Years later when they went to sell the property owned by the Trust they needed to track down the trustee (who had moved overseas years before) to sign the paperwork, because he was still on the title to the property as the owner.

Unfortunately there is more required when changing a trustee than simply signing a resolution, especially where there is a mortgage on the Trust’s property.

Generally changing a trustee involves:

1. If there is a mortgage on the property, obtaining consent from your bank or having new mortgage documents signed recording the new trustees;
2. The current trustee, your new trustee/s and your old trustee signing a document which retires the old trustee and appoints the new one;
3. Signing forms authorising the change of ownership on the title to the new trustees.

The process is not a difficult one, but can be time consuming, so if you are planning to change a trustee, bear in mind that it will not be immediate.  Seek the help of an experienced lawyer who can ensure that you don’t receive the headache that Ron and Andrea did trying to tidy up matters urgently years later.

Those like Trevor and Jill need to be careful that they continue to administer their trust after making a final gift.  There are continuing obligations in relation to trusts to ensure it is clear that the property is owned by a trust and not you personally.  Those include:

1. Decision-making – Ensure that all trustees are included in every decision regarding trust property and all major decisions are recorded in writing and signed by all trustees.
2. Finances – If the trust has its own income stream, annual accounts need to be prepared and an annual tax return prepared for the trust.  A separate bank account for the trust should be used.
3. Trustee meetings – Hold annual meetings of trustees and ensure minutes are taken.

Your lawyer will be able to assist you with ongoing maintenance of the trust, to ensure your trust is as watertight as possible.

Changes to gifting laws, although not yet finalised, are expected to come into force on 1 October 2011.  On the face of it, the changes mean that the whole balance owing from the trust to Stephen and Colleen can be gifted by them in one lump sum without incurring gift duty.

However, be warned…there are issues that can affect your decision to gift the whole balance right away, including:

1. Rules regarding eligibility for rest home subsidies could mean that if one lump sum over $27,000 is gifted by any one person (or potentially one couple), you are not eligible for rest home subsidies as you may be seen as “depriving” yourselves of assets;
2. Gifting once before October 2011 and again within the same income tax year could mean that the IRD may choose to aggregate those gifts and charge gift duty.

If you have a trust you should talk to your lawyer about the implications for you of these significant changes to gift duty.

Reasons to set up a Trust include:

• Business failure – as above, unpaid creditors may try to claim your personal assets;
• Getting sued – if you are in the business of giving professional advice or providing professional services, a disgruntled client may claim damages against you for negligence;
• Relationship breakdowns – if you owned assets before entering a relationship and did not protect them they may be subject to the equal sharing presumption under the relationship property laws;
• Wasteful children – assets you worked hard for can be wasted away by frivolous children or subjected to relationship property claims from your children’s partner;
• Rest home costs – your entitlement to subsidies is measured on assets you personally own, which generally does not include assets owned by a trust.

Now is an ideal time to set up a trust now as changes to gift duty mean that the whole value of your property can be “gifted” at once.  Talk to a lawyer about whether a trust would be appropriate for you.

The documentary can also be heard on the internet at http://www.radionz.co.nz/national/programmes/insight.  Ronette will be contributing her legal opinion on the creation of family trusts, and the benefits and protection offered by family trusts in New Zealand today.

A trust has three parties:

• Settlor (starts the trust by gifting money or assets)
• Trustee (administers the trust under the conditions set out in the trust deed)
• Beneficiaries (receive use of the assets or income of the trust usually at the discretion of the trustees)

The following case study demonstrates the practicalities of trusts and answers some commonly asked questions.

