1. The family trust

2. Why have a family trust?

3. Who is involved?

4. When is the date of distribution?

5. Who can appoint trustees?

6. How does a trust operate?

7. How does a trust acquire assets?

8. Reduction of the debt owed by the trust

9. Cross or mirror trusts

10. Getting money out of the trust

11. What about tax?

12. Caution

13. Do the right thing - see your lawyer first

Trusts are becoming an increasingly popular way of protecting property and managing assets.

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. Trusts can also be created by wills.

Trusts 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.

This pamphlet deals with one particular type of trust - the family trust - but much of the information will also apply to other types of trusts.

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 – eg, 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 needs 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.

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 look at 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 the 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 are often the settlor’s children with provision for grandchildren if a child dies before the trust finishes.
 

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.

The trust deed usually gives someone the power to appoint new trustees and sometimes the power to remove trustees. Usually this power is given to the settlor. If the trust deed does not mention this, then the trustees together can appoint new trustees.
 

A trust can operate in almost exactly the same way as an individual person 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 the powers set out in the trust deed.

Assets can be added to a trust at any time. Usually the settlor will sell assets to the trust or the trust itself will purchase assets from third parties.
 

The trust may not have any money to pay for an asset, so the trustees will need to sign a document acknowledging that the trust owes the seller a sum equivalent to the value of the asset purchased.
 

The sale of all assets to the trust has the effect of immediately limiting the value of the settlor’s estate to the amount of the debt owed by the trust. That will be regarded as an asset owned by the settlor but any increase in the value of the asset sold to the trust belongs to the trust and not to the settlor personally.
 

Similarly, any income from the trust assets will usually be trust income and not the personal income of the settlor.

The amount the trust owes to a settlor can be reduced by:

• the settlor cancelling the debt in amounts of up to $27,000 per year without incurring gift duty. Amounts over this sum will incur gift duty, which is calculated on a sliding scale;

• the trust making payments – out of its income or out of capital – to the settlor in reduction of the debt.

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 the 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.

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.
 

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 $1.

Trusts are subject to various legal requirements and there are several provisions in law that allow property in a trust to be clawed back in certain circumstances. These can defeat the purpose for which the trust was set up in the first place.
 

For instance, under the Property (Relationships) Act sometimes a partner’s interest in a trust can be classed as relationship property and be subject to the equal sharing rules. Also, a court may order some sort of compensation if one partner has made relationship property subject to a trust in a way that has the effect of defeating the other partner’s claim or rights under the Property (Relationships) Act.
 

The structure of a trust will depend on what the settlor specifically wants the trust to do. It is important to note that trustees, once appointed, cannot do just anything they want with the trust property. They have powers that allow them to do certain things and duties that must be observed.
 

These restrictions are based on:
• The trust deed – what does the deed expressly allow the trustees to do?

• Legislation – what does the printed law allow or stop the trustees from doing?

• Case law – what do the cases that have already been decided prohibit or allow the trustees to do?
 

If you wish to set up a trust, it is important that you understand your trust and what trustees can and cannot do before you establish it. You should talk to your lawyer to ensure that the terms of your trust fully meet your needs, fulfil the intended purpose and will not be upset by any clawback provisions.
 

Finally, you should assess whether a trust is a suitable vehicle to meet your objectives. You should weigh up the advantages and disadvantages of your various options, including the ongoing management compliance costs of each. Your lawyer will be able to help you determine what is required to meet your needs.

Lawyers deal with many personal, family, business and property matters and transactions. No one else has the training and experience to advise you on matters relating to the law. If your lawyer can’t help you with a particular matter, he or she will refer you to another specialist. Seeing a lawyer before a problem gets too big can save you anxiety and money.
 

Like other professional people, your lawyer charges for time, experience and skill in looking after your affairs. Ask at the beginning about the likely cost or tell your lawyer that you don’t want to spend more than a certain sum without the lawyer checking with you. Our pamphlet Seeing a lawyer – fees, charges and value will provide you with more information.
 

Choose your own lawyer for independent advice. You do not have to use the same lawyer as your partner or anyone else involved in the same legal matter. In fact, sometimes you must each get independent legal advice. Your lawyer should act for you.
 

Your lawyer will:
• treat your business as completely confidential;
• give you independent advice;

• use his or her skills for your benefit; and

• provide value for what you have to pay.
 

If you don’t have a lawyer:

• ask friends or relatives to recommend one to you;

• look in the Yellow Pages under "lawyers" or "barristers and solicitors";

• inquire at a Citizens Advice Bureau or Community Law Centre;

• check these websites:

www.familylaw.org.nz

www.propertylawyers.org.nz

www.adls.org.nz

www.wellaw.co.nz

• contact your local district law society:

The New Zealand Law Society (NZLS) publishes this pamphlet as part of its Law Awareness Programme to inform you of your legal rights, the law and how lawyers can help you. The full list of titles in the series is:

1. How your lawyer can help you

2. Seeing a lawyer - fees, charges and value

3. Your lawyer and confidentiality

4. Buying or selling a property

5. Over the fence ... are your neighbours

6. Domestic violence

7. What happens to your children when you part?

8. Dividing up relationship property

9. What happens when your relationship breaks up?

10. Living together

11. The family trust

12. Making a will and estate administration

13. Powers of attorney

14. Motor vehicles, accidents and alcohol

15. You and the police

16. Giving evidence

17. Going into business

Copies of these pamphlets may be obtained from the New Zealand Law Society, PO Box 5041, Wellington 6145, tel (04) 472 7837, fax (04) 473 7909, email pamphlets@lawyers.org.nz or from most district law societies or legal offices. They will be supplied free to individuals and non-profit community service organisations and at a small charge to others. The full text of all the pamphlets available in the Law Awareness series can be accessed through the NZLS website - www.lawyers.org.nz/pubaboutlaw.asp

All information in this pamphlet is to the best of the knowledge of the NZLS true and accurate as at the date below. However, no liability is assumed by the NZLS for any losses suffered by any person relying directly or indirectly on information in this pamphlet. It is recommended that readers consult a lawyer before acting on this information.

Reprinted August 2006

www.familylaw.org.nz www.propertylawyers.org.nz