HowToLaw summaries a range of Australian self-help documents for you to select from. Compare costs and document suppliers. This range of Australian Trust deed documents provide for the setting up of a Family Trust along with many other Trust administration documentation.
What is a Trust?
A Trust is a legal entity where an individual (‘the trustee’) holds assets for the benefit of one or more persons or third parties (called the ‘beneficiaries’). A Family Trust (also known as a Discretionary Trust) is a Trust where the trustee is empowered to decide the benefits the beneficiaries receive from the trust. A Trust can protect family assets and allows for earnings and capital to be shared among family members. Once a family trust is created (by a settlor), usually gifts or loans are made to the Trust by the person who created the Trust.
What documents do I need to form a Trust?
The documents required to form and maintain a Trust are the Trust Deed itself, the Initial Minutes when the Trustee Company is formed, Memorandum of Wishes, and commonly a Deed Appointing a New Trustee and the companying Minutes appointing new trustees.
An Australian Family Trust (also called a Discretionary Trust) is one of the most common small business structures in Australia. Suitable for use throughout Australia.
The purpose of this minute is for the Australian Trustee(s) to formally and correctly accept the role of Trustee of the Unit Trust. Suitable for use throughout Australia.
An Australian Unit Trust is cheaper and more flexible than a company. Suitable for use throughout Australia.
A trust is the legal relationship created when a person (the "settlor") places assets under the control of a person (the "trustee") for the benefit of some other person or people (the "beneficiaries") or for a specified purpose.
The assets transferred to the trustees become their property, but they hold the assets on trust for the beneficiaries. The trustees are therefore the nominal owners of the property, but they have a legal obligation to deal with the property in the manner set out in the trust deed.
Often there is more than one trustee. There may also be more than one settlor of a trust.
Note that a particular trust deed might create both a fixed trust and a discretionary trust.
Trusts have become an increasingly popular way of structuring one's affairs. It is important for those intending to use a trust to be clear on the legal relationships and obligations involved.
You should obtain legal advice before setting up a trust. Your lawyer will assist you with, in particular, drawing up the principal document creating the trust, which is called the "trust deed".
A trust must have the following essential elements:
The law requires that the settlor must intend to create a trust in order for a trust to exist. Therefore a valid trust cannot come into being by accident.
The settlor creates the trust. The settlor must be an adult (20 or over) and be of sound mind. The settlor may be a company or even another trust.
There can be more than one settlor of a trust.
Any person who can own property may be a trustee. A minor (someone under 20) can be a trustee, but a court would have to appoint someone to act as trustee until the minor turns 20.
Usually an independent trustee is included as one of the trustees, and this will often be the settlor's lawyer or accountant. Having an independent trustee helps avoid any suggestion that the settlor continues to have control of the trust assets, in which case Inland Revenue may argue that the trust is a "sham" and therefore invalid.
Trustees have a duty to acquaint themselves with the terms of the trust deed, and also with who the possible beneficiaries may be and what the assets and liabilities of the trust are.
Trustee decisions must be unanimous, unless the trust deed allows for majority decisions. Trustees must ensure that proper records are kept of their decisions. Trustees may not delegate their duties or powers to others unless the trust deed allows this.
Trustees may be paid for their services only if the trust deed specifically provides for this.
A trustee will not be liable for any losses suffered by the trust if he or she acts prudently and considers the interests of all beneficiaries (discretionary or otherwise).
For more information about trustees and their duties, see How to be a trustee.
These are the people who benefit under the trust. Under a discretionary family trust, the beneficiaries are usually the immediate and extended family.
If the trustees breach their duties, this is called a "breach of trust". Only the beneficiaries have a right to bring an action in the courts against the trustees for a breach of trust. See How to be a trustee for information on the duties of trustees.
The trust deed (the legal document that sets up the trust) should deal with the following matters:
Transferring your assets to a trust can be a useful way of protecting these assets from creditors - particularly for professional people whose personal and family assets could be placed at risk through professional liability over which they have little or no control.
For example, if you had personally guaranteed a bank loan or the lease of the business premises, a claim could be made against you personally. In that case, all of your personal assets would be available to the person claiming against you. But if your personal assets had been transferred to a trust, these assets may be protected.