Case Study

Mr and Mrs Brown are the sole shareholders of Brown Holdings Limited (BHL), a small manufacturing company experiencing strong growth.  BHL made a net surplus before shareholders remuneration and tax of $200,000 in the last financial year.  Mr and Mrs Brown are concerned about protecting their personal assets from risks associated with the business interests, especially since expansion has created greater exposure to business risk.  Both are 50 years of age.  Their assets comprise:

• Family home @ market valuation ($380,000.00)
• Shares in Brown Holding Limited (estimated value) ($320,000.00)
• Warehouse property leased to Brown Holdings Limited ($250,000.00)
• Various investments (primarily owned by Mrs Brown from proceeds from her father’s estate) ($100,000.00)

• Total Assets = $1,050,000.00

They have three children who have all left home:

• Andrew (aged 27, married to Yvonne (not liked by the family) with two children)
• Sarah (aged 25, permanent relationship with Dean and one child)
• Phillip (aged 24, not married and generally totally irresponsible towards all relationships and financial matters)

Mr and Mrs Brown are considering establishing a family trust.  They are concerned to protect their assets from business creditors and the potential for various forms of government wealth taxes.  They wish firstly to provide for their own well-being to the exclusion of the other beneficiaries and then on their death to provide for their children and grandchildren, but to ensure Phillip only gets limited access to his share of the assets.

They have the following issues they want explained regarding the establishment and operation of a family trust:

How will a trust protect our assets from creditors? 

A trust is a separate legal entity.  Any assets you place in a trust you no longer own.  Therefore, if you no longer own the assets, they will not be required to be sold if you are found liable for any debts run up by the business.  Initially there is no change in your net asset position as all you have done is swap your previous assets for a debt owed to you by the trust.  Your asset position along with exposure to creditors changes after any gifts are made to the trust and, of course, any increase in the value of the assets belongs to the trust effective immediately from the date of transfer.

Presently we can save close to the maximum gifting amount of $27,000 each year.  Won’t this mean that we always have assets in our personal names at risk to creditors claims?  

Gifting is not the only way for the debt to be reduced.  The key is to transfer all income generating assets into the trust.  The debt can then be repaid by offsetting it against income the trust earns.  In your case you could sell your company to the family trust along with the warehouse property and the other investments.  The income these assets generate including dividends from the company could be used to repay the debt.  It is impossible to remove all personal wealth from creditors claims from day one, but you can ensure all income and increment in value of assets accrue to the trust.

Will this leave us dependent on the trust for all our income?  

Not necessarily.  You could be paid a wage from the company and it is often advisable to leave a small portion of shares in your name so that income can be distributed in the form of shareholder salaries to reward personal effort and to take advantage of lower personal tax rates whilst leaving flexibility.  This would leave you free to draw money from the company and receive repayments of debt from the trust to meet your personal needs.  Being dependent on the trust for income would not be a problem so long as it was structured in a manner to give yourselves an adequate income from the trust.

Would it be advisable to transfer the family home to the trust and if so can we live in it until we die?

Your primary concern seems to be protecting your assets from creditors, so yes it would be a good idea.  You can live in it until you die so long as you are beneficiaries of the trust and the trustees allow it.

What happens if you wish to change houses and our house is in the trust?  

Provided the trustees agree there is no problem.  The trust simply sells the old house and buys the new one.

Can we reverse the process once we have transferred assets into the trust or can we undo the trust?  

As a matter of law yes, in respect of those assets – although the assets can come back into personal ownership through a distribution if you are beneficiaries.  The trustees will need to approve this.  Once the trust deed is signed, it cannot be easily altered but generally if the trust is sufficiently flexible, there is usually a way to distribute assets so as to reflect the settlors’ wishes.

Can we control the assets?  Will we not lose them?  

Legal ownership is essentially gone.  Control is with the trustees acting in accordance with the trust deed.  You can provide a memorandum of wishes and also exercise control in decision making by being one of the trustees of the trust and by having power of appointment of trustees.  The debt back to you arising from the sale of assets can provide a measure of control, particularly if security is granted.  It is important to separate the administration of the trust assets from your own and administer them within the powers granted by the trust deed.

Can we be settlors, trustees and beneficiaries (along with our children) and if so should we?  

Yes you can and should be a trustee if you wish to retain an interest in and influence over the trust property settled.  It is also advisable to have an independent professional trustee to assist you to ensure the trust is administered properly and within the law and to rebut any presumption that the trust is merely a sham.

If we have an independent trustee, who should we choose and how could we remove them if they became difficult or charged too much?  

