Once you have decided to go ahead with a trust, you need to decide which of your assets to transfer to the trust. There can be tax and other practical considerations. You may need accounting and legal advice about this, and also about how your assets need to be transferred. While there is no gift duty (it was abolished in October 2011) or tax law to prevent you transferring all your chosen assets into the trust at once, there can be other factors to consider.
You also need to think about the trust deed which sets out the rules for your trust and how you want it to work.
Trustees will need to be appointed to run your family trust. This may be you as settlor, and also perhaps your spouse or partner. One possibility that you could discuss with your lawyer is to use a company as a trustee.
In addition to the terms of the trust which are in the trust deed, trustees also have a number of legal duties. The trust deed may override some, but not all, of these duties. For example, one of their duties is to treat the beneficiaries in an even-handed manner, but a deed may say that priority is to be given to the needs and interests of a defined group of ‘primary beneficiaries’ (usually the settlors and their children). Most family trusts now have two groups of beneficiaries: ‘discretionary beneficiaries’ who may benefit at any time while the trust is running; and ‘final beneficiaries’ who receive any remaining assets when the trust comes to an end.
Unlike a company or an incorporated society, a trust is not treated in law as if it were a separate person or entity. It‘s the trustees who represent the trust. All trust assets must be held in the name of the trustees who will be personally liable for trust debts unless the creditors agree to limit the trustees’ liability.
Even after you have set up your trust and put your major assets into it, you cannot just put the family trust papers away and forget about them. It’s important to keep careful record of trust assets and trustees’ decisions. If you don’t do this, or if you seem to treat trust assets as if they still belong to you, your trust could be considered to be a sham or your puppet. In that case all the benefits of having a trust to protect your assets could be lost.
You may have seen media coverage suggesting many trusts in New Zealand are shams or won’t stand up to scrutiny. If you never intended to operate a real trust, then it may be a sham and can be set aside. If trustees are doing their best, however, and always intended to act as genuine trustees, then the courts are unlikely to say this is a sham.
Please contact Tina McLennan, Anna Ferguson, Gemma Keystone or Jo McLennan for more information.