Should I have a Family Trust?

The words “Family Trust” can evoke all sorts of images; especially for those not familiar with them, but they are a valuable tool for many New Zealanders when it comes to asset protection, tax planning and inheritance/estate planning. Having a family trust can be stressful if not done correctly or planned properly from the beginning, however there are good reasons why family trusts are so popular with kiwis.

Official estimates are that there could be as many as half a million trusts in New Zealand. Many of these will own the family home, maybe a few investments but not much more.

While the advantages of having a family trust out-weigh the disadvantages, they are not a “magic bullet” or “cure-all”. There are disadvantages in having a family trust that are important to know.

Disadvantages of a Family Trust

1. Legal compliance – a trust is a separate legal “person”. This means that there is paperwork and legal requirements that must be met.

2. Cost – there are fees to set a trust up and, in most cases, annual fees for the ongoing costs of managing the trust.

3. Complexity – a trust adds a layer of complexity to things that was not there beforehand. “Normal” every-day decisions, such as buying or selling a house, will need to be properly documented and important documents signed by all the trustees (managers of the trust).

4. Time – with increased legal compliance and complexity, additional administration time will be required for trust related matters.

5. Loss of Ownership – once a trust owns your assets, such as the family home, you are no longer the legal owner. While this is one of the main purposes of a family trust, it can still be daunting to some people to realize that they no longer “legally” own their home.

Given these disadvantages, why do so many people still choose to have a family trust?

Because the Advantages can be worth it…

1. Protection of Personal Assets – if you have a business or provide personalized advice (such as an engineer), your personal assets (family home, rental properties, savings and investments) could be at risk from creditors or lawsuits against you. A family trust isolates you from your personal assets, protecting them from business or legal challenges.

2. Special Purpose – a family trust can be used to ensure that funds are set aside for matters important to you. This may be things such as the long-term care of a handicapped child or helping with the costs of a grandchild’s education.

3. Separating Assets from Relationship Property – whether from concerns of an ex-partner making a claim against your estate in the event of your death, a new relationship not lasting or protecting the inheritance money of children from their present (or future) spouses, a trust helps isolate inheritances from personal assets.

4. Residential Care Subsidies – if you require permanent rest home care when you retire, you may be eligible for a rest home care subsidy. Currently Work and Income (WINZ) tests the income and assets of recipients to determine their eligibility for this subsidy. When assets are transferred appropriately, and in a timely manner to a trust, these assets (and any income they generate) can be excluded from this calculation.

If you want to know more about family trusts, want to know if a family trust is suitable for your circumstances, or want help in initial planning for a family trust, contact us today. We are happy to help you.