Understanding Family Trusts

Transferring assets into a family trust is something many individuals could benefit from, however, it can be difficult to understand exactly what a family trust is and the advantages of setting one up. Why would an individual put their property and assets into a trust for a third party’s benefit?

What is a Family Trust?

A trust is designed to protect your assets now and in the future. The person who sets up the trust (known as the settlor) transfers their property to another person (know as a trustee), who administers the asset/s according to the trust deed for the benefit of a third party/parties (known as beneficiaries).
For example, John and Mary transfer their family home into a trust for the benefit of their children. Their family solicitor acts as the trustee and administers the property according to the trust deed, which has been written by John and Mary. One of the provisions of the trust deed is that John and Mary can live in the house for the duration of their lifetime.
Trusts have been used to protect property and assets since the Middle Ages, when crusading knights leaving for the Holy Land entrusted the management of their property to another person until they returned. Nowadays people set up family trusts for perhaps less intrepid reasons but the advantages for doing so are numerous, including:

Protecting your personal property from creditors

If you are an entrepreneur or a director of a company, you may wish to place your personal assets in trust so they cannot be claimed by creditors to pay off business debts. However, you cannot set up a trust with the specific aim of avoiding paying existing debts. Insolvency legislation allows the Official Assignee to claw back gifts made to a trust up to five years prior to bankruptcy.

Protecting separate property

Under the Property (Relationships) Act 1976 if a relationship breaks down, the assumption is that all ‘relationship property’ will be split 50/50 between the parties. However, if you are not yet in a relationship, but may wish to enter one in the future, you can ensure your property is kept separate by transferring everything into a trust, perhaps for the benefit of your children. If you are already in a relationship you would need to enter a ‘contracting-out’ agreement as the courts can claw back assets from a trust if they were set up to defeat a future claim.
Similarly, you can set up a trust to ensure that assets such as a family farm are kept for your children only, thereby protecting any claims from future in-laws.

Protection from claims against your estate

Once property becomes part of a trust it ceases to be part of your estate, therefore there can be no bitter family feuds over who gets what when you pass away. Gift duty was abolished on the 1st October 2011, which means that you can gift all your property to a trust in your lifetime without paying tax. This allows you to have full control over who will benefit from your property as additional claims cannot be made against a trust.
It is important to seek legal advice and have your trust set up properly as there can be serious ramifications if managed incorrectly.
Depending on your situation setting up a family trust may be easier than you anticipated. If you wish to find out more, contact us and one of our solicitors will talk you through the process.

2 thoughts on “Understanding Family Trusts

    1. Hi Jill,

      Thanks for your question.

      Yes, a settlor can also be a trustee and a beneficiary. The only limitation is that there can be no ‘identity in the trust’. That means that if there is a sole trustee there cannot be a sole beneficiary who is the same person. Equally if two people are trustees – say a husband and a wife – those same two people cannot be the only beneficiaries.

      Feel free to contact me if you have any more questions.

      Scott Donaldson
      scottd@hewatgalt.co.nz

Leave a Reply

Your email address will not be published. Required fields are marked *