Introduction to Trusts
Trusts can be an excellent way of protecting and preserving family wealth for future generations.
For many years now, they’ve been very popular in New Zealand. To put this in numbers, it’s estimated that between 300,000 and 500,000 exist.
One thing to remember, though, is that as Trusts come in many forms, making sure their structure is appropriate and they’re managed correctly is essential to their success.
Want to know if a Trust is right for you and your family?
Take a look at the brief overview on Trusts below. At Perpetual Guardian we also have a team of experienced professionals who are happy to help you review your current situation and discuss the best options for you.
What is a Trust?
A Trust is legally binding arrangement which requires three essential elements: a Trustee, Trust property and beneficiaries.
A Trustee owns and manages the Trust’s assets. They do this ‘for the benefit of selected persons’ called beneficiaries. The person who establishes the Trust is called the Settlor.
The diagram below explains it a bit more:
The ‘Trust Deed’ holds all these relationships together and serves as the operating manual for the Trustees.
Trusts can be an invaluable and structure to separate and protect your assets - and preserve your wealth for future generations or causes that are dear to you.
- Protect your assets;
- Protect your personal lifestyle from the risks associated with business;
- Provide for your dependents such as children and grandchildren (e.g. for their education, or if they have physical or other disabilities);
- Ensure continuity of family ownership;
- Protect assets you bring into a marriage or relationship;
- Provide long-term support for charity;
- Protect and grow your investment assets and enable these to be passed on to your loved ones; and,
- Limit claims being made against assets after death.
To be effective a Trust must be managed well. While the duties of Trustees can be onerous, Trusts don’t have to be complex.
They do, however, come in many shapes and sizes, which is why it’s so important to get professional advice.
Our team of experts have the knowledge, skills and experience to help you figure out how your Trust needs to be set up to meet your goals in our forever-changing world. We can help you establish a structure that best suits you and your unique circumstances and needs.
Already have a Trust set up and what to make sure it’ll stand the test of time? We have teamed up with New Zealand Trustee Services to create a Trust review tool called TrustGuard.
Trusts have been around since the Middle Ages and are a useful way of protecting and preserving family wealth.
By removing assets from your personal ownership and transferring them to Trustees, you’re protecting them from any claims that could be made against you personally.
Whether this kind of asset protection benefits you depends on various factors, all of which are quite unique to your personal circumstances. At Perpetual Guardian we can provide you with all the information you need to help you make that decision.
We provide independent expert trustee services for the life of the family Trust and ensure that:
- Accurate records are kept;
- All tax and other legal requirements are met;
- Trust documents are kept safe; and,
- You are kept up to date on any law changes that could affect your Trust.
Once you decide what assets you’d like to transfer to the Trust there are a number of decisions to be made including:
- Who you wish to be Trustee/s;
- Do you want an advisory trustee or a protector;
- Who should be the beneficiaries; and
- How do you want the Trust to be run.
We can help you with these decisions and ensure all accounting and tax matters are dealt with correctly.
A Charitable Trust is quite different from a Family Trust. To be valid it has to be established for one, or more, of four specific charitable purposes:
- The relief of poverty;
- The advancement of education;
- The advancement of religion; or,
- Other purposes beneficial to the community.
This means that while a Family Trust can be established for private purposes, a Charitable Trust must have some element of public function. When set up correctly, it can also obtain a favourable tax status which means any charitable giving is maximised.
Many charitable Trusts have specified beneficiaries. Sometimes these are ‘discretionary’, which means the Trustees or an advisory group decide where grants are distributed. In such cases, the Trustees may apply for funds with publicly listed charities and organisations.
That’s not all though. There are additional administrative requirements in managing a Charitable Trust, particularly around registration and reporting.
We’ve been managing Charitable Trusts for over 100 years here at Perpetual Guardian. Today, we manage over 650 Charitable Trusts and distribute $35 million per year. On top of this, we also provide investment expertise, an investment fund for charities, advice on granting policies and processes for reviewing the effectiveness of any charitable grants.
If a Charitable Trust isn’t the right fit for you, the Perpetual Guardian Foundation is another way you can satisfy your charitable intent. Find out more here.
Want to find out more about setting up a Charitable Trusts or getting involved with the Foundation? Get in touch.
Many of us wish to transfer wealth to our children and wider family.
Traditionally, this is done through a Trust that’s established during your lifetime. Even more common is to leave an inheritance as a gift in your Will when you die. One thing to be aware of with gifting in your Will though, is that there is a risk of claimants challenging the Will.
