Are family trusts worth it?
Are family trusts worth it?
We are very often asked if family trusts are really worthwhile. After all, haven’t most of the advantages been whittled away?
Of course it always depends on individual circumstances but trusts are almost always the best entity to own a business or assets such as your family home.
Having said that, there are plenty of things to be aware of before deciding to put assets into a trust.
Most of the tax benefits of running a trust are long gone. The IRD have been very active in changing tax law and adjusting tax rates so the complex tax structures of yesteryear are consigned to history. Having said that, a change in government and future tax policy might change that.
It’s undoubtedly true that trusts still offer the best protection for assets that appreciate in value. Benefits include offering protection from creditors, spouses and other family members. Assets owned by a trust may also fall outside any means testing imposed on an elderly person when applying for a residential care subsidy (rest home subsidy).
One thing to accept from the outset is that running a trust will involve spending money regularly.
Moving assets like property into or out of trust protection will incur legal fees.
Regular minutes are required to document changes and resolutions must be signed. These documents are typically organised by your solicitor so on-going fees will be incurred. Very often you’ll appoint an external professional such as a lawyer or accountant to be a fellow trustee so there may be fees involved there.
Another point to note is that assets need to be in trust for a considerable period of time for any of the protections afforded by the trust to be effective. Trusts are certainly not a quick fix. There’s no point in trying to squirrel away assets if you see trouble on the horizon. That’s almost always too late. Gifting assets to the trust may take some considerable time for the protection of the trust to take effect.
It is really important for a trust to be professionally managed. This is one area where DIY is not advisable. The law is constantly changing and it’s vital to have good support from a solicitor or professional trustee who is experienced in trust law. Good intentions are not protected in law so it pays to have everything in order if for any reason the Trust is attacked by an interested party.
We also believe that you should have financial statements prepared on an annual basis as a way of documenting any changes to the finances of the trust throughout the year. This will clearly show any profit or loss and set out the assets held in trust.
It is true that some of the legal protections that trusts once afforded are being gradually eroded by the courts. A court does have the power to claw back assets if it believes that a creditor or spouse has been unfairly treated. In addition the Law Commission has proposed legislative changes that the government is considering.
Having said that it’s very often better to have a trust than no trust at all.
So are they worth it? Trusts come at a cost but we believe they are still the best way to protect assets. It takes a lifetime to amass wealth but it can all be lost very quickly without any legal protection.