In steps the family trust: the ultimate safety net for hardworking families. Or at least, that's what the thousands of professionals who make a tidy income each year by selling family trust-related services have to say.
So what's the truth? Setting up a family trust is a way of legally separating your assets such as a house or other investments, from yourself. With a trust you no longer own your house or your other investments in your own name.
It's often said that people don't know they need a trust until it's too late. One of the most common reasons for having a family trust is to protect your assets against a future partner who does a runner and takes half under the Property (Relationships) Act. This can also be achieved by having a pre-nuptial agreement setting out who gets what in the event of a split.
But family trusts don't just protect you and your family against ill-chosen partners. They can also keep your personal assets safe from business creditors and rest home charges. In short they're a relatively inexpensive insurance policy.
But here's 'de catches'. Up to 75% of trusts are at risk of being bust open because they're not run by the letter of the law. That's the results of an online Trust Busting test that can be taken on the website: integritytrust.co.nz. There are plenty of highly paid lawyers out there who when it comes to a court case find many ways to prove that a trust is a sham. If they succeed, then the assets are returned to the settlor [the person who set the trust up] and lose their protection.
Even once you've got a trust, it can take many years until your assets are fully protected. That's because you can't simply give a house or investments to your trust unless you're willing to pay gift duty to the Inland Revenue Department on the value. What happens in reality is your assets are put into the trust and each year you "forgive" $27,000 (or $54,000 for a couple) until the trust owns everything outright.
You need to finish your gifting five years before moving into a rest home if you want a government subsidy rather than eating into your assets. Even so, Work and Income New Zealand (WINZ) can still try to have your trust declared a sham.
A trust can be set up very cheaply if you do it yourself. Or you can use a Rolls Royce service where a lawyer or trust company does everything for you. Even if you do it yourself, there are costs involved in preparing the annual accounts and filing tax returns to the IRD.
The moral of the tale is: if you think you need the protection of a family trust: don't delay, educate yourself, get good advice, and review your trust every year.
Useful websites:
Law Society
NZ Trustees Association
Good books:
Trusts, a Kiwi Sham? by Mark Maxwell
Successful Trust Management, by Ross Holmes
Diana Clement
Independent Financial Commentator
Issue 10: 31-05-2007