Trusts
Posted: 9th March 2010
A lot of people have Trusts - Should I Have One Too?
Trusts have been used extensively in New Zealand in the western
world for many years. They originally arose in the Roman
times when they were used by Roman senators to circumvent laws that
they found inconvenient-nothing much has changed, it seems.
Reasons for forming a Trust
- The number one reason is for asset protection. Assets properly
transferred to a trust can survive the bankruptcy of the settler or
any of the beneficiaries. Virtually all other reasons for
forming a trust come back to asset protection.
- Trusts are used to create a living will to set assets up for
future generations that can stay in place for up to 80 years, well
beyond the death of the settler. For instance, a trust could
be set up to hold a beach property for the benefit of children and
grandchildren.
- Rest Home costs. Some people are motivated by the desire
to retain assets for their family that would otherwise be used to
pay rest home costs. They sell their house into the trust and
then gift the debt back to the trust. Properly done this is
effective but bear in mind that WINZ goes back 5 years (at least)
and it allows only $5,000 gifting annually, not the $27,000 that
the IRD allows.
- Relationship Property. Trusts have been used to keep
separate property from being considered as "relationship
property." to be certain of this the trust property should
not be used as the joint home and a proper written contracting out
agreement must be put in place. The relationship property
legislation overrides everything and it also applies after
death. Trusts are now no longer fully effective against the
provisions of the Relationship Property Act.
Benefits of Trusts
- Continuity. Trusts continue to operate after the death of
the settler until such time as the trustees decide to terminate it
or the final vesting date is reached.
- Family Protection Act. Assets placed into a trust are
generally safe from family protection claims by family members who
are not happy with the provisions of the will.
- Preserving assets for future generations. Trusts can be
an effective way to keep control of assets that could be lost due
to beneficiaries becoming bankrupt or having failed marriages at
some future time.
- Income spreading. Trusts are very effective at utilising
beneficiaries' lower income tax rates, thus saving tax.
Distributions to children under 16 years of age are limited to
$1,000 income annually at their low tax rate, otherwise they are
taxed at 33%.
- Tax savings. Trusts are taxed at 33% while high income
individuals are taxed at 38%. This has led to most successful
private company shares being held by trusts. Dividends from
the company to the trust require no further payment of tax whereas
the receipt of a dividend by an individual on maximum rates
requires an extra $900 tax per $10,000 net dividend (an extra $800
from 1 April 2009). The new company tax rate of 30% from 1
April 2008 has changed the simple passing of dividends to trusts
with no further tax to pay but there still remains a significant
tax advantage for trust share ownership rather than individual
share ownership for high income earners. The new PIE regime
also allows individuals and trusts to limit their effective tax
rate on qualifying PIE income to 30%.
Establishing a Trust
A Trust Deed is a complex legal document that should be prepared
with proper legal advice. The trust formation and transfer of
property into the trust necessarily involves working with your
solicitor to achieve the desired result. Generally trusts are
set up by the settler during his or her lifetime. Trusts can
also be established by a will and are known as will or testamentary
trusts as there are a number of people who may not wish to
establish a trust in their lifetimes but who may be willing to do
so on their deaths under their wills. A testamentary trust
has specific protection as regards the Property (Relationships) Act
section 33(3)(m).
Source: NZICA