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Family Trusts -Advantages and disadvantages

It can be a difficult decision whether or not to set up a family trust.  There are a lot of things to take into consideration. This article looks at the advantages and disadvantages of family trusts.

What is a Trust?

A trust exists whenever one person, a settlor, gives property to another person, a trustee, to hold for the benefit of a third person, a beneficiary.  A family trust is therefore a relationship involving:

  • a settlor, who creates the trust and decides what goes into the trust deed; and

  • the trustees, who hold title to the trust assets in their own names and deal with them as instructed in the trust deed; and

  • the beneficiaries, who receive the benefits from the trust.

Beneficiaries may include:

  • discretionary beneficiaries, who may receive a benefit at the discretion of the trustees;

  • final beneficiaries, who are entitled to whatever funds are still left in the trust when it is wound up; and

  • primary beneficiaries, who are discretionary beneficiaries given some sort of priority ahead of other beneficiaries.

Advantages of Family Trusts

The following are some of the advantages of setting up a family trust:

  1. Creditor protection – assets held in trust are usually protected from creditors of the beneficiaries, or the trustees personally.  A usual situation in New Zealand is where the parents have personally liabilities (often related to their business interests), and wish to protect their family home from such liabilities in the event they are unable to meet them. In most circumstances a trust protects those assets from personal liabilities.

  2. Protection against relationship property claims – If you give personal assets to your children during your life or in your will, those assets may, in certain circumstances, become available to their partners under the Property (Relationships) Act 1976.  However, if your assets are owned by a trust, or are given to your trust on death, your children can continue to receive the benefit of those assets but the assets do not form part of their personal property, and therefore cannot be subject to claims by your children’s partners. 
    Further, if assets are transferred into a family trust prior to entering into a relationship, the assets in the trust are less likely to be subject to a relationship property claim at the end of the relationship.

  3. Protecting property from or for beneficiaries – You may be reluctant to simply give your assets to your children during your life or on death if you have concerns about their ability to manage their financial affairs.  If you give your assets to a family trust, then the trust can provide a vulnerable child with income and/or capital to meet their cash requirements as they arise.  This can protect the long term value of your family’s assets.

  4. Protecting assets for future generations from potential tax law changes – Family trusts may provide protection against various forms of wealth tax that may be introduced in the future, such as death duties or inheritance tax. 

  5. Reducing or preventing claims against your estate – The Courts can effectively rewrite your Will under the Family Protection Act 1955 if it considers that members of your family have been disadvantaged by its provisions.  However, the Court cannot rewrite your trust for Family Protection Act purposes.

  6. General flexibility to deal with law changes – Modern trust deeds normally allow limited rights of variations to deal with changes in the law.

  7. Confidentiality – Family trust are not publicly registered and therefore can be kept confidential.

Disadvantages of Family Trusts

The following are a number of the disadvantages of having a family trust:

  1. Loss of ownership of assets – If you transfer your personal assets to a trust, then the trustees of that trust will control the assets.  Although you can retain some control by holding the power to appoint and/or remove trustees, or even by being a trustee yourself, it is important to remember that assets you transfer to the trust are no longer your own.  If you continue to treat the assets as your own, any trust could be open to challenge as a sham.

  2. Additional administration – If you establish a trust, you need to allow for the time and cost involved with meeting the trust’s annual accounting and administrative requirements.

  3. Cost of formation of the trust and the transfer of assets – There are costs involved with establishing a trust.  These will depend on the complexity of your trust and the nature of the assets to be transferred.

  4. Future law changes – Possible changes to legislation of trust law may remove or effect some of the original objectives for the trust formation.

Is a family trust appropriate for you?

In some cases, an immediate financial benefit can be achieved by establishing a trust.  Most family trusts are formed to reduce the impact of changes which may, or may not, occur such as:

  • claims from business creditors; and
  • protection from relationship breakdowns.

If you have any further questions, or would like to talk to someone about establishing a family trust, make an appointment with Gibson Sheat Lawyers today.