But to be protected, the transfer of the assets to the trust must not be seen to have been carried out to defeat creditors. These gifts to the trust can be challenged if they are made within two years of bankruptcy and claimed back by the Official Assignee under the INSOLVENCY ACT 1967.
The PROPERTY LAW ACT 1952 also allows creditors to apply for a transfer of property to be declared invalid if it was transferred with the intention of defrauding creditors. The transfer could certainly be set aside if it could be proved that when you set up the trust you were insolvent or a creditor was pursuing a major claim against you.
If your assets are transferred into a trust during your lifetime, those assets will not be subject to claims after your death from family members or others whom you do not wish to share in those assets.
Claims of this kind can be made under the FAMILY PROTECTION ACT 1955 and the LAW REFORM (TESTAMENTARY PROMISES) ACT 1949: see How to contest a will.
If you transfer your assets into a family trust when you enter into a marriage or de facto relationship, this may prevent these assets being classified as "relationship property" should you later split up, and therefore from being subject to the equal-sharing rules contained in the PROPERTY (RELATIONSHIPS) ACT 1976. This Act sets up a presumption that all relationship property will be split equally between you if you split up. If the assets are first transferred to a family trust, then your spouse or partner would not be able to claim a share of those assets. See generally How to: The division of property when a marriage or de facto relationship ends.
A different but related situation can occur with your children. If you have gifted assets to a child who later separates from a spouse or partner, half of that child's assets may be taken by the ex-spouse or ex-partner. But if those assets were held by a family trust for the benefit of that child, rather than being held by him or her directly, those assets may be protected.
There may be tax advantages in placing income-earning assets in a trust. The income earned by a trust is taxed at 33 percent. This is the same as the rate imposed on companies but lower than the current highest marginal rate for individuals (39 percent). The trust income can also be allocated to beneficiaries (including your children) who may earn little or no other income, and may therefore be liable to pay tax at a rate lower than the 33 percent trust rate.
But if the Commissioner of Inland Revenue believes that the only reason for creating the trust was tax avoidance, then the Commissioner has power under the INCOME TAX ACT 1994 to declare the trust arrangements invalid and levy income tax as if the trust never existed.
One of the longer term advantages of a trust is that the capital funds of the trust may be exempt from assessments for rest home subsidies or other government benefits:
You should be aware, however, that the relevant government agencies are entitled to review gifts or other transactions that were intended to deprive a person of income and assets in order to qualify for a benefit. It's therefore important that the trust be set up for other valid reasons (such as benefiting family members) and that those reasons are documented.
Estate duty taxes the value of the assets that the deceased person held when they died. There is currently no estate duty or other form of death tax. The last form of estate duty imposed in New Zealand amounted to 40 percent of the estate. Transferring assets into a trust avoided estate duty, provided the deceased person had lived for at least three years after the date of the last gift to the trust.
New Zealand is apparently the only country in the western world that does not have this type of taxation. But this could change and this possibility should not be overlooked in assessing whether you need to set up a trust. If you successfully transfer your assets to a trust or to family members, then hopefully these assets would be exempt from any future estate duty or death tax.
Two questions commonly asked by those considering a trust arrangement are:
The answer to both of these questions is "Yes".
For example, a trust places "fiduciary" obligations on trustees, which means that the trustees have a duty to act in the best interests of the beneficiaries at all times (see How to be a trustee). This could mean that in the future the trustees may find it necessary to make decisions that were different from what you as settlor originally had in mind. But certain conditions may be able to be included in the trust deed to address this problem: see below, "'Protector' clauses".
Much will depend on how well the trust deed is drafted. For this reason you must seek expert legal advice in creating your trust. A proper trust deed should be a lengthy, carefully calculated document containing detailed provisions as to the trustees' powers and responsibilities and also setting up suitable mechanisms to protect the assets from being used inappropriately.
One of the most obvious ways for making sure that the trustees operate the trust according to your wishes is to make sure that you, the settlor, are one of the trustees.
Another method is one of a variety of "protector" clauses. These clauses could reserve the right to you and your spouse to hire and fire trustees, or to limit in certain ways what the trustees can do. For example, a protector clause could require the trustees to obtain your approval before dealing with any trust assets worth more than $1,000.
