What is a family trust and why would I want to set one up?
A family trust is a legal way to protect and manage assets, such as your family home, for you and your family for the future. The assets will be owned and managed by the trustees rather than by an individual.
There are many reasons why people set up a trust, including:
- to put money aside for a specific purpose - eg to pay for your children's tertiary education costs when they grow up;
- to manage the assets of a family member who is unable to manage their own financial affairs;
- to protect your assets from a professional liability claim or unexpected business-related financial problems (which is more relevant if you have your own business);
- to maintain some control over how the assets will be used after you die - for example to protect your offspring’s inheritance;
- to protect assets from relationship property claims - e.g. to your business assets.
Be aware that the transfer of assets to a trust can be challenged in the courts. The court may rule that the transfer has been made solely to avoid your obligations to a spouse or to potential creditors, for example, and may ‘claw back’ the assets from the trust.
There are some drawbacks to having a trust. One is that you will no longer be able to treat the assets held in trust as though they are your own, as decisions about them will be made by the trustees. Another is the costs involved in starting up and maintaining a trust.
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Who is involved in the establishment and workings of a trust?
The settlor is the one who sets up the trust and whose assets are to be transferred to the trust. There can be more than one settlor.
The beneficiaries are the people who receive benefits from the assets held by the trust. For example, they might receive income from the trust, or have the use of trust property. A settlor can also be a beneficiary of the trust (but not the sole beneficiary).
The trustees are people appointed by the settlor, to manage the trust’s assets responsibly and in accordance with the trust deed and the Trustees Act 1956. Often the trustees of a trust will include a mix of family members and an independent professional advisor such as lawyers, accountants or a professional trustee company.
A settlor can also be a trustee but they can't be the sole trustee. For example, a family trust set up by you might have as its trustees: you, your spouse and a professional advisor (who is an independent trustee); the beneficiaries might be: you, your spouse and your children. Any decisions the trustees make about the trust must be for the benefit of the beneficiaries.
The trust deed is the legal document which identifies the trustees and beneficiaries, and sets out how the trust will be managed and administered - including who can appoint new trustees and remove trustees.
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How do I get a family trust set up and do I need a lawyer?
Although it is possible to set up a family trust without getting a lawyer involved, it is probably worth getting legal advice from an experienced trust lawyer or trustee company (a business that will carry out trustee duties). They can help you decide whether or not it would be advantageous for you to set up a family trust in the first place. They can also advise on how to structure your family trust and how the gifting should proceed, and draw up the trust deed so that it clearly sets out what the trustee/s can and can’t do.
How much the lawyer or trustee company charges you for their services will depend on how complex the trust turns out to be and whether they will be one of the trustees. Generally you will be charged start-up costs for setting up the trust, plus on-going management fees if they will be an independent trustee. Get an estimate or a quote from the lawyer or trustee company before you proceed.
If you decide to proceed, you will need to decide the following:
- What assets should be in the trust (e.g. real estate, cash, shares) and get valuations of those assets. Assets are usually transferred to a trust through gifting, either all at once or over a period of years. There is no gift duty to pay on the amount gifted, as gift duty was abolished in October 2011.
- Who the beneficiaries will be.
- Who the trustees will be - they should be people you can trust and who are capable of managing the trust’s assets responsibly.
- What, if any, special rules there will be about how the trust will be run.
You might also create a Memorandum of Wishes and give this to the trustees. This document is guidance for the trustees regarding how you want the trust to be administered, eg who will benefit when you die, prioritise how the trust funds will be used, and whether the trustees should take your children’s wishes into consideration. Note that a Memorandum of Wishes is not binding on the trustees.
Remember that if you set up a trust you will also need to review your will - or write a new one - to take the trust into consideration. Your will should also deal with any debt that might be owed to you by the trust, and state who will inherit your powers (if you hold them) to appoint trustees and beneficiaries according to the trust deed.
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Is there a minimum age for someone to be appointed as trustee?
The Trustees Act 1956, which governs trusts, doesn’t specify a minimum age for trustees. However it is generally accepted that a person under the age of 20 could have their appointment challenged in court because they are still a minor (under the Age of Majority Act 1970).
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What are my responsibilities as a trustee?
The trustees are the legal owners of the trust assets, so as a trustee your responsibilities are to manage the trust’s assets (eg ensuring real estate is properly maintained and investing trust funds responsibly), and to act impartially, with the good of the beneficiaries in mind. You may not profit personally from your position as trustee.
When you become a trustee, you’ll need to read and understand the trust deed and related documents, because these tell you what your responsibilities are and what you can and can’t do. If you are replacing a trustee, find out what specific role that person played.
