What is a family trust and do you need one?
When you buy a house or start a family, you may start thinking about setting up a family trust. Family trusts are arguably a New Zealand social institution, but is a family trust right for your situation?
In this article, we’re looking at the pros and cons of having a family trust.
What is a family trust?
The most important point to remember is that a trust is a legal entity. However, family trusts do not have to be publicly registered, so their purpose remains confidential. They are commonly set up for asset protection beyond your lifetime. The trust operates according to a trust deed, which is administered by trustees. You gift your assets to the trust, appoint your trustees and name the beneficiaries who are to receive benefits from the trust. Our trust lawyers can provide advice about the different types of beneficiaries and the responsibilities of trustees.
The pros of having a family trust
The main advantages of having a family trust is to protect assets for beneficiaries from their creditors, relationship property claims, or if you believe they are unable to manage their financial affairs. They also serve to minimise or prevent claims against your estate. You can be a trustee and a beneficiary of your trust, so a trust may be useful to protect the family home from a risky business venture for example. Trusts can also be used to protect money set aside for special purposes.
At your death, the Courts can overturn or rewrite provisions in your will if they consider family members have been disadvantaged, but they cannot do this to a trust. Essentially, this ensures your estate continues to benefit your named beneficiaries regardless of their individual situations.
The cons of having a family trust
The most significant disadvantage of having a trust is that you lose ownership of the assets you gift to the trust. Even though you can appoint trustees and act as a trustee, the assets have to be used in accordance with the trust deed. If you continue to treat the assets as your own, the trust can be challenged as a sham.
Next there are establishment, accounting and administrative costs to consider. As a legal entity, the trust will have to file an annual tax return if it generates income. The cost of establishing a trust depends on its complexity and the assets it holds. You’ll need to weigh up the benefits of having a trust against the ongoing costs.
Is a family trust right for you?
Everybody’s situation is unique, but our trust lawyers have been serving Hawke’s Bay families for many years and are familiar with the challenges faced by the people of our region. There are immediate benefits for protection against claims from business creditors or as a result of a relationship breakdown, but setting up a trust is not a decision you should make lightly. If you’re thinking about setting up a family trust, talk to us for sound advice.
Guides to the law
Here are links to the New Zealand Law Society law awareness pamphlets.