Copeland FitzPatrick, Lawyers

Why Form a Family Trust

 
PURPOSES OF A TRUST

    Asset Protection
    Retirement Planning
    Income splitting
    Special Purposes
    Creditor Protection

ASSET PROTECTION

  • Capital Gains Tax Avoidance (Capital Gains Tax and / or Estate Duty are a future possibility)

RETIREMENT PLANNING

  • Residential Care Subsidies 
    • Not in itself a good reason for forming a Family Trust
  • Investment Vehicle
  • Income splitting (Discretionary Allocation of Income)

INCOME SPLITTING

  • Discretionary Allocation of Income
    • To Beneficiaries
    • Or to a Company

SPECIAL PURPOSE TRUSTS

  • Education Trust 
    • for children or grandchildren
  • Superannuation Trust
  • Protection from Matrimonial or Family Problems 
    • Failed Marriage Relationships
    • Avaricious in-laws

CREDITOR PROTECTION

  • The object is to ensure that the Debtor has no property which can be seized in execution.

HALLMARKS of a TRUST

  • Independent Trustees (who are excluded from the list of possible beneficiaries) 
    • Under tax law Trustees cannot allocate Income to themselves
    • However Trustee-Beneficiaries can act with Independent Trustees
    • the additional names on the Title gives protection against seizure by creditors
  • Separate IRD Number
  • Separate Bank Account
  • An identifying Name
(This counter suggestion that Trust is a sham).

CHARACTERISTICS of a TRUST

  • Beneficiaries can include the Settlor and his/her children
  • Benefits are allocated in a Discretionary manner 
    • this allows for income splitting
  • Property is held in the name of Trustees jointly 
    • who file Tax returns
    • so there are on going management expenses

LEGLISLATION that can adversely affect Trusts

  • s 60 Property Law Act 1952 
    • any alienation of property made with the intent to defraud creditors is voidable at the instance of the person prejudiced (time limits are not specified in the section)
  • s 54 Insolvency Act 1967 
    • any gift is voidable if made within two years of bankruptcy
    • any gift made within five years of bankruptcy can be challenged if at the time of making the gift the Donor was unable to pay his/her debts
  • s 47 Matrimonial Property Act 1976 
    • any agreement made with intent to defraud creditors of either party is voidable if challenged within two years of its making
  • s 182 Family Proceedings Act 1980 
    • This section enables the Court on review to attack property in a Trust. It does not affect the validity of the Trust. The powers are discretionary.

WHAT NEXT (when you have formed your Family Trust)

  • Obtain an Independent Valuation of the Property
  • Transfer the Property to the Trust(ees) 
    • This effecively pegs the value of the Transferor's interest in the property for Revenue purposes.
  • The Trust(ees) pay for the property by an Acknowledgement of Debt (or mortgage or Debenture.
    • This Debt is an ASSETT in the name of the Vendor of the Property
    • The Vendor discharges the Debt by a series of annual Gifts
    • NOTE: as long as there is an asset in the name of the Debtor there is something for creditors to persue.
  • Institute a Gifting Programme

GIFT DUTY RATES
 

Total Annual Gifting

Duty Payable
   
Gifts to $27,00.00

Nil
$27,000.00 to $36,000.00

5% over $27,000.00
$36,000-00 to $54,000.00

$450.00

plus 10% over $36,000.00

$54,000.00 to $72,000.00

$2,250.00

plus 20% over $54,000.00,

over $72,000.00

$5,850.00

plus 25% over $72,000.00,


  WHAT ASSETS SHOULD YOU PUT INTO A TRUST

  • For Creditor Protection 
    • Everything (including life Policies).
  • For Retirement Planning 
    • All your Investments
    • All your Life Policies
    • Probably your Home (and Holiday Home) 
      • A Family Home owned by a Trust is exempt from Capital Gains Taxes.
  • For Special Purpose Trust 
    • Whatever is needed to achieve the objects of the Trust.
STRATEGIES used by Family Trustees include:
  • Splitting income to family members on a lower tax rate
  • Invested in tax paid securities to lessen impact of tax
  • Paying beneficiaries out of capital (to avoid tax)

MEMORANDUM OF WISHES This document., which is addressed to the Trustees, sets out the policies and objectives of the Settlor (the person who set up the trust).

HOW MANY TRUSTS?

  • An Investment Trust 
    • for home and holiday homes
    • for Investments with little risk
  • A Trading Trust 
    • which would own the company which runs the business
    • this is designed to isolate risky investments or trading operations
    • or to hide assets from outside scrutiny
  • Parallel (or Mirror) Trusts 
    • These are separate Trusts for each marriage partner.
    • The concept is best based on the premise that each partner has sufficient investments to be self sufficient, if necessary
    • It also protects against the return to the pre 1993 situation where the reservation of a benefit to the settlor defeated the exercise for the purposes of estate duty.
YOUR WILL Settlors and beneficiaries should consider making wills that provide either
  • to leave all your assets to the Trust or
  • at least cancel (forgive) all debt owing to you by the Trust

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