United States Legal Documents


Living trusts

This range of US Living Trusts documents provide for the setting up of a trust for a couple or single person along with other adminstartion documentation required.

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How to understand trusts

Introduction

What is a 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.

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.

"Fixed" and "discretionary" trusts


  • Fixed (or non-discretionary) trusts - With this type of trust, the number of beneficiaries and their relative shares are fixed at the outset. For example, a trust might be established for a handicapped child to ensure that the child will be properly cared for if the parents or guardians die.

  • Discretionary trusts - Here, the trust deed gives the trustees a discretion about matters such as who may be a beneficiary and what each beneficiary's share will be. Discretionary trusts are more common than fixed trusts; nowadays, most family trusts are discretionary.

Note that a particular trust deed might create both a fixed trust and a discretionary trust.

Getting proper legal advice

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".

The Essential Requirements of a Trust

Introduction

A trust must have the following essential elements:

  • a settlor (the person who creates the trust)
  • the assets to put into the trust
  • a trust deed (the legal document setting up the trust)
  • one or more trustees (those in charge of administering the trust)
  • beneficiaries

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

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.

Trustees

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.

The beneficiaries

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: What should be included in it?

The trust deed (the legal document that sets up the trust) should deal with the following matters:

  • the nature and purpose of the trust
  • identifying the parties involved
  • the duties and powers of the trustees
  • the requirements for decision-making by the trustees (including any delegation of decisions)
  • the trustees' powers to invest trust assets
  • how the trust's bank account is to be operated
  • the recording of minutes

Reasons for Forming a Trust

Protection from creditors

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.

Claims by family members or others

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.

Matrimonial/Relationship property

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.

Income tax

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.

Asset-testing by the government

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:

  • Rest home subsidies ("Residential Care Subsidy") - Gifting assets to a trust may assist you to qualify for this subsidy. For more information on how gifting to trusts or directly to family members can achieve this, see How to apply for a rest home subsidy (Residential Care Subsidy) and How to set up a family trust.

  • The NZ Superannuation Surcharge has now been abolished, but some other form of means test may well be applied in the future. Transferring income-earning assets to a trust can reduce your income, and previously this avoided or reduced the surcharge liability. A trust arrangement would almost certainly confer the same benefits if a future means test is imposed. The value of income-earning assets given to the trust would be owed by the trustees to you, the settlor, and that debt could be repaid by the trustees; as repayments, they would be capital and therefore be tax free.

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

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.

How Settlors Can Maintain Some Control Over Trust Assets

Introduction

Two questions commonly asked by those considering a trust arrangement are:

  • Is it possible for the trustees to deal with the trust's assets in a way that I, the settlor, would not have approved of?
  • Is it possible for me, the settlor, to lose control of the assets?

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.

Appointment of the settlor as one of the trustees

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.

"Protector" clauses

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.

Amending and re-settling the trust

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.

Family Trusts

What is a family trust?

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.

How do I set up a family trust?

A family trust arrangement might typically work like this:

  • The settlor makes an opening cash gift.
  • The settlor sells assets to the trust, with the trust incurring a debt to the settlor for the purchase price.
  • The settlor forgives this debt in stages under a "gifting programme".
  • The trust assets (for example, the family home) are leased to the settlor, who pays rent for them to the trust.

This process is explained in detail in How to set up a family trust.

Cautionary notes
  • It is essential to obtain legal and accounting advice before setting up a trust. Your advisers can tell you whether a trust is the most effective way of structuring your affairs; if it is, they can assist you in creating the trust.
  • You should not put forward as reasons for establishing the trust that you wish to defeat tax and estate duties, because the trust could then be set aside by the courts.

How to structure the ownership of family assets

Introduction

There are a number of ways that families can structure their assets. The most effective structure will vary according to your particular circumstances.

Creating a family trust

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.

Joint ownership versus ownership in common

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.

Forming a company

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).

Cautionary notes
  • The type of structure that is most effective and appropriate will vary according to individual circumstances. It is essential to obtain legal advice before and during the process of structuring family assets.

How to buy a unit in a retirement village

Introduction

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).

