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Copying the Joneses

Do you really need a Trust?

The neighbours have one, your brother has one, your banker is asking you about yours, what is the big deal about trusts? Family trusts have proliferated in New Zealand. But just because the Joneses have one does not necessarily mean you need to rush out and set one up. The point of effective trust ownership is that it is just that, trust ownership of assets. You do not actually own the assets anymore. And that may not suit everyone.

A trust involves a disposition of property by a person, called the settlor, to a person or persons, the trustees, who are instructed to hold that property for the benefit of others, the beneficiaries. There must be an express intention to establish the trust, it must be clear who the beneficiaries are and the trust property should be clearly identifiable. A trust will normally be set up by the execution of a trust deed, which records the terms of the trust and directs the trustees as to how they should administer the trust property.

There are three main reasons for the use of trusts in New Zealand: asset protection, estate planning and taxation benefits. By ceding legal title to the assets, a settlor of a trust may put assets beyond the reach of his or her creditors. Secondly, a trust gives the settlor power to control distributions to the beneficiaries. For example, a settlor may give an income interest to his or her spouse for life but still ensure that the residual interest vests in his or her children. Lastly, a trust provides numerous taxation benefits in New Zealand.

By placing income producing assets in a trust, the settlor can effectively transfer income from him or herself to persons that may be taxed at a lower marginal tax rate, although special rules apply to distributions to beneficiaries under the age of 16. For a beneficiary in the highest marginal tax bracket, income can be accumulated within the trust and taxed at the trustee rate, resulting in potential tax savings.

So far so good, but what are the pitfalls? With so many ridding themselves of assets held in their personal name there are more and more attacks on trusts, more often creditors, the official assignee, relationship partners and family members seeking to have the trust set aside as a sham in order to access trust property. Such an attack is more likely to succeed where the settlor has failed to properly acknowledge that the trust assets are no longer his or her own. Although a good degree of control can be properly maintained over trust assets, the assets legally belong to the trustees, not the settlor and the settlor cannot borrow against them, use them as their personal property or sell them without regard for the trust arrangement.

So if you decide to copy the Joneses and set up a trust, and there are certainly good reasons to do so, care should be taken that the trust is recognised and trust property is dealt with properly. Jones Law can assist you with establishing and managing your trust and understanding your role as settlor and/or trustee.

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