What is a family trust?
A trust exists when one person (a "trustee") holds and owns property for the benefit of another person (a "beneficiary"). A family trust is a trust set up to benefit members of your family.
The purpose of the family trust is to hold (through you transferring your assets), so that legally you own no assets yourself, and through the trust, still have some control over, and get the benefit of, these assets.
You can set up a family trust either while you are still alive (by a declaration of trust contained in a trust deed) or when you die (by the terms of your will). This article is mainly concerned with trusts created while you are alive, and with the benefits that these trusts can provide for you in your lifetime.
The family trust can be setup either as a "Fixed" trust (with named / specified beneficiaries with fixed ratio / amount of benefits) or a "Discretionary" trust (with "described" beneficiaries with benefits that are at the "discretion" of trustees). This is discussed in a bit more detail in the beneficiaries section below.
Why do you need a family trust?
A family trust is a vehicle / entity created for, among other reasons, a few key purposes:
Given that it’s a "living will", the settlors (see below) are able to maintain some control over the assets. The exact level of control can be established in the Trust Deed in accordance with the wishes of the settlors.
What are the key elements of a family trust?
Like any other type of trust, a family trust must have the following elements:
The settlor – This is the person who sets up the trust, and is usually also the person who currently holds the assets that will be transferred to the trust. There may be more than one settlor: in the case of a family trust, a married couple may both be settlors.
The trustees – The trustees are the people who are responsible for administering the trust. They must make sure that the wishes of the settlor (as set out in the trust deed) are carried out. The Settlor (s) can also be trustees as well. Usually the settlor will also appoint an independent trustee, which is often the settlor's lawyer or accountant (the accountants however are increasingly being discourages by their professional bodies from taking up trusteeships of discretionary family trusts). Having an independent trustee may help avoid any suggestion that the settlor continues to have full control of the trust assets, in which case IRD may argue that the trust is a "sham" and therefore invalid. The rights and obligations of a trustees are usually included in the Trust Deed but they cannot supersede those contained in the Trustees Act 1956.
The beneficiaries – These are the people who benefit under the trust. With a family trust, the beneficiaries will normally include current and future (e.g as yet unborn grandchildren, step children etc) family members.
These beneficiaries are all "discretionary" beneficiaries, which is a key factor in family trusts. Discretionary beneficiaries (unlike the beneficiaries under a "fixed' trust) have no right to receive any benefit under the trust; instead, the trustees have a power to choose which of these beneficiaries will receive the benefit of any assets in the proportion they decide from time to time keeping in view the objectives of the trust.
The trust deed – This is the legal document that states the settlor's wishes and sets up the trust. It appoints the trustees and states their powers and duties, states the beneficiaries, and states various rules for the administration and management of the trust. In order for the deed to be clear and to meet certain tax requirements, it must generally be a lengthy and carefully drafted document.
The trust's assets – The trust must have some assets. When the trust is first set up, these assets will usually only be nominal amount of say $10. But the eventual aim is for the trust to hold all of your significant assets.
The costs of maintaining a trust
There are likely to be overheads in maintaining a trust. If the trust holds income-earning assets, the trustees must maintain annual accounts and annual tax returns and comply with any other requirements imposed by the Inland Revenue Department. It is therefore important to establish, before you set up a trust, that the benefits of the trust will outweigh the costs.
What assets can or should be transferred to the trust?
Almost any assets can be held by the trust, including real estate, motor vehicles, valuable artwork, household items such as furniture, and company shares .Generally, settlors should transfers appreciating assets (such as real estate, jewelry etc.) into the trust before depreciating assets (such as motor vehicles).
You should get expert advice from your advisor at Core Business Services on this as it could depend on the settlor's age, how they intend the trust to be used, and their personal circumstances.
What steps do I take for transferring assets to a New Zealand family trust?
Overall the simple message is this. If you have questions about whether a discretionary family trust is for you, check with your advisor at Core Business Services advisor about. S/he can outline the details of how and when to action this and keep you informed all the way through to setup and operating to the BAU (business as usual) stage.
The above publication discusses income tax & other issues generally and is not intended to be specific tax or other advice. Whilst every effort has been made to provide valuable, useful information, Core Business Services Ltd, any related suppliers, associated companies & practices accept no responsibility or any form of liability from reliance upon or the use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only. Please do consult with your tax advisor or call this firm for information / advise specific to your circumstances before finalising any particular course of action