Some of the tasks that trustees need to do are:
- keeping financial statements, including a record of the trust assets, and make them available to the beneficiaries;
- meeting together regularly to review the needs of the beneficiaries and any investments made by the trust;
- making and recording trust decisions, for example to distribute trust income to beneficiaries;
- ensuring that the trust complies with its legal obligations;
- ensuring that the trust meets its tax obligations;
- getting professional advice when appropriate.
You can’t delegate your responsibilities to another person unless you need specialist knowledge, such as that of a lawyer or engineer.
Trustees are personally liable for all debts incurred by the trust (eg as a result of poor investment outcomes), although if the trust takes out a loan, the loan document normally excludes the independent trustee (e.g. the trustee company) from this liability.
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I’m a beneficiary of a family trust - what are my rights?
The trustees decide how much information about the trust you can access.
As a trust beneficiary you have the right to:
- expect the trustees to be responsible in managing the trust assets, and to make their decisions; with you and any other beneficiaries in mind (more about a trustee’s responsibilities above).
- be treated fairly and objectively by the trustees;
- ask for funds from the trust assets (but the trustees can turn you down if they have a good reason to);
- seek help from the courts if you have a dispute with the trustees (see a lawyer if you want to do this).
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Is it possible to remove or replace a trustee?
A trustee might be removed or replaced because:
- they have died;
- they are unfit for the role;
- they refuse to fulfil their role;
- they no longer wish to be a trustee; or
- they are a company which has ceased trading.
Trust deeds usually include a clause which specifies who has the power to remove a trustee.
If the trust deed does not have this clause, the trustees can agree to appoint a new trustee or, if the trustees can’t agree, the trustees can talk to a lawyer about having the issue resolved in court. It is also possible for the beneficiaries (if they are all in agreement) to apply to the courts to have a trustee removed.
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How are disputes settled between trustees or between trustees and beneficiaries?
Usually the trust deed will state that the trustees have to act unanimously in their decisions. The trust deed may also include instructions for resolving disputes.
If a dispute proves difficult to resolve, mediation can be an option. This could be done through the lawyer who set up the trust or through a professional mediator. Otherwise, such disputes are generally settled in the High Court. Depending on the situation, the court could:
- review a trustee’s actions and require them to justify their decisions;
- require trustees to provide information to the beneficiaries (e.g. about the trust deed, financial statements);
- force the removal of a trustee;
- replace a trustee with a new one.
If you have a dispute over the management of a family trust and are thinking of going to court about it, it’s best to get legal advice.
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Can we dissolve or wind up our family trust early?
The trust deed must specify an end date for the trust, and in general a family trust can only be in place for a maximum of 80 years. The deed may give trustees the power to wind up the trust early or extend its life (up to the 80-year maximum).
Reason for winding up a family trust early include:
- the reason for establishing the trust in the first place no longer exists (e.g. the trust was established to fund the education of certain offspring, and they have now ended their education);
- the trust was set up for the benefit of parent/s and children but the parents are now deceased - so the children might decide to wind up the trust and distribute the assets among themselves;
- the trust was set up by a couple, and that couple has decided to separate;
- the trustees think there is no longer any benefit to having a family trust.
Check the trust deed for a dissolution or winding up clause, as this will tell you whether the trust can be wound up early and in what circumstances. It’s also a good idea to get legal advice about the implications of winding up the trust, for example about the distribution of the assets, in terms of the tax obligations, and liability for any losses made by the trust.
If you used a trustee company to set up and manage the family trust, you will probably need their help to wind up the trust.
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Our home is in a family trust and I'm not one of the beneficiaries. Does this mean I won’t get a share of the house if we separate?
If the house is owned by a family trust and you are not a beneficiary of the trust, then you will probably not have a claim on the house if you and your partner separate.
If you do separate, you can apply to the Family Court for a relationship property order with regard to the family home. The court could order compensation for you in another form, for example a payment of money. You will probably need to get legal advice if you are thinking of doing this.
More about the division of relationship property after separation is on our Relationship property page.
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Can I get a rates rebate if my home is owned by a family trust?
The Rates Rebate Scheme is a subsidy to help low-income homeowners with the cost of their rates, and is administered by the local councils. However a trust or organisation can’t apply for the rates rebate, only an individual can.
In order to be eligible for the rates rebate:
- your income must be below a certain maximum,
- you must be usually living at that address and
- you must be registered on the Certificate of Title as the ratepayer.
If your home is owned by a family trust, then most likely the trustees (not you) will be named on the Certificate of Title and on the rates database.
However, if you are paying the rates, you can have yourself registered as a ratepayer on the Certificate of Title, after which you can apply to your local council for a rates rebate. As this process requires a certain amount of legal expertise you would probably need a lawyer to help you.