Choosing a retirement village

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:

  • the cost of care, and when any fees for the cost of care are deducted
  • any other costs involved in the ongoing use of facilities
  • the financial stability and reputation of the village owner/operator
  • any potential developments for the village
  • how much you will receive when the unit is "resold", and when you will be paid

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.

Types of ownership

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:

  • Unit title for life – A title for life to the unit will be issued in the name of the resident for the resident's life or until he or she terminates it at some earlier date. This means that the title belongs to the resident: the rest home owner is unable to deal with it. For an explanation of unit titles, see How to: unit title ownership of apartments and other properties.
  • Mortgage back in favour of the resident – In some instances the resident makes an occupation loan to the retirement village owner. The resident's loan is secured by a registered first and only charge against the title to the resident's unit.
  • Prospectus regime with a licence to occupy – In the above two cases the resident deals with the rest home owner directly; but under the most common form of "ownership", an occupation licence, the resident pays a fee to a statutory supervisor, who then passes the proceeds on to the retirement village owner. The statutory supervisor is appointed as part of the issue of a prospectus by the owner. The statutory supervisor takes a first charge over the village units and receives financial reports from the owner and audited reports about the financial aspects of the business. So under this type of agreement you deal with the owner of the retirement village only through the statutory supervisor, whose role is to protest the interests of you and the other residents.
Cautionary notes
  • You will need to be aware that if you decide to leave the village or if you die, in some situations the funds may not be repaid to you or your estate until the unit is sold to another new resident.
  • As there are so many different types of ownership agreement, it is important that you seek legal advice before entering into any agreement. Your lawyer will ensure that your investment is secure and that, when you leave, the money is paid back within a reasonable time.

How to secure your investments

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:

Company shares

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).

Mortgage over land

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).

Chattels mortgage

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.

Debenture

Another legal form of charge is a debenture – 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.

Guarantors

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.

Cautionary notes
  • To ensure that whatever form of security you choose is enforceable and secure, it is advisable that you see a lawyer, who will draft the documents and ensure that they are executed correctly. A lawyer will also make sure that, where necessary, the documents are registered (for example, the registration of a mortgage under the LAND TRANSFER ACT 1952).

How to choose a rest home and know your rights

Introduction

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.

What questions should I ask?

Some of the main questions you should ask are:

  • Do the residents seem happy and well cared for?
  • Do the staff appear to be friendly and responsive to residents? How many staff are on duty? What are their qualifications?
  • Does the rest home have effective fire safety and other safety procedures? Is it secure from potential intruders?
  • What type of medical and dental care is given? Is there a registered nurse on the premises at all times? Is a doctor on call at all times?
  • Are the rooms comfortable? What facilities are provided in each room?
  • What type of food is served? Is there a choice of food?
  • What type of activities are available for residents?
  • How much are the fees and what do these fees include?
  • Is the rest home certified by some outside agency?
  • Is the rest home a participant in the subsidy scheme run by Work and Income New Zealand (WINZ)? Rest homes in this scheme must meet certain conditions.

The Consumers' Institute provides a comprehensive checklist for choosing a rest home on its website at www.consumer.org.nz/other/restcheck.aspl.

What are my rights as a rest home resident?

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:

  • to medical advice and treatment
  • to the confidentiality of your personal records
  • to manage your own financial affairs
  • to have your personal requirements met
  • to have visitors
  • to participate in community activities and events

What should I do if these rights are breached?

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).

Cautionary notes
  • If you are unsure about your rights as a rest home resident, you may wish to seek legal advice to ensure that your rights are being met and for advice on a course of action to take if they are not.

How to: Caring for the elderly

Introduction

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.

Am I responsible for looking after my parents?

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.

What Government support is available to the elderly?

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 – 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).

Do I have any say about where my parents should live?

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).

Powers of attorney

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:

  • an "ordinary power of attorney", which you can exercise only so long as the elderly person remains mentally capable, or
  • an "enduring power of attorney", which can still be exercised if the person in question becomes mentally incapable

Personal and property orders

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).

Cautionary notes
  • If you are unsure about your legal rights and responsibilities in caring for your elderly relatives, you should seek legal advice.

How to be a trustee

Introduction

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.

Who can be a trustee?

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.

