Trusts have been around for centuries and are still a popular vehicle of property ownership and asset protection in New Zealand today. Despite this many people still don’t understand the basic workings of a trust, what a trust is and how to form a trust. This article explains some of the frequently asked questions surrounding trusts.
What is a Trust?
Unlike a company, in New Zealand a trust is not officially registered anywhere. This is because a trust is not an entity as such, rather a set of obligations placed on the Trustees. A trust exists when a person (or company) known as a Trustee holds and owns assets for the benefit of another person being the beneficiary.
Why consider setting up a trust?
Forming a trust is a way of protecting major assets such as the family home or bach and accumulating wealth for future generations. Some of the main benefits and reasons to consider a trust include:
· As part of an estate plan to provide for, and benefit, future generations;
· Protection against relationship property and third party claims;
· To provide for minor children, and/or family members who may be physically or mentally disabled.
· To protect against income and asset testing maily with regard to rest home care subsidies
· For protection against potential reintroduction of estate duties
· For charitable or philanthropic purposes.
How is a trust formed?
A family trust is created when trustees sign a trust deed by which they agree to hold property on trust for beneficiaries. A trust is not a separate legal entity, in the way that a company is.
A Trust Deed should be always be signed as this is the legal document that appoints beneficiaries and trustees, states the wishes of the settlor, the powers and duties of the trustees and sets out rules as to how the trust should be managed. The Trust Deed is usually quite a long detailed document that should be crafted according to the specific wishes of the Settlors. As trusts Deeds are technical legal documents you should always get one drafted by a lawyer with experience in this field. Your lawyer will also be able to assist with updating your wills, memorandum of wishes and gifting all of which are important aspects of having a trust.
The Settlor then transfers his assets to into the names of the trustees so in the case of a house the trustees’ names would show on the title.
What is gifting?
Current gift duty regulations mean that a Settlor cannot give assets valued at more than $27,000 per annum to the trust without incurring gift duty. So what usually happens is the Settlors transfer assets to the trust with a debt back, then each year the Settlors forgive $27,000 of this debt until there is nothing left owing. The government has announced that it is likely that gift duty will be abolished from the 1st October 2011. This will mean that trusts no longer have to complete gifting documentation and submit this each year to IRD making the administration of the trust simpler and cheaper.
Does your trust need to apply for an IRD number?
In many instances Trusts do apply for an IRD number and become registered with the Inland Revenue Department for tax purposes. This is usually not necessary unless the trust is receiving an income either passively or from actual trading. It is best to discuss your circumstances with your accountant who would be able to advise whether or not your trust needs to apply for an IRD number.
Get in touch to discuss if a family trust is the right option for you.
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Categories: Trusts
Tags: asset protection, beneficiary, family trust, FAQ, lawyer, settlor, sham trust, trust, trust deed, trustee