Finally, to allow for changes to the law or for the settlor wanting to create further terms for the trust, most modern trusts now have amendment clauses, which permit limited alterations to the trust deed in some cases, and "re-settlement" clauses, which allow that, if necessary, the trust assets can be re-settled onto a new trust with different provisions or beneficiaries.
A family trust is a specific type of trust, and the same considerations that apply to trusts in general apply to family trusts. The beneficiaries of a family trust are usually spouses, children and grandchildren.
You will need to decide the assets to be put into the trust, and to place a value on them. The ownership of the assets is then transferred to the trust and the trust incurs a debt to you, the settlor. This debt can then later be "forgiven".
For more information, see How to set up a family trust.
A family trust arrangement might typically work like this:
This process is explained in detail in How to set up a family trust.
How to make a will
There are many good reasons for making a will. A will records who you (the "testator") wish to benefit from your estate (that is, your assets). You can provide for people - such as friends - who would not be entitled to anything from your estate if you died without a will.
If you die without a will (called dying "intestate"), the law dictates who will receive your assets after you die: see How to deal with a relative dying without a will.
The most important things to provide for in your will are who will be your executors, and who will be the beneficiaries of your assets.
In making your will, you should consider any future children you may have, and provide for them in your will. You should also consider how you would like your property to be distributed should your spouse or partner die at the same time as you.
It is also possible in a will to forgive any debts owed to you.
Aside from these matters, wills commonly provide for such things as:
You should consider who you want to be the executor of your will (the person that your will appoints to manage and distribute your estate). The executors will be in charge of carrying out your wishes, so they should be responsible and trustworthy.
It is preferable that you appoint two people to be executors, in case one of them dies before you do.
To be legally valid, a will must be:
The two witnesses should preferably be at least 20 years old.
Witnesses cannot be beneficiaries under the will, and nor can the spouse or civil union or de facto partner of a witness. If they are beneficiaries, this does not make the will invalid, but they are not entitled to receive anything under the will.
The will need not be drafted by a lawyer. Printed forms for drawing up your own will are available from major stationery stores.
However, the cost of getting a lawyer to draw up your will are relatively small. Further, if the will is relatively straightforward, some law firms may not charge for this service. In any event, even a small charge would be cheap compared to the problems that can arise if a will is badly drafted and therefore unclear, or if the will is invalid because it has not been signed and witnessed properly.
A will must be in writing: a spoken will is not binding. However, if you promise to provide for someone in your will in return for services that he or she has performed for you (for example, looking after you while you were sick), that person may bring a claim against your estate under the LAW REFORM TESTAMENTARY (PROMISES) ACT 1949. For more details, see How to contest a will.
Yes, you can do this either by making a new will or by adding a "codicil" (an amendment) to the will: see How to change a will.
Assuming your will can't be challenged as being legally invalid (that is, it was properly witnessed and so on), it may still be able to be challenged after your death by:
These are explained in detail in How to contest a will.
If you are concerned about whether your children will benefit under your will if you leave everything to your spouse, you can establish a family trust in your will to ensure that your children's needs will be met (see How to establish a trust).
There are a number of ways that families can structure their assets. The most effective structure will vary according to your particular circumstances.
One way of structuring assets is by using a family trust. A trust is the legal relationship created when a person (the "settlor") places assets under the control of a person (the "trustee") for the benefit of some other person or people (the "beneficiaries") or for a specified purpose.
With a family trust, assets such as the family home can be placed in trust, with the beneficiaries usually being spouses, children or grandchildren. With the transfer of the assets to the trust, the trust incurs a debt to you, the settlor, which can then later be "forgiven". For more information, see How to form a trust.
It is also important to decide who should hold family assets. For example, the family home could be owned by a husband and wife as joint owners. With joint ownership, if one party dies the home passes to the other party.
An alternative is "ownership in common" (or "tenancy in common"). If the parties own the property as owners "in common" and one of them dies, the share of the house owned by the deceased party will be dealt with according to his or her will (or, if there is no will, according to the rules of "intestacy", for which see How to deal with a relative dying without a will). Therefore with ownership in common the deceased party's share does not automatically pass to the survivor.
Another way of structuring assets is by using a company. When a company is incorporated and registered, it becomes a separate legal entity. The shareholders are effectively the owners of the company.
