For the majority of people their home is their main asset. We know that you want to ensure that as much of your home as possible passes to your children and hence is protected from being taken by others. Here are some examples of how your home can be taken by others:
- Rest Home fees
- Re-marriage after the death of one partner (the new partner/spouse could end up with your house)
- Your surviving spouse having more children thereby diluting the share that should go to your children
- Bankruptcy (creditors trying to get their money back)
- Most commonly one of you dies and the other has to go into care or the survivor remarries and inadvertently or deliberately disinherits the children.
Common Mistakes When Setting Up a Trust?
- Not identifying your objectives for establishing a trust and structuring the trust and other asset protection documents properly.
- Being advised to have an independent trustee, but not being told:
- That Trustees must be involved in every decision; and
- To change or remove a Trustee is expensive
- Getting no practical running instructions, and therefore not knowing how to run the trust, for your benefit.
- Getting no guidance on how to record decisions.
- You get a Trust Deed only, and no Deeds of Loan, Deeds of Gift or initial minutes of Trustees, or no advice on what these all mean.
- New wills leaving your assets to the Trust, or as you wish, are not prepared.
How to form a trust as part of an overall asset protection plan
Because of each person’s unique situation, trusts must be custom made to meet your special needs. You need advice on whether you require a single Trust, more than one Trust, or a parallel Trust. The trust clauses need to be modified to achieve your wishes (e.g. by including clauses cutting out future partners, enabling you to live rent free in the trust’s house, and giving priority to Principal Beneficiaries followed by other Primary Beneficiaries). We have seen poorly prepared off the shelf trusts with a few blanks filled in.
Step One - complete our questionnaire
You need to identify and record your objectives so that you can plan to achieve them. To do so, we will email you our questionnaire. To plan successfully you need to plan for both the best and worst case scenarios.
Step Two - decide who the Trustees should be
All trustees must take part in all decisions and a decision must be unanimous. We therefore do not advise using a professional trustee due to the extra day to day administrative expense. Instead you could appoint a protector to oversee the administration of the trust on an “as needed” basis to ensure that your intentions for the management of the trust fund are put into effect. The simplest arrangement is to appoint yourselves as trustee of your trust and provide for a replacement trustee in your will.
Step Three – decide whether you would like to use a Protector
The Protector could be said to occupy a “watchdog” role in respect of the administration of the trust.
Using a protector in your trust has many benefits, such as:
- More economical than using an independent trustee;
- Providing an added layer of protection when you are not a trustee of the trust;
- Where you have specific intentions for the management of the trust fund after your death;
- Where you are concerned about protecting the trust fund from future partners of your spouse;
- Where you are concerned about protecting the trust fund from partners of the beneficiaries;
- A professional protector can lie dormant until its services are required. This simplifies the day to day administration of the trust and ensures you will not be charged unnecessary fees.
If you require an investment trust we would generally recommend that you use a Trustee Company as the sole trustee:
Under section 14 of the Trustee Act 1956 only one Trustee is legally required. As legislation requires that the Trustee’s name be recorded as the asset owner for land, company shares and life assurance policies, administration of the trust is more economical if a private company is the trustee. The directors of the company therefore act as the trustees (and can include an “independent” director if required - but only if they are genuinely involved in all decisions). You will be the shareholders of the company, and can without cost hire and fire the directors. Unlike individual trustees, the death of a director does not require changes to the titles of trust assets.
Decide upon the trust structure needed for you
- One “Family” trust
- One “Family” trust with classes of beneficiaries
- Several trusts
- Investment company owned by the “Family” trust
Additional trusts for:
- Investments (with beneficiaries including loved ones, other trusts and companies)
- Private company share ownership
- Property trading/development
The trust structure must be safe
The features of a safe "Family" Trust are:
The Principal Primary Beneficiaries should be yourselves. The Trust Deed should provide that you can occupy any trust property and be maintained in the standard to which you are accustomed.
The Final Beneficiaries will normally be you and your children (or the others whom you have named to benefit in your will) and they are entitled to benefit from the trust fund when it is finally distributed.
Other discretionary Beneficiaries will normally be your grandchildren (or the children of the others whom you have named to benefit in your will) and they only hold a mere expectation to benefit from the trust fund which is not enforceable.
For Income Tax purposes (as a result of the complex accruals rules) you must have natural love and affection for these people (which means they must be close blood relatives or lifelong family friends), or New Zealand tax exempt charities if you are making gifts to the trust while you are alive or on your death.
The other asset protection documents which you need
- Trust Deed.
- Memorandum of Wishes.
- Minute book and running instructions.
- Enduring Powers of Attorney.
- Sale documents, where your assets are sold to your trust.
- Gifting documents.
Contact Helmore Ayers Lawyers to review your current asset ownership and ensure your trust and asset protection plan is set up properly.
How a trust works
To avoid the risks above, you sell the assets which will increase in value (and all income producing assets (other than PIE investments where advice is needed) if you are on the 33% tax rate) to the trust for their current market value.
You get back an “IOU” (a Deed of Acknowledgment of Debt). Increases in asset value belong to the Trust. It is not a good idea to sell depreciating assets to a trust.
If the purpose of your trust is creditor protection from high financial risk the abolition of gift duty on 1 October 2011 means that you may gift the entire IOU back to the Trust without penalty. However, even though gift duty was abolished and the IOU can be gifted in one gift, if you do so the Ministry of Social Development may treat this as a deprivation of assets for geriatric care means testing purposes, and will treat gifts of more than $27,000 per annum as part of your assets. Accordingly gifting normally reduces the IOU by $27,000 each per year if financial risk is not a concern.
With a trust, assets stay within it until it is sensible for the beneficiaries to inherit. With a good asset protection plan, assets pass from the trust to the beneficiaries’ trusts. Therefore the assets cannot be taken from the beneficiaries, as they never belonged to the beneficiaries.
Your new will which leaves your assets to the trust is simple, totally safe and sensible. It completes gifting not completed at the date of your death without gift duty, and puts all assets still owned by you into the trust. They are then totally safe. In the case of couples all assets are owned by the trust, and nothing passes by survivorship to the other. Once all of your assets have been gifted to the Trust, no one can challenge your will on your death as you have no assets.
Operation of the Trust is easy
With our unique detailed running instructions and draft minutes the trust will work much the same as you presently do. If anything, it is less complicated.
Your personal bank account will still be used for your personal income and personal spending. You own depreciating assets (furniture & cars).
The Trust normally owns appreciating assets. The Trust’s bank account is for trust investments, trust income & payments to beneficiaries.
Helmore Ayers Lawyers prepares detailed running instructions and draft minutes to enable trustees to easily operate the trust. We can assist you to administer the trust as required.
The Trust Properties
If you live in the Trust’s property the Trust must have:
- A provision to let you live rent free in the Trust’s home.
- A minute of trustees permitting you to live rent free
You then live in the Trust’s house effectively as the squatter. You pay rates, insurance, maintenance and interest. The Trust pays the principal mortgage repayments. You lend the Trust the money to pay the principal loan repayments.
The costs involved
In the case of Helmore Ayers Lawyers the investment in an asset protection plan is mainly a one off cost. So long as the asset protection plan includes practical running instructions, the on-going running costs will not be great, as the trustees can take care of the administration themselves. The security and future safety achieved through your asset protection plan makes any upfront costs very worthwhile.
If you have a trust we can review it, and make sure that it has been well prepared, is up to date, and part of a comprehensive asset protection plan.
The trusts we form are no more difficult to run than your own affairs and there are no ongoing fees unless you consult us, and you are not tied to us.