Trusts and Estate Planning

Trusts and Estate Planning

Trusts and Estate Planning

What Is A Trust?

A trust is created when a person, called the settlor, transfers property to people known as trustees. Trustees are obliged by law to use the property for purposes that the settlor specifies. Usually, one of these purposes is to make payments from the trust property to people called beneficiaries. The way the trust property is to be dealt with and the parties involved are usually set out in a document known as the trust deed.

Family Trusts In NZ

Family trusts in NZ can be set up for charitable purposes such as education or established specifically for the benefit of the members of a particular family. The terms of trusts can differ markedly depending on the purpose for which a trust has been established.

At ABA Chartered Accountants we can prepare all of the documents required to establish family trusts in NZ as well as administer that trust.

We will assist with:

  • Trust formation
  • Trust administration
  • Gifting
  • Charitable trusts

The ten things you need to know about family trusts in NZ:

1. Why have a family trust?

Reasons for establishing a family trust include:

  • to protect assets for family members – by transferring the ownership of some assets to a trust, a settlor may be able to undertake a higher risk occupation or venture knowing that those assets will not be put at risk.
  • to ensure certain assets – e.g. a family business or farm – are transferred intact to the next generation
  • to make sure some assets are retained for other family members, when one, or more, members need a rest home or hospital care.
  • to protect family members or a family business from possible relationship property or family protection (contesting a will) claims.
  • to manage the assets of someone who is unable to manage their own affairs, perhaps through age or infirmity.
  • to assist with estate administration (and cost savings) by transferring assets to a trust before death
  • to change tax liability. More or less tax may be payable. Tax liability should be reviewed regularly.

2. Who is involved?

The main parties to a trust are:

The settlor – the person (or people) who makes the initial transfer of property, which may be as little as $1, to the trustees of the trust. Anyone who transfers assets to the trust may be treated as a settlor.

The trustees – a trust normally has two or more trustees – usually people in whom the settlor has confidence. A settlor can choose to be a trustee of his or her own trust. In some circumstances, it is advisable also to have an unrelated trustee, who might be a family friend, the settlor’s accountant or lawyer for example, or a corporate trustee. One of the matters to consider when choosing trustees is how the trust is to be managed. Will the settlor do this or will a professional trustee have a continuing involvement with the management and account keeping? Unless the trust deed provides otherwise, the trustees have a duty to act prudently in the management of assets subject to the trust.

The beneficiaries – people for whose benefit the trust has been established. They can be either named individuals or a class, such as “children” or “grandchildren”. There are generally two types of beneficiary – discretionary beneficiaries and final or ultimate beneficiaries.

Discretionary beneficiaries have a right to be considered by the trustees for payments from the trust property but they do not have an automatic right to receive payments from the trust.

The following are often named as discretionary beneficiaries:

  • the settlor
  • the settlor’s spouse
  • the settlor’s children and grandchildren
  • any spouses of the children and grandchildren
  • any future spouse of the settlor
  • the settlor’s parents
  • the settlor’s brothers and sisters
  • any charity.

Final or ultimate beneficiaries have a legal right to the trust property on the date the trust finishes. They are often named, and they are often the settlor’s children with provision for grandchildren if a child dies before the trust finishes.

3. When Is the date of distribution?

In simple terms, a family trust cannot exist for longer than 80 years and the trust deed must set a date on which the trust has to finish. This is known as the date of distribution. Trustees are usually given the power to bring the trust to an end before the date of distribution. Some trust deeds give trustees a power to extend the distribution date.

4. Who can appoint trustees?

Usually the settlor appoints the trustees. Although in some cases, the trust deed can also list someone who has the power to remove or add new trustees. If the trust deed does not mention this; all the trustees together can appoint new trustees.

5. How does a trust operate?

A trust can operate in almost exactly the same way as an individual can. A trust can hold property, raise mortgages, hold bank accounts and generally hold all types of assets and investments as long as it operates according to what is set out in trust deed.

6. How does a trust acquire assets?

Assets can be added to a trust at any time. Usually the settlor will sell assets to the trust or the trust will purchase assets from third parties. If the trust does not have the required amount to pay for the asset, the trustees will need to sign a document acknowledging that the trust owes the seller a debt equivalent to the value of the asset purchased.

7. Reduction of the debt owed by the trust

The trust may not have the money to pay for an asset, so the trustees need to sign a document acknowledging that the trust owes a debt in the sum of the value of the asset purchased. This debt can be reduced by the settlor cancelling the debt in amounts of up to $27,000 a year (any amounts over this will incur gift duty), or the trust making payments out of it’s income from assets or capital to the settlor.

8. Cross or mirror trusts

Cross trusts (or mirror trusts) involve setting up two trusts instead of one. For example, the first spouse can establish a family trust with the second spouse, children and grandchildren as beneficiaries. The second spouse also establishes a family trust with the first spouse, children and grandchildren as beneficiaries. This type of structure is quite common and is generally referred to as a cross or mirror trust.

Once it has been established, each settlor spouse can sell selected assets to his or her trust for full value in exchange for a debt back from the trustees. Such trusts are used when each spouse wants as much control as possible over one or more assets, without the direct involvement of their spouse as a co-trustee.

9. Getting money out of the trust

The trustees decide which payments from income or capital are to be made by the trust and which beneficiaries shall receive them.

In addition, if the document recording the debt allows, the person to whom the trust owes a debt can demand payment of any part of the debt owed. If the debt for the initial purchase of assets is repayable to the settlor on demand, the settlor can require payment of all or any part of this debt at any time. Payments of this kind from the trust to the settlor may be free from income tax.

10. What about tax?

Income will either be taxed in the hands of the trustees as trustee income or in the hands of the beneficiary if the trustees decide to pay income to beneficiaries. If income is paid to a beneficiary over the age of 16, then it is taxed at the beneficiary’s personal tax rate. Income that is not distributed in this way is taxed in the trust at the rate of 33c in the dollar.

We have chartered accountants who specialise in trusts and estates we can provide professional tax advice we management services for family trusts in NZ. If you’re thinking about protecting your assets, call our trusts and estates team on 09 426 8488.

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