To be registered as a company, a company must have at least one share, one shareholder and one director. You must first reserve a name for the company with the Companies Office, and then apply for the company to be registered and incorporated under the COMPANIES ACT 1993 (see How to form a company).
Buying a unit in a retirement village is significantly different from buying a freehold home, and there are a number of specific questions you will need to consider. As well as finding out as much as you can about the village and its reputation from its staff and residents, you will also need to consider the type of ownership it is offering, which may be, for example, an occupation licence or a unit title (see below for the different types of ownership).
In choosing a village you should start by visiting the villages in your area. As well as meeting with the managers and nursing staff, talk with as many of the residents as possible about how they find the staff and facilities, the standard of care, the standard of maintenance of the units and common facilities, and other issues.
As well as generally feeling comfortable with the village and its facilities, you should make sure you address a number of important specific questions:
You should obtain the documents for the legal ownership of any of the properties in which you are interested. Usually the main document will be an occupation licence (see below).
The Consumers' Institute provides a comprehensive checklist for choosing a retirement village unit on its website at www.consumer.org.nz/other/retirecheck.html or check the Ministry of Economic Development's companies office online.
The Retirement Villages Act 2003 introduces new rights and protections for residents, and intending residents, of retirement villages. It also introduces new responsibilities for operators of retirement village so that residents have a clear understanding of the financial and other obligations of being a resident, and to ensure and residents receive what they were promised or are entitled to. Before intending residents agree to enter into any agreement to occupy a unit in a retirement village, the person making the offer will need to provide the intending resident with an Occupation Rights Agreement and this must include a cooling-off clause.
From 1 May 2007 you are now able to search Retirement Villages registered under the Retirement Villages Act 2003 online at www.retirementvillages.govt.nz.
There are a number of different types of ownership agreements for retirement village units, and you will need to consider the advantages and disadvantages of each form. The main forms of ownership agreement include the following:
If you are planning to advance money to an independent party it is advisable that you seek some form of security or interest to protect your investment.
The nature of the security or interest you should seek will depend on the type of investment made and also on the identity of the party who is to benefit from the advance.
The following are the principal forms of security that you should consider:
If you are advancing money to a company, the most obvious form of security is to obtain shares in the company (see How to buy shares in a company).
Another useful form of security is a mortgage over land. If the borrower (the mortgagor) defaults in the loan payments, you will have the right to enforce a mortgagee sale, but will need to follow strictly the procedure for exercising this right (see How to know your rights and obligations as mortgagee (lender).
You may also try to obtain a chattels mortgage, which is a charge over the borrower's property in the lender's favour. Chattels are generally movable, tangible articles of property, such as cars, household appliances and furniture.
Another legal form of charge is a debenture â€“ this is a document used as security indicating that a debt is owed and will be paid. This may create either a fixed or floating charge on the property.
A "fixed" charge gives you a security interest over a specific asset or assets of the borrower (such as land or machinery), and the borrower cannot dispose of that asset or those assets unless you, the charge-holder, consent to it. By contrast a "floating" charge is not on any specific asset, but is on the borrower's assets generally; the borrower can therefore carry on business as normal and dispose of any of its assets as it wishes.
You may be able to get someone to guarantee the loan, which means that this person (the guarantor) would be responsible for the borrower's debt if the borrower defaults in the loan payments.
At some point many of us will have to choose a rest home for ourselves or for a loved one. This is an important matter and it is essential that you feel comfortable with your decision.
In order to choose a rest home, you might begin by asking your doctor or your local hospital for recommendations of homes with good reputations.
You should make a thorough inspection of all the homes you visit and ask questions of the staff. As well as generally feeling comfortable with the home and its facilities, you should make sure you address a number of important specific questions.
Some of the main questions you should ask are:
The Consumers' Institute provides a comprehensive checklist for choosing a rest home on its website at www.consumer.org.nz/other/restcheck.aspl.
Once you have chosen a home, you should be aware of your rights as a resident and ensure that they are being met at all times.
These include the right:
If you feel that one of your rights as a rest home resident has been breached, you should first discuss the matter with the manager of the home.
