• PKF Hamilton Team
  • October 29, 2018
  • Blog

By Dale Adamson

 
You may have a family trust or be told you need one, or even be a trustee of a trust, but do you really understand what a trust is and why it’s needed?

A Trust is a legal relationship in which an interest in property is held by one or more persons (the Trustees) for the benefit of others (the Beneficiaries).  There are three categories of people involved in a Trust relationship:

  • The Settlors are the people who create the Trust by transferring property (assets such as land, investments etc.) without receiving full value or payment in return. Settlements can occur when the Trust is first established or at a later stage.  For example, forgiveness of a loan to a Trust by a person, even though they weren’t the original settlor, would mean that the lender was reclassified from being a creditor to a settlor of a Trust.
  • The Trustees are the people responsible for the management of the Trust. Their names will appear on the documents of ownership of some assets held by the Trust – e.g. land titles.
  • The Beneficiaries are those people who will benefit from the Trust, either by receiving income and/or capital during the term of the Trust (the beneficiaries) or the Trust’s assets upon the final winding up of the Trust (the final beneficiaries). Discretionary beneficiaries are a class of beneficiary who only receive a distribution if the Trustees decide they should.

It is important to remember that even though a person may appear in more than one of the categories above, they wear different hats for each. With those hats come different rights and responsibilities. Once a person settles property on a Trust, it is no longer theirs to do with as they wish.  It passes to the Trustees who are obliged to deal with it in accordance with the terms of the Trust Deed and comply with the Trustees legal responsibilities to look after it for the Beneficiaries. If the Settlor continues to treat the property as though it is still their own, the Trust may be treated as a “sham” trust and set aside.  The Inland Revenue Department, in particular, is alert to the existence of sham trusts.

The Trust is controlled by the Trust Deed.  This is a legal document which must be clearly prepared and witnessed to make it valid.  The Deed will normally cover the nature and purpose of the Trust, the term (maximum currently 80 years), parties (settlor, trustees, beneficiaries), powers and duties of trustees, and rules regarding distribution of income and capital.

There are a number of reasons for forming a trust and potential benefits include:

  • To preserve value for future generations. The trust continues to operate after the death of the settlor. There is therefore the opportunity to give beneficiaries income (e.g. the spouse until his/her death or remarriage) while still maintaining control over who the final beneficiaries will be.
  • To protect assets from relationship property or family claims.
  • To protect the assets from irresponsible children or their spouses. They could receive income distributions, but the capital is retained.
  • To protect assets from creditors. For example, to isolate the family home from business creditors.
  • To potentially protect assets from the Government. For example, NZ used to have death duties and other countries in the world have inheritance taxes.

Trust Deeds are living documents and it is important to make sure they are regularly reviewed and updated. Changes in circumstances and legislation can impact existing Trust structures.   Accountants, with their knowledge of the Settlor’s personal and financial affairs, can assist to review the Trust to ensure it will continue to meet the Settlor’s requirements.