Family trusts are wonderful things. It's just a shame they're full of fish-hooks. The book Trusts - A Kiwi Sham? is a bit of a sobering eye-opener for anyone with a family trust – and there are 200,000 of us here in New Zealand.
Author Mark Maxwell concludes that at least 70% of family trusts in this country could be bust open by the courts. Maxwell who runs his own company Integrity Trust, but before that spent 17 years at the Public Trust says trusts aren't like consumer goods. You can't just shell out a few hundred bucks and forget about them. Unfortunately trusts come with legal obligations.
And if you don't follow the letter of the law all sorts of people and organisations could take a pot shot at your trust through the courts. That includes ex-spouses, the kids' ill-chosen partners, business creditors, the Inland Revenue Department (IRD), and Work and Income New Zealand (WINZ), who could all fight to have your trust declared a sham.
The biggest risks for mum and dad trustees as well as professional ones are:
Treating your trust bank accounts like a personal piggy bank isn't a good idea. One family that used a trust to ensure that their income on paper was low enough to qualify for family assistance was taken to court by the IRD because they were using the trust bank account to do their day-to-day shopping rather than keeping it at arm's length.
This doesn't mean you necessarily need to employ expensive trustees. But it's essential to understand the law and follow it. As well as Maxwell's book there are other useful titles on the market such as of Successful Trust Management by lawyer Ross Holmes.
It's not just trusts to beware of. Holders of loss attributing qualifying companies (LAQCs) need to watch out as well that the assets are adequately protected from acquisitive partners or business creditors. If a risk exists it may be worth holding those assets in the family trust – even if that means you can only roll losses forward, instead of claiming them against the current tax from your day job.
Structures can get quite complex. Garth Melville, accountant and company structures specialist at Company Solutions says with some business clients he will set up a trust which owns a number of companies. The day-to-day business would be held in one company and buy and hold rental properties in another. That way any losses from the rental properties can be offset against the business' tax liability and yet the properties retain asset protection.
What are your thoughts about New Zealand trust laws?
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