If that does not resolve the matter, you may have grounds to make a complaint to the Health and Disability Commissioner if there has been a breach of the Code of Health and Disability Services Consumers' Rights. You can obtain a copy of the Code by phoning the Commissioner (0800 112 233) or you can read it on-line at the Commissioner's website (www.hdc.org.nz). A complaint to the Commissioner does not have to be in writing.
If the Health and Disability Commissioner does not have jurisdiction to deal with your complaint, you may have other courses of action. For example, if the confidentiality of your personal records has been breached, you may make a complaint to the Privacy Commissioner (phone 0800 803 909).
Growing old is one of life's certainties and may raise a number of important legal issues, particularly questions to do with the care of one's parents or parents-in-law.
You have no legal responsibility to support your parents or parents-in-law. The only situation in which this may occur is where parents or parents-in-law have promised to leave you something in their will in return for supporting them in their old age. If this is the case then a contractual obligation may have arisen and can be enforced.
Specifically, you have no legal responsibility to pay your parents' medical bills.
If an elderly person is over 65 he or she is eligible for New Zealand Superannuation. A person who has not yet reached 65 may possibly claim sickness or other benefits â€“ contact Work and Income New Zealand (WINZ) to ask what they can or cannot claim.
The Government also provides a rest home subsidy (the Residential Care Subsidy), which is subject to asset- and income-testing: see How to apply for a rest home subsidy (Residential Care Subsidy).
Elderly people can live anywhere they choose; their children do not have the power to stop them living in a particular place.
An elderly person cannot be forced to move into a rest-home against his or her wishes, unless the court makes a "personal order" under the PROTECTION OF PERSONAL AND PROPERTY RIGHTS ACT 1988 on the ground that he or she is mentally incapable of dealing with his or her own affairs (see "Personal and property orders" below).
Along with caring for one's elderly parents comes the responsibility of dealing with any business matters that may arise. It may be necessary for the elderly person in question to give you or some other person a power of attorney to deal with his or her affairs (see How to give a power of attorney). You may be given either:
If a parent or parent-in-law becomes mentally incapable but has not previously given anyone an enduring power of attorney to deal with his or her affairs (see above), you can apply to the court for it to make various orders to provide for the person's personal welfare and business affairs.
The orders that may be made include appointing a manager for the person's property affairs, and appointing a welfare guardian to deal with the person's personal care and welfare (see How to obtain a personal or property order for someone who is mentally incapable and How to be a welfare guardian).
If you wish your property to be used for a charitable purpose you may decide to establish a charitable trust.
A charitable trust differs from other trusts in that it does not have particular beneficiaries but instead is for a particular purpose. This type of trust therefore need only identify a class of people and not particular individuals as beneficiaries. See generally How to form a trust .
As with creating any trust you should choose the trustees carefully.
A charitable trust must have one of four basic purposes:
You may decide to take advantage of the many benefits that arise through registering the trustees as a trust board under the CHARITABLE TRUSTS ACT 1957. Registration under the Act may allow the trust to enjoy many tax exemptions, including donations being tax deductible.
The registration of the trust board means that the trust becomes a separate legal entity, and as a result many of the administrative inconveniences and expenses of an ordinary trust are avoided.
To register as a trust board you will need to apply to the Registrar of Incorporated Societies at the Companies Office. The Companies Office is a part of the Business and Registries Branch of the new Ministry of Economic Development. For contact details, see the Ministry's website at www.med.govt.nz.
The application must be in the form set down in the Act or to similar effect, and must be signed by a majority of the trustees. You must attach a copy of the trust deed to your application, and a statutory declaration from one of the trustee applicants. There is no application fee.
The position of trustee is an extremely important one, as trustees are in a "fiduciary" relationship with the trust's beneficiaries. This means that they are in a special position of trust and accordingly have a number of significant duties. If you are a trustee, it is vital that you familiarise yourself with those duties, as you can be liable for "breach of trust" if you do not fulfil them.
This sheet gives information about the duties of trustees, and also gives practical advice about how to ensure that those duties are complied with.
Any person who can own property may be a trustee. A minor (someone under 20) can be a trustee, but a court would have to appoint someone to act as trustee until the minor turns 20.
