Who is involved in the workings of a trust?
What is a family trust and why would I want to set one up? What would I have to consider?
What is the difference between a private trust and a charitable trust?
My late husband set up a family trust, so that I would be looked after. I am a trustee and so is my brother-in-law. The brother-in-law is very controlling. What are my rights regarding the trust?
Who is involved in the workings of a trust?
A family trust is a legal way to hold and protect your assets for you and your family for the future. The trust is arranged so that the trust property is no longer owned by a person, but rather managed by the trustees for the beneficiaries (usually family members). In this way, an ancestral home could be managed as a place for successive generations without arguments about ownership or being used as security on a loan, for example. Before setting up a trust, you should always seek legal advice from your lawyer or the Public Trust.
When you set up a trust, how it will work is detailed in a trust deed. The previous owners of the money and property held by a trust (the settlors) transfer their ownership to the trust, choosing who will manage the trust's assets and on what terms the assets will be managed.
A trust is managed by trustees, who manage the trust in the interest of the beneficiaries. The trustees will make investments in the name of the trust, for instance a trust might use some of the property it holds as a bed and breakfast to create income that will go towards the upkeep of the property or to the beneficiaries. One of the most obvious ways for making sure that the trustees operate the trust according to your wishes is to make sure that you, the settlor, are one of the trustees.
The beneficiaries are the people who receive the benefits of the assets, for instance the people who receive income from the trust without having to manage it, or who use a property without having to pay for its upkeep or management.
What is a family trust and why would I want to set one up? What would I have to consider?
A family trust is basically a pool of assets held for the benefit of a family. It can include investments, property, and anything that can be bought or sold. There are many reasons to set up a trust. Some of these are
- Tax- The income of the trust itself is taxed at 33 percent, unless it is distributed to the beneficiaries of the trust, in which case it is taxed at their personal income tax rate unless they are minors. In this way, trusts are useful for income splitting. Trusts of this sort are often family university or retirement funds
- Achieving a purpose- There are several purposes a trust could be set up for, for instance to pay for a child's wedding or education costs when they grow up. Agreements of this sort are often specific, for instance the child will only receive the trust fund money if they study at university, or only if they study a certain subject
- Debt protection - Trusts can be used to protect belongings from being reclaimed by debt collectors, because if something is legal property of the trust it cannot be reclaimed as personal debt security unless it was gifted to the trust during the financial trouble. Accordingly, you cannot put property or money into a trust simply because you know it will be reclaimed otherwise
- Family property- Trusts are also used to manage collective family land so that it can be held in the family for generations. This sort of trust could be used for a family farm or to manage Māori tribal land.
- Avoiding relationship property issues- Trusts are often used so that family property cannot be claimed as relationship property if a couple splits up. In this way, a family heirloom could be protected, or children from split families provided for
There are also some drawbacks to having a trust. Some things you should consider before setting up a trust are
- Startup costs. These could be legal costs in drawing up the trust deed, contracts, and initial development or investment in trust property
- Management Fees. Whoever manages the trust will usually be paid a fee, and sometimes this can be high depending on the amount of work required to manage the trust. Other fees may need to be paid to manage the finances of the trust, for instance accountancy or legal fees
- Loss of management rights. If you gift your property to a trust, you no longer own it. You cannot simply transfer it back, and you may not have as much of a say in what happens to it unless you have written specific terms of management into the gifting agreement or are a trustee
- Risk of mismanagement. If your trust is not managed properly, it could wind up going into debt
In order to transfer assets to a trust, the settlor 'sells' their property to the trust at it's full market value. The trust then owes the settler a debt which can slowly be gifted to the trust at a rate of $27,000 a year without payment of gift duty. In this way the family can transfer property legally to the trust.
What is the difference between a private trust and a charitable trust?
Private trusts are set up by an individual or group of individuals who own the assets that are gifted to the trust. Usually a private trust will have a contract between all parties (settlor, trustees, and beneficiaries), and the trustees have legal responsibilities to manage the property or money for the beneficiaries.
Charitable trusts exist principally or exclusively for a charitable purpose and are normally formed to undertake charitable activities and are less suitable for commercial activities. They can have many beneficiaries, and money or property donated to them is tax deductible. If you'd like to know more about charitable trusts, see our information on the community sector or visit the Ministry of Economic Development webpage on charitable trusts.
My late husband set up a family trust, so that I would be looked after. I am a trustee and so is my brother-in-law. The brother-in-law is very controlling. What are my rights regarding the trust?
A good way to prevent this happening is to appoint a 'protector' for the trust. The protector is not a trustee, but their approval is required for particular important decisions. If you wish to appoint a protector, they should ideally be someone independent, who can be trusted to ensure that your wishes are followed. Their job may include resolving disputes between trustees, making sure that one trustee does not hijack the trust for their own purposes, and the appointment or removal of trustees. For advice and assistance in this matter, you should talk to a lawyer or your local community law centre.