Family Trusts 


What is a family trust and why would I want to set one up? What would I have to consider?
Who is involved in the workings of a trust?
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. My brother-in-law and I are the trustees. My brother-in-law is very controlling. What are my rights regarding the trust?


What is a family trust and why would I want to set one up? What would I have to consider?

A family trust is a legal way to hold and protect your assets for you and your family for the future (e.g. investments or property).  The assets will be owned by the trust rather than by a person, and they are managed by trustees (e.g. a family member, a lawyer, or an accountant) for the beneficiaries (usually family members).

For example, an ancestral home could be managed as a place for successive generations without arguments about ownership or being used as security on a loan.

 

There are many reasons to set up a trust. Some of these are:

  • To protect the assets from future changes in tax liability – for example, a wealth tax 
  • To put money aside for a specific purpose- e.g. to pay for a child's wedding or tertiary education costs when they grow up. 
  • Debt protection - Trusts can be used to protect belongings from being reclaimed by debt collectors, for example in case your business fails. 
  • To keep family property within the family - 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.
  • To avoid potential relationship property - e.g. to protect a family heirloom which your child will inherit, so that it doesn’t become relationship property when they grow up and enter a relationship.

Be aware that if you set up a family trust or transfer asset to it with the intention of protecting it from being counted as relationship property (for example), a Court may rule that the family trust is a “sham” which would mean that you’ll lose all the advantages of having one.

There are some drawbacks to having a trust. Some things you should consider before setting up a trust are

  • Start-up costs. These could be legal costs in drawing up the trust deed, contracts, and initial development or investment in trust property 
  • On-going management fees. Whoever manages the trust will usually be paid a fee, and 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

 
Assets are usually transferred to a trust through gifting, either all at once or over a period of years.  Although there is no gift duty to pay on the amount gifted (gift duty was abolished in October 2011), gifts are still included in the Residential Care Subsidy assessment.

A family trust must have an end date (a date of distribution) and cannot last more than 80 years.

More information about setting up a family trust is on the sorted website.

Setting up and maintaining a family trust can be complex, so if you are thinking of doing this you should first seek legal advice from a lawyer (also, some trust specialists offer free initial advice).


Who is involved in the workings of a trust?

Because family trusts can be complex to set up, it is a good idea to ask a lawyer or trustee company to do this for you.  You will need to decide who will manage the trust (the trustees) and who the beneficiaries are.

The settlor is the person who sets up the trust. Generally this is the person (or people e.g. a couple) whose assets are to be transferred to the trust. The settlor can ensure their rights to remove a trustee or appoint a new one, by including this provision in the trust deed.

The trustees manage the trust in the interest of the beneficiaries and according to the trust deed. A trustee must be aged 20 years or over and, can be a family member, lawyer, accountant or a professional trustee organisation. They can make investments in the name of the trust, for example 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.  Anything they do with the trust must be for the benefit of the beneficiaries.

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 trust property without having to pay for its upkeep or management.
 
It is possible for a person to be a settlor, trustee and beneficiary – but they can’t be the sole beneficiary.


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 (see our previous questions about family trusts).

Charitable trusts exist principally or exclusively for a charitable purpose and are normally formed to undertake charitable 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. My brother-in-law and I are the trustees. My brother-in-law is very controlling. What are my rights regarding the trust?

The trust deed may include instructions for how disputes about the trust to should be resolved.

You can also try mediation, for example through the lawyer who set up the Trust or through a professional mediator.

Otherwise, disputes between trustees or between beneficiaries and trustees can be settled in Court (generally the High Court). The Court can decide, for example, that a trustee should be removed and a new one appointed.

Going to Court can be costly and slow, so if you are considering going to Court it is a good idea to get legal advice.

One way to prevent this from happening is to appoint a protector for the trust. The protector is neither a settlor nor a trustee, but they can remove trustees (or appoint new ones) and resolve disputes between trustees. If you wish to appoint a protector, they should ideally be someone independent who can be trusted to ensure that your wishes are followed. For advice and assistance in this matter, you should talk to a lawyer or local Community Law Centre.