In general, the main duties of trustees are:
Trustees should be aware of the following issues when a trust is first created:
Before making decisions the trustees should acquaint themselves fully with all the relevant facts, and consider whether they need expert advice from lawyers, accountants, investment advisers or other specialists
After considering any expert advice that they think is necessary, the trustees must ensure that they turn their own minds to the question in hand, acting honestly and in good faith. The decision must be theirs, and not that of their expert advisers, as trustees are not permitted to delegate their decision-making power, except when this is authorised by the trust deed.
In general, trustees should not commit themselves in advance as to how they will exercise a discretion in the future.
Trustees can apply to the courts for directions concerning any of the trust property, or the management or administration of the trust property, or the exercise of any power or discretion vested in them. In this way trustees who are in doubt about the legality of an intended course of action can get the court's approval and be protected from any liability for the action.
Trustee decisions must be unanimous, unless the trust deed allows for majority decisions.
The trustees should record all their decisions. They should also record the reasons for their decisions, and attach all the relevant documents including any expert advice given.
In general the courts won't interfere with decisions made by trustees: if the trustees are exercising their discretion in a proper manner, the courts won't substitute its own decision for that of the trustees.
However, the TRUSTEE ACT 1956 gives beneficiaries a limited right to apply to the court for it to review a decision of the trustees; this applies only when the trustees have exercised a power under the Act, not a power given by the trust deed.
The courts may also interfere in some cases when the trustees have acted outside their powers or have acted capriciously, or have taken into account irrelevant or improper factors, or have made a decision that no reasonable trustee could make.
Trustees are liable for any transactions they enter into that they are not authorised by the trust deed or by statute.
Trustees may be paid for their services only if the trust deed specifically provides for this. The deed often provides for the trustees to be paid, particularly if the trustees include professional independent trustees - for example, lawyers, accountants or financial advisers.
If the trust deed doesn't provide for payment, then the trustees would need the consent of the beneficiaries or of the court to receive payment.
Usually the trust deed will provide for when and how new trustees will be appointed. But if the trust deed doesn't deal with this, the matter is governed by the TRUSTEE ACT 1956 (any provision in the trust deed overrides the Act). The Act provides that a new trustee may be appointed when a trustee
The Act says that the new trustee is appointed by the person whom the trust deed nominates to make new appointments, or, if the trust deed doesn't nominate anyone, by the other trustees.
The beneficiaries cannot control the exercise of the power of appointing new trustees conferred on a continuing trustee by the Act.
The court also has a general power to appoint new trustees, whether instead of or in addition to existing trustees, when it is "expedient" to do so. In particular the court can appoint a new trustee in place of an existing trustee who:
Trustees can also be removed under any express power contained in the trust deed.
A trust exists when one person (a "trustee") holds and owns property for the benefit of another person (a "beneficiary"). A family trust is a trust set up to benefit members of your family.
The purpose of the family trust is for you to progressively transfer your assets to the trust, so that legally you own no assets yourself, but for you, through the trust, to still have some control over, and get the benefit of, these assets.
You can set up a family trust either while you are still alive (by a declaration of trust contained in a trust deed) or when you die (by the terms of your will). This HowTo sheet is mainly concerned with trusts created while you are alive, and with the benefits that these trusts can provide for you in your lifetime.
You may wish to set up a Family Trust with a Trust Deed designed for an individual or a Trust Deed designed for a couple.
Like any other type of trust, a family trust must have the following elements:
You, the settlor, are normally allowed to also be one of the trustees of your trust. Usually the settlor will also appoint an independent trustee, which is often the settlor's lawyer or accountant. Having an independent trustee helps avoid any suggestion that the settlor continues to have control of the trust assets, in which case Inland Revenue may argue that the trust is a "sham" and therefore invalid. For more on trustees, see How to understand trusts and How to be a trustee.
These beneficiaries are all "discretionary" beneficiaries, which is a key factor in family trusts. Discretionary beneficiaries (unlike the beneficiaries under a "fixed' trust) have no right to receive any benefit under the trust; instead, the trustees have a power to choose which of these beneficiaries will receive the benefit of any assets. The trustees are free to decide who is the most deserving beneficiary from time to time.
The goal of setting up a family trust is to transfer your significant assets from personal ownership to ownership by the trust - in other words, to achieve "personal poverty" while becoming a beneficiary of the trust yourself.
