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.
Like any other type of trust, a family trust must have the following elements:
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.
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 goal of setting up a family trust is to transfer your significant assets from personal ownership to ownership by the trust â€“ 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 1976. 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").
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?"
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.
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.
Once the trust has been formed, the steps involved in transferring assets to the trust are as follows.
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.
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.
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 â€“ the trust now owns it. But you can still receive a benefit from it as a beneficiary under 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:
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".
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 recent trend has been for people setting up a family trust to grant themselves a life interest in an asset â€“ such as a lease for life over the family home â€“ 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" â€“ 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 â€“ 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 â€“ in other words, a $200,000 house could be sold to the trust for $80,000.
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:
It's important that anyone who is considering using this technique, or indeed any other type of family trust arrangement, gets full legal advice.
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.
Yes, certain Acts of Parliament do provide for transfers of assets or gifts to be set-aside in certain circumstances:
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 -
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.
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 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.