A family trust is usually established as a discretionary trust. For the purposes of the information below we are going to use the phrase ‘family trust’ to describe the purpose of a trust set up for the benefit of family members.
Family trusts can be useful for many reasons, but they should not be entered into lightly. If a trust is not well-maintained, it can leave the trustees open to legal action. Family trusts can be used for estate planning, safeguarding assets, and income tax planning.
Setting up a family trust in Aotearoa New Zealand can have many benefits, including protecting assets and distributing them to younger family members. However, there are also some disadvantages to consider, such as the cost and ongoing management responsibilities.
Here are some of the benefits of setting up a discretionary family trust.
Protection of vulnerable beneficiaries
For FASD families and whānau, the number one reason to set up a trust is to help protect them from con-artists, scammers and predators seeking to manipulate them for some personal gain. It can also help financially protect those who have addictions or other mental health issues.
Support for dependents
Trusts can be set up to provide ongoing financial support for vulnerable beneficiaries, such as minors or individuals with disabilities, ensuring their needs are met throughout their lives. The trust deed can stipulate conditions under which beneficiaries can access funds, helping to protect them from poor financial decisions and manipulation.
Asset protection
A trust can protect assets from creditors, lawsuits, and family disputes. For example, you can use a trust to protect your family home from business failure.
Shielding Assets from Creditors
Family trusts can protect assets from creditors in the event of bankruptcy or legal claims against the beneficiaries. This is particularly beneficial for individuals in high-risk professions or businesses.
Protection from Relationship Property Claims
In the event of a relationship breakdown, assets held in a family trust may be protected from being divided as relationship property, depending on how the trust is structured and managed.
Avoiding Probate
Assets held in a trust do not go through the probate process upon the death of the settlor. This can save time and legal costs, allowing for faster distribution to beneficiaries.
Control Over Distribution
Trusts allow the settlor to specify how and when assets are distributed to beneficiaries. This can be particularly useful for managing distributions to minors or individuals who may not be financially responsible.
Tax benefits
Trusts can facilitate income splitting among beneficiaries, potentially allowing for tax advantages. If beneficiaries are in lower tax brackets, income can be distributed to them to minimise overall tax liability.
Tax-Free Gifts
Assets transferred to a trust may not be considered gifts for tax purposes, potentially avoiding gift duty and reducing tax liabilities on transferred assets.
Distribution of assets
A trust can help you distribute assets to younger family members. For example, you can use a NextGen Trust to protect assets for your child throughout their life.
Flexibility
The trust deed can be tailored to your circumstances, giving you flexibility in how the trust operates.
Changing Circumstances
Family trusts can be structured to allow for flexibility in management and distribution, adapting to changing family circumstances or financial situations.
Trustee Discretion
Trustees can have the discretion to make decisions regarding the distribution of assets, which can be beneficial in responding to beneficiaries' needs or changes in family dynamics.
Continuity of Asset Management
A family trust provides a mechanism for the ongoing management of family assets beyond the life of the settlor. This ensures that assets are managed according to the settlor's wishes, even after their death.
Prevention of Family Disputes
By clearly outlining the terms of asset distribution, trusts can help minimise disputes among family members regarding inheritance.
Privacy of Asset Distribution
Unlike wills, which become public documents upon death, trusts do not go through probate, thus preserving the privacy of the settlor’s estate and the distribution of assets.
Philanthropic Goals
If the family wishes to support charitable causes, a family trust can be structured to include charitable giving, allowing the family to manage their philanthropic efforts while enjoying potential tax benefits.
Summary: Establishing a family trust in Aotearoa New Zealand can provide numerous advantages, including asset protection, effective estate planning, tax efficiency, and flexibility in managing family assets. However, it is essential to consult with legal and financial professionals to ensure that the trust is set up in accordance with your specific goals and complies with relevant laws. By doing so, you can maximise the benefits of a family trust for your family’s future.
Here are some of the disadvantages of setting up a family trust:
Cost
There are initial costs to set up a trust, plus ongoing legal and accounting fees.
Complexity
They can be complex to set up and manage. Understanding the legal requirements and responsibilities can be overwhelming for individuals without legal or financial expertise.
Administration requirements
Trusts require regular administration, including record-keeping and compliance with legal obligations, which can be time-consuming.
Loss of control
Once you put assets into a trust, you no longer own them. The trustees are responsible for managing the assets in the best interests of the beneficiaries. If the trustees do not act in the best interests of the beneficiaries, it can lead to conflicts or disputes.
Tax implications
Trusts in New Zealand can be subject to higher tax rates on income generated by trust assets. The trustee tax rate can be as high as 33%, depending on the income level.
Disbursement delays
If trustees need to determine whether to distribute funds, beneficiaries may face delays in accessing their inheritance or support.
Family disputes
If the trust isn't managed well, family members may sue the trustees.
Regulatory scrutiny
Trusts must comply with various legal and tax regulations, which may subject them to scrutiny from authorities. Failure to comply can result in penalties.
Reporting obligations
Trustees have specific reporting obligations that can lead to increased administrative burdens.
Summary: While family trusts can provide valuable benefits, such as asset protection and estate planning advantages, they also come with significant disadvantages. It’s essential for individuals considering setting up a family trust in Aotearoa New Zealand to weigh these drawbacks against the potential benefits and consult with legal and financial professionals to ensure that it aligns with their specific needs and circumstances.
RECOMMENDATION: Before setting up a trust, it's important to get professional advice to ensure it's right for you.