The main duties of trustees

In general, the main duties of trustees are:

  • to act in the best interests of the beneficiaries of the trust
  • to act in an even-handed manner between beneficiaries and between groups of beneficiaries
  • not to use knowledge or influence gained as a result of being a trustee to advance the trustee's own position (except when the trustee discloses his or her personal interest to the settlor of the trust and obtains the settlor's informed consent)
  • to act personally rather than delegating decisions to others (except if the trust document explicitly permits delegation)
  • to act honestly and with the level of skill and care that would be expected of the reasonable businessperson in administering the affairs of others
  • to be thoroughly familiar with the terms of the trust in the trust deed (the main trust document), and with who the possible beneficiaries may be and what the assets and liabilities of the trust are.

Specific duties when the trust is set up

Trustees should be aware of the following issues when a trust is first created:

  • Payment of the initial settlement to the trustees
    The trust deed will usually state that an amount of money is to be paid by the settlor to the trustees as the initial settlement of the trust. It is advisable that this amount be paid to the trustees and banked immediately into a bank account opened in the trustees' name. Similarly, if land is transferred to the trust, a memorandum of transfer should be completed and registered.

  • Obtaining an IRD number for the trust
    If the trust will hold income-earning assets, the trustees should apply to Inland Revenue for an IRD number for the trust, because the trust is a separate entity for tax purposes. A copy of the trust deed will need to be sent with the application. The IRD will also require the trustees to complete a standard form that lists the trustees and beneficiaries and other details of the trust.

  • Registering for GST
    You will need to consider whether the trust should be registered for GST, especially if the trust is going to be a trading entity: see How to work out whether you must register for GST.

  • Keeping the trust documents
    The original documents of the trust, centrally the trust deed, should be kept in safekeeping. Copies of the trust documents should be freely available for the trustees and beneficiaries. A good practice is to bind together photocopies of the trust deed, the trustees' opening minutes, and all initial transaction documents (such as memoranda of transfer) and for these to be given to each trustee for their own records, and also to the trust's accountant. (The documents of title to any assets bought by or gifted to the trust should be held in safekeeping, along with the original trust documents.)

Specific ongoing duties of trustees


  • maintain a file or diary of correspondence, including copies of contracts with third parties
  • capital and income accounts
  • cash books
  • lists of trust property (which also state where documents of title are kept)
  • a document containing the relevant details of the trust, including: the date of settlement; the identity of the settlor and trustees; the names, addresses and dates of birth of the beneficiaries; records of the births, deaths, marriages and divorces of beneficiaries; and any indemnities and guarantees

  • Trustees' meetings & minutes
    If the trust will be actively trading or acquiring assets, then the trustees will probably need to meet regularly. But if the trust is intended simply to acquire and hold assets, then the need for trustee meetings is less. However often the trustees meet, all meetings should be recorded in the minute book, along with all decisions; it is also useful to record the reasons for the decision and background information.

  • Annual accounts
    The trustees must ensure that proper and professional accounts are prepared each year by the trust's accountant. Even if the trust is simply a passive investor or holder of property, it is desirable that proper books of account be prepared, especially if the trust has a bank account.

  • Annual income tax returns
    The trustees are required to file separate income tax returns for the trust.

  • Other files and records
    The trustees should maintain:

  • Investment of trust assets
    Trustees should develop, maintain and review an appropriate investment strategy for the trust. They should keep accurate and thorough records about the strategy they have adopted. The level of care required of trustees is stated in Part 2 of the TRUSTEE ACT 1956 (as amended by the TRUSTEE AMENDMENT ACT 1988). This requires that they exercise the care and skill that a "prudent" businessperson would exercise in managing other people's affairs. Professional trustees and trustees who invest money for others as a profession are required to exercise the special care and skill that someone in their profession would exercise. 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).

  • Changes in trustees
    When the trustees change (for example, one retires and another is appointed), it is important that the change be formally documented and that the trust's lawyer be notified. If not, the incorrect trustee names may be recorded on documents of title to new assets that are acquired, and this will mean that when the asset comes to be sold there will need to be an extra round of legal documentation before the sale can be completed. See below for the appointment of new trustees.

  • Information for beneficiaries
    Trustees should provide the beneficiaries with any information that they request about the operation of the trust and its assets.

