can be made to beneficiaries at different times. A Trust gives a great deal of flexibility to the trustees as to how to deal with the assets for the benefit of the beneficiaries. The trustees can continue to manage the assets after your death without necessarily having to distribute the assets to the beneficiaries.

3. Confidentiality

   Trusts are not publicly registered and can be kept confidential, particularly if a corporate trustee is used.

4. Protection Against Relationship Property Claims

   Any assets given to your children during your life, or left to them under your will, may be subject to claims by their partners under the Property (Relationship) Act 1976. If the assets are held in a Trust then they will not form part of a child’s personal property and in most cases cannot be subject to claims by their partners.

5. Taxation

   There are some potential tax benefits in having a Trust but this should not be the primary reason in forming a Trust. Trusts also enable the passing of control of assets from one generation to the next, which may provide protection from future forms of tax, including death duties, inheritance tax and a wealth tax.

Disadvantages of a Trust

1. Loss of Ownership and Control of your Assets

   Once you have formed a Trust and transferred any assets to it you no longer own or control those assets - the trustees do. As settlor, you do have some control in terms of the power of appointment of trustees, but the legal ownership of those assets has changed. If you continue to treat those assets as your own then you run the risk of “not having a Trust” and being unable to rely on the benefits and advantages of having a Trust.

2. Cost and Time

   There will be costs involved in forming a Trust, including legal fees to prepare the documents and transfer the assets. There will also be ongoing costs of the trustees, costs in the preparation of Trust accounts and possibly tax returns. There may also be extra time that you have to spend on the administration of the Trust.

There is a lot to consider in the formation of a Trust. Like many things, it is a matter of reviewing all of the information, talking to family and friends, taking professional advice, assessing the pros and cons for your circumstances and then making your decision.

So, is a Trust appropriate for you?

James

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