Generally not a family member – a professional advisor, trustee company or close family friend.  They can be removed if the settlor reserves to himself or herself the power to appoint and remove trustees.

We have heard a trust can have tax advantages.  Can you see any avenues for tax savings given our situation?  

It is important to realise that any income distributed to beneficiaries is vested absolutely in the beneficiary.  The tax advantages of a trust arise from allocating income amongst beneficiaries on lower tax rates.  Under present tax rates, income could be distributed to any beneficiary except a child earning less then $38,000 and taxed at 19.5% whereas if earned in their personal name, tax would be incurred at 33%.  If your tax rate is 39% you can save by transferring income producing assets to a trust which pays tax at 33%.

How important is the trust deed?  

The trust deed is of paramount importance and should always be personalised for the circumstances and objectives of the settlor.  The deed is the basis under which the trustees administer the trust.  Therefore, it is important to set out the purposes for which the trust’s assets should be used and who is entitled to receive its benefits especially for a time when you will no longer be a trustee.  A trust in this sense is often referred to as a “living will”.  A memorandum of wishes signed by the settlor can also be an important means of clarifying purpose and intention.

What is the effect of a trust on relationship property?  

A Relationship Property Agreement/Contracting Out Agreement may be required to ensure equalisation of ownership of assets and to identify any separate property that is not going into the trust.  However there are wider implications associated with entering into a Relationship Property Agreement and Mr and Mrs Brown should seek legal advice in this area.  If they do proceed with an agreement, they will each need independent advice.

What happens if our marriage breaks up?  

The property in the trust is trust property.  The debt back is generally relationship property.  It could be the trust carries on or its property is valued and distributed in the same manner as if it were relationship property.

Should we review our wills at the same time as we enter into a relationship property agreement and establish a trust?  

Yes, so as to ensure that they are now consistent with your changed circumstances and the objectives of the trust and include provisions to automatically forgive any balance owed back to you from the trustees, arising from the initial transfer of assets.

How will a trust protect our assets from wastage by Phillip once we are gone?  

You can specify in the trust deed that Phillip is only entitled to receive income from the trust and not entitled to asset distributions.  This will preserve the assets for future generations.  A trust is effective in situations such as this as the particulars of the trust deed cannot be challenged, only failure of the trustees to act within the requirements of the trust deed.  A will on the other hand can be challenged in the Courts for unfairness.

Will a trust prevent Yvonne from benefiting from our assets once we are gone?  

In the case of a marriage breakup between Yvonne and Andrew, Andrew’s share of inheritance which could have become relationship property would be in the trust and Yvonne would have no claim against it.  If they remain married she will benefit from whatever distributions Andrew receives.

Does it matter when we set up the trust?  

Yes, timing is critical.  Tomorrow may be too late if you want to get those assets out of your ownership.  Both the Insolvency Act and the Property Law Act give time frames for disposal of assets which can make void any gifting within those time frames.  The best time to get assets out of your ownership is when they have minimal value.  Assets have to be transferred to the trust at a suitable market value.  This means if you waited a year to start up the trust any appreciation in value of the assets will also have to be gifted or repaid by the trust.  Potential changes in the law also need to be considered.

How long will the trust continue for?  

The law permits a trust to operate for defined periods of time only and the usual period adopted is that of 80 years.  A shorter period can be stipulated and it is normal for the trust deed to allow the trust to be terminated at an earlier date.

Advantages of Trusts

You can see that the major advantage is the flexibility provided by the trust documentation and structure.  Specifically the advantages gained from utilising a trust structure can be broadly split into four categories:

Family Consideration

Family trusts are often used to protect wealth from other family members.  Wasteful siblings can be restricted in their entitlements to guard family wealth for future generations.  Assets placed in a trust are not relationship property.  This has the benefit of safeguarding assets against either future spouse or siblings of spouses in the event of a relationship breakdown.  A trust could also preserve family wealth following an illness of the mind in old age.

Business Dealings

A trust can protect assets against:

• Debts run up by failed businesses;
• Claims in negligence made against professional advisors; or
• Claims against company directors under the Companies Act.