  • Not mixing trust and personal property
    Trustees must not mix their personal property with the trust property. If this happens, the onus is on the trustee to distinguish the separate assets, and to the extent that the trustee fails to do this those assets belong to the trust. To ensure that assets aren't mixed, the purchase price for all assets bought by the trust should be paid for out of the trust's bank account. Similarly, the sale price for all assets sold by the trust, and all income belonging to the trust, should be paid into the trust's account.

Decision-making by trustees

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.

Can the beneficiaries challenge decisions of the trustees?

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.

Are trustees paid for their services?

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.

How are new trustees appointed? How are trustees removed?

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

  • is dead
  • is unfit to act or incapable of acting
  • refuses to act
  • is overseas for more than a year
  • no longer wishes to be a trustee
  • is a company that has stopped trading or been liquidated

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:

  • is guilty of misconduct in administering the trust
  • is convicted of a crime involving dishonesty
  • is mentally disordered
  • is bankrupt
  • is a company that has stopped trading or been liquidated

Trustees can also be removed under any express power contained in the trust deed.

Cautionary notes
  • The duties of trustees are important and often complex. A trustee should obtain legal advice in order to understand them fully.

How to set up a family trust

Introduction

What is a family trust?

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.

What are the key elements of a family trust?

Like any other type of trust, a family trust must have the following elements:

  • The settlor - This is the person who sets up the trust, and is usually also the person who currently holds the assets that will be transferred to the trust. In other words, this is you. There may be more than one settlor: in the case of a family trust, a married couple may both be settlors.
  • The trustees - The trustees are the people who are responsible for administering the trust. They must make sure that the wishes of the settlor (as set out in the trust deed) are carried out.

    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.

  • The beneficiaries - These are the people who may benefit under the trust. With a family trust, the beneficiaries will normally include every member of your family (including possible future family members such as future grandchildren).

    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 trust deed - This is the legal document that states the settlor's wishes and sets up the trust. It appoints the trustees and states their powers and duties, states the beneficiaries, and states various rules for the administration and management of the trust. In order for the deed to be clear and to meet certain tax requirements, it must generally be a lengthy and carefully drafted document.
  • The trust's assets - The trust must have some assets. When the trust is first set up, these assets will usually only be nominal – say $10. But the eventual aim is for the trust to hold all of your significant assets.

The goal of a family trust: Your "personal poverty"

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").

By what age should I have transferred my assets to 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?"

The costs of maintaining a trust

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.

Transferring Your Assets to the Trust

What assets can or should be transferred to the trust?

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.

The steps for transferring your assets to a family trust

Once the trust has been formed, the steps involved in transferring assets to the trust are as follows.

  • Choose the asset to be transferred to the trust - This would usually first be the family home. But as explained above, you can also transfer holiday homes, boats, vehicles or paintings - indeed any assets that you personally own.
  • Obtain valid and acceptable valuations for that asset - Usually you will need to get a market valuation for the house or other asset. In some cases there will be several different methods of determining the market value; it can often be worthwhile to use all the methods available and then take the lowest valuation.

    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.

  • Transfer the ownership of the assets in exchange for a debt - Typically you would make an Agreement for Sale and Purchase of the house or other asset to the trust.

    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.

  • Forgive the debt - At the end of the previous stage, the asset has passed to the trust, but the trust owes you a debt for an equivalent amount. A debt owed to you by the trust is still a personal asset of yours, so you have not yet succeeded in divesting yourself of significant assets. The solution is to forgive the debt to the trust – this is done in stages over several years, by a "gifting programme", so as not to incur duty on the forgiveness of the debt. Each stage is effected by a Deed of Partial Forgiveness of Debt. This process of forgiving the debt, and why it is necessary to do it by stages, is explained in more detail under the next heading.

    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.

The "gifting programme": How to forgive the debt to 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:

  • $27,001 to $36,000 - The gift duty is 5 percent of the excess over $27,000.
  • $36,001 to $54,000 - The gift duty is $450, plus 10 percent of the excess over $36,000.
  • $54,001 to $72,000 - The gift duty is $2,250, plus 20 percent of the excess over $54,000.
  • Over $72,000 - The gift duty is $5,850, plus 25 percent of the excess over $72,000.

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".

