The concept is simple:  you want to have direct ownership of less assets while still providing for family members and retaining the benefit of the assets.  A trust is a legal structure that separates you from ownership of your assets.  A primary reason why you may want to separate ownership is to protect yourself from claimants against your assets.

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. Mr and Mrs Brown are concerned about protecting their personal assets from risks associated with their business interests, especially since expansion has created greater exposure to business risk.  

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 in future.  They wish firstly to provide for their own well-being, and then on their death to provide for their children and grandchildren, but to ensure one child 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.


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 as 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, 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 you 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? 

This can be anyone, but commonly will be a family member, a professional advisor, trustee company or close friend.  They can be removed if the settlor reserves to himself or herself the power to appoint and remove trustees.


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 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 Contracting Out 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, 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, and give your power of appointment to somebody.


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

You can specify in the trust deed that a certain child is only entitled to receive income from the trust and not entitled to asset distributions for example.  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.


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. It is also important to ensure the trust is not set up with the intention of defeating creditors, so it is best to do it before you go into business.  Assets have to be transferred to the trust at a 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. Shortly the law will be changing to allow for trusts to run for 125 years.

 

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?

It is important to take legal advice specific to your situation. Your experienced trust lawyer will be able to advise you about whether a trust is right for you.




Claire Tyler


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