Let’s say your gift property under your Will. On its own, this is deemed separate property and is protected. As soon as things become intermingled with joint bank accounts or property though, the gifting of that specific property becomes at risk.
That’s where an Inheritance Trust can be useful. It works through transferring your assets under your Will to an Inheritance Trust that you’ve established during your lifetime. This means you can keep assets in your own name until they’re transferred and protected for your chosen beneficiaries.
Want to find out more?
We can help you structure Inheritance Trusts appropriate for your family situation. We can also help you decide and document your wishes on how the Inheritance Trust should be administered. This becomes important as separate Inheritance Trusts should be established for each person you want to benefit.
Extra tip: Before you set up your Inheritance Trust, make sure you update your existing Will.
The death of a loved one is never easy, but there are ways to lighten to burden.
By setting aside funds for your funeral now, your family will have one less thing to worry about and you can have the send-off you deserve.
Why pay now?
The cost of a funeral can run into the thousands. So paying in advance can help take a burden off your loved one’s shoulders.
Funeral Trusts are currently exempt from asset testing, so you can set aside up to $10,000 in a Funeral Trust without it being taken into account when working out if you qualify for a Residential Care Subsidy.
How does it work?
To ensure you get the funeral you want, it’s important the funds you set aside grow to accommodate for potential increases in funeral costs. That’s why Funeral Trust funds are invested in low-risk, short-term money market investments.
Then, when you die, your Funeral Trust funds will be immediately available to settle the burial expenses. This means that you access early payment discounts for funeral costs. Any remaining balance will be paid to your executor for the benefit of your estate.
What are the costs?
Setting up a Funeral Trust costs $150. You’ll also need to fill out an application and make an initial minimum contribution of $3,000.
A management fee will be charged on the funds invested. There are no other fees to operate your Funeral Trust and no fee is charged when the funds are paid out. You’ll receive annual statements giving details of all the transactions over the previous year.
Income earned on your Funeral Trust is taxed, like any other investment, at 33% as Trustee income. These earnings don’t need to be declared in your tax return as income.
Frequently asked questions
Why should you have a Trust?
The main purpose for establishing a Trust is to separate assets from your ownership to ensure they are protected for the intended beneficiaries. Here are the main reasons for establishing a Trust:
- To protect your personal lifestyle assets from the risks of business. The use of a Trust ensures your family doesn’t suffer the loss of the family home and other personal assets not associated with a business should your business venture fail. The transfer of assets must be fully completed before the first signs of any creditor action or business failure is evident.
- To ensure your assets transfer to your children, without challenge, and without being attacked if their relationship with their partner breaks down in the future.
- To provide for dependants such as children or grandchildren - for their education, if they have disabilities or an inability to manage money.
- To ensure continuity of family ownership. Many New Zealand families have owned businesses or farms for several generations and want to keep these assets in the family. Transferring assets to individuals may result in the loss of the assets through relationship breakdown in the future.
- To protect separate property within a marriage or a de facto relationship.
- To provide for unequal sharing of your assets on your death. For example, different amounts for specific children of a prior marriage or a child with limited money management skills.
- To provide long-term support for a charity.
A Trust should not be established just to avoid tax. A Trust established for this purpose can be declared void under anti-avoidance provisions of the Income Tax Act. However, it is sometimes possible to set up a Trust in a way which minimises tax liability.
Can a Trust be overturned?
Unfortunately, it is not enough to sign a piece of paper with ‘Trust’ at the top of the page and then to carry on as if nothing has changed. In recent years the Courts have been quite active in striking down Trusts where these were considered to be a sham.
A Trust is a sham if you started off with no intention of treating it as a genuine Trust. Or it may be that you started off with a genuine intention but over time you forgot to run things properly and started to treat the assets as if they were still yours. Either way you may find you have gone to all the trouble and expense to set up a Trust, but because of the way you have acted, it is as though you never set up a Trust.
There are a few things you could do to help avoid this risk:
- Ensure trustees’ decisions are recorded in a trustees’ minute book or by way of written resolution;
- Where there is more than one trustee, all of the trustees must be involved in all of the decisions and actions by the Trust;
- Ensure the trustees meet at least once a year to review the investments and assets of the Trust; and,
- Maintain proper annual accounts and (if required) file tax returns.
Perpetual Guardian can assist you with all of this.
What happens if you move overseas?
Trusts are not as prevalent in other countries as they are in New Zealand and you cannot simply pick up your Trust and take it with you. You will need to obtain specific tax and legal advice about the country you are going to.
We can assist you in obtaining the right information and making the decision as to whether it is worth your while continuing with the Trust or winding it up.