An example of a gifting programme

  • A couple, John and Marsha, have set up a family trust. They jointly own a house with no mortgage. They want to transfer the house to the trust.
  • The couple obtain an acceptable valuation. A Real Estate Agent's appraisal has indicated a market value of $180,000, while a current market valuation from Valuation New Zealand indicates $170,000. The couple choose the lower market value of $170,000.
  • The couple then enter into an Agreement for Sale and Purchase with the trustees of the trust for the sale of the house for $170,000.
  • On the settlement of the transfer of the house from the couple to the trust, the trust pays $170,000 to the couple and in exchange receives $170,000 as an interest-free loan. At this point, the trust is now the owner of the house, but the couple still have a personal asset (the loan) of $170,000.
  • The couple now start the process of forgiving the debt. At each stage this is done by them making a Deed of Partial Forgiveness of Debt:
  •  
    • In the first year John and Marsha each forgive the maximum allowable $27,000 of the debt owed to them by the trust, a total of $54,000. This reduces the trust's debt to the couple to $116,000.
    • In the second year, the couple forgive a further $27,000 each, so that the total debt owed by the trust to the couple is $62,000.
    • In the third year, the couple forgive a further $27,000 each, so that the total debt owed by the trust to the couple is $8,000.
    • In the fourth year, the couple forgive the remaining debt of $8,000.
  • The trust now owns the house and the couple is no longer owed any debt. The full transfer of the asset to the trust using the gifting programme is complete. The couple can correctly and legally declare that they do not own the house, if called on by a creditor or other person to make such a declaration.

Do I have to notify IRD of any gifts?

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 "lease for life": An alternative to outright sale of the family home to a trust

A recent trend has been for people setting up a family trust to grant themselves a life interest in an asset – such as a lease for life over the family home – 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 – 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.

When should a lease for life approach be used?

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:

  • the value of the property
  • the age by which the settlors wish to have completed the process of gifting their assets to the trust
  • the likelihood of the trust needing to sell the property (which may in turn depend on the nature of the property, such as whether it's a beach property)

It's important that anyone who is considering using this technique, or indeed any other type of family trust arrangement, gets full legal advice.

What if the property I want to transfer is subject to a mortgage?

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.

Can a transfer of assets to a trust be set aside?

Yes, certain Acts of Parliament do provide for transfers of assets or gifts to be set-aside in certain circumstances:

  • Property Law Act 1952 - A transfer of property may be set aside if the intention in transferring it was to defraud creditors.
  • Insolvency Act 1967 - A payment of money can be taken back if you are adjudged bankrupt within two years of that gift being made, or within five years if it can be shown that at the time you made the gift you were unable to pay your debts.
  • Property (Relationships) Act 1976 - Under this Act transfers of assets can be set aside if the effect of that transfer is to defeat the rights of spouses or de facto partners to share in the couple's relationship property.
  • Social Security Act 1964 - This is the Act that is relevant to rest home subsidies (Residential Care Subsidy). Unlike the other Acts listed above, its effect is not to overturn the gift but rather to provide for the government to refuse to grant a benefit in some cases where a gift has been made. This is explained in more detail below.

Rest-Home Subsidies & Gifts to Family Trusts

Asset-testing for the Residential Care Subsidy

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 -

  • you have no home (unless your spouse or partner dependent child is still living in your home), and
  • your cash savings are less than the set limit
For more details, see How to apply for a rest home subsidy (Residential Care Subsidy).

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.

The five-year time limit for gifting

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's powers to look back further than five years

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.

Cautionary notes
  • It's not enough simply that you form a trust and transfer assets to it. It's essential that the trust is properly administered, that records are kept and that the trust assets are dealt with according to the terms of the trust. Otherwise, the trust could be held to be invalid through investigations by the Inland Revenue Department or some other creditor (including Government departments). For more information on trusts and the duties of trustees in administering trusts, see How to understand trusts and How to be a trustee.
  • Expert legal advice is essential. Bad advice is a waste of money.

Relevant forms and documents available free on the web

  • IR 196 "Gift Statement" - 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).

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This kit will assist a single person or individual spouse in amending their Living Trust.

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This kit provides tools and guidelines to assist a single person or individual spouse without children in preparing, drafting, and finalizing your Living Trust.

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