Case Study: Trusts
TRUSTS: A CASE STUDY
From Birdsey & Associates, 1 Hinemoa St, Birkenhead
P: 4809794
Nick.birdsey@birdsey.co.nz
Why have a Trust?
There are a number of very good reasons such as:
- Protection of assets such as from creditors if you are in business and for children’s property entitlements (thinking about the Property (Relationship) Act there);
- For long term estate planning for your family such as:
- There might be family members with special needs eg education or care requirements;
- To enable you to protect your children’s interests long term in the event of the wheels regrettably falling off their relationships.
- Potentially, for efficient tax structure arrangements. There is less opportunity in this area because the Inland Revenue Department have been busy plugging holes in the dyke, ie closing the loopholes. We can work with you and your accountant (or we have a specialist accountant who can help there) to put together an estate/trust structure that works best for you. (For example is the trust purchases rental properties).
The Family
So let us consider a modest home, Castle dun roamin, and the family whose assets need protecting. Now modesty forbids us to mention last names of course, but basically we have our castle dwelling suburban household consisting of Alan (second name Phillip) Belinds (second name Elizabeth) and their children Charles (married to Ermantrude known in her morning tea coffee circles as Trudy) and Dianna (whose live in Partner is Frederick) otherwise known of course as (Fred). [No prizes for guessing that we needed to come up with names that followed letters of the alphabet].
Now historically, the concept of Trusts and to hold property in Trusts goes back a long way to the feudal times when the concept of the idea was devised as a way for initially the Church and then the Landed Gentry to retain property and not have to revert to the Crown. People called trustees could hold property “in trust” for other people who naturally enough became called beneficiaries.
Settlor(s)
So turning to our diagram we have Alan and Belinda wearing various different hats but to sort things out you will see that they are the “settlors” in the Trust. This means that they settle “or transfer” property to the trustees to hold for the beneficiaries which may also include themselves. Of course, you can also have a single settlor for the trust as well.
Trustees
That property is the Trust fund. It is held by the trustees, and often in your family trust situation, the trustees can be mum and dad and they can have a third trustee. In order to keep our sequence we have shown “G” for Gerald in brackets.
Beneficiaries
Who then are the beneficiaries? Still more hats for Alan and Belinda, and we also need to add Charles and Dianna. Depending on the situation, we may or may not add their spouses/partners and in the past usually we would, and we would also include grandchildren. After all the purpose of the Trust is to enable property to be held, to give it a measure of protection against creditors (which can be useful if you are in business) as well as providing for children and grandchildren to be able to keep the assets Alan and Belinda built up in their lifetime. There may be children who have particular needs or it may be that the settlor wishes to introduce a degree of control into how the “family assets” are dealt with. We will come to how that happens in a minute.
Property
Now as to the actual property that is involved in the Trust, we will of course transfer the Castle Dun Roamin. One of two situations is likely to apply. Situation A: here you can transfer the castle to the trust when the castle is bought. There may be a debt back to Alan and Belinda from the trust if they provided the deposit. Situation B: here Alan and Belinda already own the castle, and they transfer it to the trust. As a result there will be a debt back to Alan and Belinda since they own the castle and the Trust actually has no money of its own with which to pay for the castle (just like a new born baby).
It may not suit the situation of Alan and Belinda to have a debt that they are owed, for example if Alan is in business the debt may prove to be very interesting to creditors. So they will forgive the debt which is a process which you may have heard of. Previously when gift duty applied, they could only forgive the debt at $27,000 each without incurring duty, a total of $54,000 per annum. Now that gift duty does not apply they could forgive it all at once. We will discuss the pros and cons of that with you. The assets of the Trust are then dealt with by the Trustees for the benefit of the beneficiaries. In general, the higher the value of Castle Dun Roamin the sooner it should be transferred to the Trust to gain some of the protections.
Debt
The next thing to consider is what to do about the debt when the time comes for Alan for example to shuffle off this mortal coil. Should Alan be in a castle restoration business his creditors might be very interested in that debt as forming an asset in his estate that they could seize upon. So the idea is for Alan to forgive whatever debt is owed by him (and Belinda to do the same) to the Trust. And also to name somebody to replace him as a Trustee as of course the Trust lives on as an independent legal entity even after Alan and Belinda are no longer around.
Protection of Assets
We have already seen how assets can be protected from for example creditors. They may also give a degree of protection for children in respect of property split up when relationships end. So what could happen here is that instead of Charles and Dianna receiving a cash distribution (their entitlement) (after all you want to help your children as much as possible don’t you?) the Trust could lend money to them so that instead of there being a nice fund that Trudy or Fred could seize on to, there will be simply a debt back to the Trust which may be forgiven by the Trust at an appropriate time or may not depending on the circumstances.
So the next question is how long does the Trust last for. The rule here is that it lasts for 80 years. There are historical public policy reasons as to why a Trust should not go on for ever and a day but your average family Trust will for that period of time or less if stipulated in the Trust Deed.
What else is involved to complete the picture?
As above, Wills: we will provide in the wills of Alan and Belinda:
- That the debt is forgiven. Otherwise the creditors might have a target to go for…
- For a person or persons to take over the important duty of trustee including the power of appointment that the Settlor(s) hold under the Trust deed.
Documents required: Trust Deed, transfer of property (Agreement for sale and purchase), resolutions, Deed of acknowledgement of debt, deed of forgiveness of debt, wills.
(and don’t forget that special powers of attorney are needed for trustees and of course you do have enduring powers of attorney don’t you? If not we are happy to fix that for you…).
Shopping list: settlors: You, beneficiaries: You need a reasonable list such as family members (eg parents, siblings), as we will explain.
We look forward to helping you and your family.