Under the Spotlight: Reasons to Form a Trust

If you've learnt a bit about Trusts and you're not sure if you should form one, have a read through these top five reasons to form a trust. This will help you decide if it is for you.

1. For Succession Planning

Passing assets from one generation to the next

Most New Zealanders wish to provide for their families. This may be done by passing on the family farm or business or even just the family home. There are many obstacles to this happening. Using a Trust is a way to plan for the smooth succession of assets from one generation to the next.

This is where Inheritance Trusts have become very popular.

Most people now live well into their 80's. When you die your children may well be approaching retirement themselves and possibly seeking to divest themselves of assets due to whatever asset testing regime is current at the time. Receiving an inheritance at that time may well compound their problems.

The question is; are you better to leave the Estate to your child directly or create a trust to hold the asset for your Childs benefit?

For many people the formation of an Inheritance Trust represents a safer option than a direct inheritance.

Settlement Process

If you believe that an Inheritance Trust would best protect your family then you need to:

1. Prepare a separate Inheritance Trust Deed for each child.

2. Prepare a new Will leaving your residuary estate to the Inheritance Trusts rather than to your child directly.

3. If you have an existing Family Trust you need to check your Trust Deed to ensure that it allows for distributions to other Trusts. If this is the case you need to prepare a new Will and Memorandum of Wishes that instructs your trustees to distribute your Trust to the Inheritance Trusts rather than to your child directly.

(Read more about the Structure of an Inheritance Trust – coming soon)

2. To Protect Separate Property

Trusts are often used when individuals have separate property they do not wish to intermingle with their relationship property. If the separate property is placed in a Trust they no longer own this asset and it can then be kept separate from relationship property. This is particularly important to those people who have just left a relationship or have property and are forming a new relationship.

3. To Reduce Risk of Asset Loss through Business Failure

New Zealand is a country of small businesses and unfortunately some of them do not trade successfully. Placing your house in a Trust may help protect your family in the event of a business failure.

4. To Reduce Risk of Loss of Assets through Legal Action

As a country we seem to be becoming more litigious in nature. If your business is one that could expose you to a legal action, through advice or actions you may wish to protect your family by placing your home into a Trust.

5. To Gain Taxation Benefits

When income is received in a Trust the Trustees can elect to either retain income within the Trust or allocate it to a beneficiary. This decision should be made in conjunction with the Trust's Accountant.

Note – the timing in respect to the establishment of the Trust is critical as protection takes time, there are very few immediate gains for any Trust due to the nature of the Gifting Requirements, therefore advice on forming a Trust for these or any purpose should be sought via your New Zealand Trustee Services – Trust Managers.