By doing this, you may succeed in protecting your assets from threats from various directions, such as claims by business creditors, or claims by ex-spouses or partners under the PROPERTY (RELATIONSHIPS) ACT. For more details on these and other threats to your assets, and how a trust protects against them, see How to understand trusts (under "Reasons for Forming a Trust").
To get the maximum benefit from your trust, you should aim to have your significant assets in a trust by age 55 at the latest. It's therefore normally recommended that people in their forties and fifties should be considering the advantages of a family trust.
As an illustration, if a single person aged 70 to 80 proposed gifting assets of, say, $200,000 to a trust, they would need to live another eight years to forgive the debt at $27,000 each year, and then another five years before qualifying for government rest home subsidies. (This is explained below under "Transferring Your Assets to the Trust" and "Rest-Home Subsidies & Gifts to Family Trusts".) At that advanced age, this may well be overly optimistic. It's likely that the person would need to seek care well before those time limits expired and the gifts were completed.
But even if you do not transfer your assets to a trust by age 55, a trust can still provide you with benefits, as is explained below: see "Rest-Home Subsidies & Gifts to Family Trusts /Can a trust help even when rest home care is impending?"
There are likely to be overheads in maintaining a trust. If the trust holds income-earning assets, the trustees must maintain annual accounts and annual tax returns and comply with any other requirements imposed by the Inland Revenue Department. It is therefore important to establish, before you set up a trust, that the benefits of the trust will outweigh the costs.
Almost any assets can be held by the trust, including real estate, motor vehicles, valuable artwork, household items such as furniture, and company shares.
You should usually consider transferring appreciating assets into the trust before depreciating assets (such as motor vehicles). But this depends on your age, how you intend the trust to be used, and your personal circumstances. You should get expert advice on this.
Once the trust has been formed, the steps involved in transferring assets to the trust are as follows.
The values should ideally be fixed by an independent valuation - for example, by a Registered Valuer for real estate, by Stock Exchange sale values for equities, and by independent expert valuation of government and other registered stocks and debentures.
The trust must pay you, the seller, the full value of the asset - if the family home is worth $200,000, the trust must give you a cheque for $200,000. But usually a family trust will have been set up with only nominal assets (say, $10), and cannot afford to buy the home. So you the seller will lend the trust $200,000 as an interest-free loan. This is effectively a paper transaction - the loan and the payment cancel each other out, and so you do not need to borrow any money from your bank.
The debt to you is recorded in, and is secured by, a Deed of Acknowledgement of Debt, made by the trustees.
Once the debt has been fully forgiven, you have achieved "personal poverty" in relation to that house or other asset. You no longer own it - the trust now owns it. But you can still receive a benefit from it as a beneficiary under the trust.
When you forgive a debt to the trust, this amounts legally to a gift. New Zealand tax laws limit the amount that any one person may gift each year, without incurring gift duty, to $27,000.
If a married couple transfers assets to a trust, they can each take advantage of the $27,000 a year limit, and therefore gift a combined $54,000 a year.
For gifts above $27,000, gift duty is payable at the following rates:
If the value of the assets being transferred is more than $27,000 for each person, the debt incurred by the trust when the assets are transferred to it cannot by forgiven all at once without incurring gift duty. It must therefore instead be forgiven in stages.
This process of forgiveness of debt by stages is known as a "gifting programme".
Inland Revenue requires you to fill in and send them an IR 196 "Gift Statement" form whenever you make gifts totalling more than $12,000 in any 12-month period. You will therefore need to send them an IR 196 if you make a Deed of Partial Forgiveness of Debt to a family trust (if the reduction in debt is for more than $12,000). You should send two copies of the form, along with a copy of the deed of forgiveness. You can get a copy of an IR 196 form from the IRD website at www.ird.govt.nz (under Forms, Books & Newsletters/Duties).
A recent trend has been for people setting up a family trust to grant themselves a life interest in an asset â€“ such as a lease for life over the family home â€“ before they sell the asset to the trust.
This is an alternative to the conventional approach for dealing with the family home or other significant asset in family trust arrangements, which is for the settlors to sell full ownership of the house to the trust, and lend the trust the money for the sale. The trust owns the house, but leases it back to the couple, who pay rent to the trust.