A trading trust can have specific advantages over a company such as no requirement for interest to be charged on overdrawn current accounts, no requirement for shareholding continuity to carry forward losses and flexibility in income allocation.

Wealth Taxes

Wealth built over a lifetime and sometimes over several generations can quickly be eroded by taxes aimed directly at taxing wealth.  Examples of wealth taxes are estate duty and superannuation surcharges.  Although not currently law, it is possible similar style taxes will be introduced by future governments.  The other type of wealth tax falls under the category of asset tested benefits such as retirement home and medical subsidies for the elderly.  Assets held by a trust are not used in calculating entitlements to these types of benefits.  Therefore, assets need not be sold to pay for these charges.  There may however be a time consideration before the assets are excluded.

Taxation

Trusts can be used as vehicles to flexibly allocate income to family members on the basis of need and personal circumstances and consequently can take advantage of lower personal tax rates.  Trusts are taxed at the corporate rate of 33%, however income distributed to beneficiaries is taxed at their marginal tax rates.  Therefore, trusts are valuable in redistributing income to family members on lower tax rates.  As with all asset transfers, careful consideration should be given to tax avoidance rules.

Checklist:  Should I be considering a trust?

You should be considering a trust if you answer “yes” to any of the following:

• Are you involved in business ventures that are exposed to risks?
• Can you be held liable for professional advice?
• Do you hold any company directorships?
• Do you have income from business ventures and investments and have family members whom you support on lower tax rates?
• Are you considering entering into a relationship (marriage or de facto), getting married and concerned about protecting your interest from any future separation?
• Do you have insufficient income generating assets to pay for medical and retirement home costs in your old age?
• Are your children frivolous or are you concerned about your children’s relationships breaking up after your death?
• Are you concerned about the reintroduction of estate duties or any asset tested superannuation policy?

This means it is absolutely vital that your Trust cannot be accessed by anyone other than those for whom it was established.

One of the main things that can make a Trust vulnerable is failure to run it properly as an entity that is completely separate from your personal assets.  You should:

1. Hold an Annual Meeting of Trustees and keep proper Minutes of Trustees’ decisions.
2. File an annual Tax Return.
3. Prepare annual accounts.
4. Keep proper records of all financial movements.
5. At all times keep the Trust’s property separate from your remaining personal assets.  That means never include any Trust property in a statement of your personal assets given to your Bank.
6. If you and your spouse are the only Trustees, it is advisable to have a separate, independent Trustee as well.  While this is not a legal requirement, it shows that the Trust property is no longer under your sole control.
7. Ensure that all the Trust’s assets are in the names of the Trustees.

All the above points are straightforward but failure to observe them could easily result in your Trust being vulnerable.  If it turns out that your Trust does not give you the protection you expected, then why have it in the first place?

Years later when they sold the property owned by the Trust they needed to track down the trustee, who had moved overseas years before, because of course he was on the property title as the owner.  The former trustee had to sign the transfer documents for the sale to go ahead.   They hadn’t considered the fact that the trustee’s name would still be on the title to the property.

It is inevitable that most people with family trusts will need to change one or more trustees of their trusts at some point.  We have found that there is a common perception that this simply involves signing a form.  Unfortunately it is not that simple, especially where the Trust owns a property subject to a mortgage.

Generally changing a trustee is a three step process:

1. If there is a mortgage on the property, it will be necessary to contact your Bank to see how they want to deal with the change of trustee in relation to your mortgage.  The names on the title to the property generally have to match those on the mortgage, so if the owners of the property, i.e. the trustees of the trust, change, then they will need their documents to align with that; 
2. The current trustee, your new trustee/s and your old trustee need to sign a document which retires the old trustee and appoints the new one;
3. The new trustee needs to be registered as an owner on the title to the property.  You need to sign forms authorising us to register the new names on the title and we then proceed with registration.

The process is not a difficult one, but can be time consuming, so if you are planning to change a trustee, bear in mind that it will not be immediate.   We can help to guide you through the process to ensure that any change is done properly, to minimise future delay, inconvenience and cost.