With a lease for life, by contrast, the settlors grant a lease for life to themselves to occupy the house, through a Deed of Lease for Life to Occupy Building, and then sell the trust the "reversion" - that is, what's left of the ownership rights in the house after the settlors' right to occupy it during their lives. So, unlike the conventional approach, the trust does not get outright ownership of the house. And unlike the conventional approach, the settlors' right to live in the house comes not from a lease given by the trust, but from the lease for life that the settlors granted themselves before the trust obtained any ownership rights in the house.
The purpose of choosing the lease for life approach is to reduce the value of the asset that is transferred to the trust. If a person has a right to use an asset for the rest of his or her life, then that asset is immediately worth less to someone else â€“ in this case, to the trust. The settlor should obtain a valuation of the property before the sale to the trust; the value will be much less because of the lease for life to the settlors.
For example, if a life interest (a lease for life) in a property is created for a 60-year-old woman, the property is now worth 40 percent of what would be the market value if there were no lease for life - in other words, a $200,000 house could be sold to the trust for $80,000.
Although the creation of a life interest in a property sounds like a miraculous cure to advance the gifting programme, it does have some significant drawbacks in practice. It is therefore useful only in certain narrow circumstances. Factors that will be relevant include:
It's important that anyone who is considering using this technique, or indeed any other type of family trust arrangement, gets full legal advice.
A mortgage over the property can make the necessary transactions more complicated and therefore more costly, but it imposes no real barrier to transferring the property to a trust. For more detailed information on this, get legal advice.
Yes, certain Acts of Parliament do provide for transfers of assets or gifts to be set-aside in certain circumstances:
People going into long-term rest home care can apply for the Government to pay for their care by way of a Residential Care Subsidy.
The most important requirements for qualifying for this subsidy are that -
The asset threshold increased dramatically on 1 July 2005, from $15,000 to $150,000, and after that increases by a further $10,000 on 1 July each year. However, by 2010, for example, the asset limit will still be only $200,000 (for a single person), and any assets over that amount will go towards rest-home fees. Therefore, there are still significant benefits to be obtained in this area by transferring your assets to a trust. Also, there remain other important arguments for transferring your assets to a trust, besides Government asset-testing: see How to understand trusts.
Note that you are allowed to reduce your cash assets by pre-paying a funeral up to the value of $10,000.
When you apply for the Residential Care Subsidy, you must sign a declaration that answers the question, "Have you made any gifts within the previous five years?"
A forgiveness of debt under a family trust arrangement is a gift. This means that the debt owed by the trust must have been completely forgiven more than five years before you apply for the Residential Care Subsidy in order for you to be able to answer "no" to this question.
If you have made any gifts within the previous five years that total more than $5,000 per year, the excess over $5,000 a year is treated as part of your assets when you apply for the Residential Care Subsidy, even though you no longer in fact have that asset.
You get the benefit of the $5,000 a year deduction for each year since you made the gift. So if you gifted $30,000 four years ago, you get the benefit of a $20,000 deduction (four times $5,000), so that only $10,000 of the gift is assessed as part of your current personal assets.
Work and Income have wide powers to investigate gifts made earlier than the previous five years, going as far back in time as they like. If they decide a gift made at any time was made so that you would qualify for a benefit or subsidy, they can assess it as still being part of your personal assets and refuse you the benefit or subsidy on the basis that your personal assets are more than the allowable maximum.
If you want to change your AustralianTrust Deed so that you only have one Trustee.
Do you need to update your Australian family trust deed to include the latest taxation benefits? Suitable for use throughout Australia.
This document is suitable for producing minutes for multiple Australian Trust Deeds.
You have an Australian Family Trust (sometimes called a Discretionary Trust or Family Discretionary Trust), and wish to change the name of the Family Trust. Suitable for use throughout Australia.
This document is suitable for producing minutes for multiple Australian Trust Deeds. Suitable for use throughout Australia.
Winding Up an Australian Family Trust. Suitable for use throughout Australia.
The purpose of this document is to formally change the trustee of your Australian Family Trust. The safest way to update the trustee is by Deed of Change of Trustee. Suitable for use throughout Australia.
You build a Declaration of Trust if you are about to acquire an asset. Suitable for use throughout Australia.
The purpose of this Kit is to formally and correctly accept a new Member into an Australian Unit Trust. Suitable for use throughout Australia.
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