What is a Family Trust?

by Graeme Withers Law

What is a Family Trust?

A family trust is established by a legal document called a trust deed which appoints the people who will run the trust, known as trustees. It is set up by another person known as a settlor who establishes the trust for the purpose of benefit of the beneficiaries. It is the settlor who decides what the trust should own and who the beneficiaries of the trust will be. Beneficiaries can be named individuals. It is also common practice to include a generic formula such as “the children of Mr and Mrs ABC” which enables the beneficiaries to be identified. The trust deed will also provide what the beneficiaries are to receive and when, although in a fully discretionary trust, this decision is commonly left to the trustees to decide. The trust deed will also prescribe how long the trust will run for, within limits prescribed by law.  In most family trusts a settlor can be a trustee and beneficiary, although this is not always the most desirable. A trust creates a series of relationships between various people or entities.

A trust is a very flexible instrument. It can be set up for the simple purpose of owning a home. Another common purpose is to own a business, or to carry out charitable purposes. A trust may also be the owner of income earning property such as a commercial building or residential rental properties. Trusts also own passive investments such as shares and term deposits.

What are the advantages of a family trust?

Appropriate legal advice is required by anyone contemplating setting up a family trust. One purpose of seeking such advice is to identify at the outset what advantages a family trust might offer. The answer to this question involves a consideration of each individual’s circumstances, in order to identify the advantages a family trust can be expected to offer that individual. A reputable advisor will tell you a family trust is not a solution where one size fits all, so you need to find out if a family trust would protect you and suit you in your particular family and financial circumstances. Some examples of situations in which a family trust might be appropriate are now set out by way of illustration:

(1) Asset protection

For many people asset protection is the main reason for setting up a trust.  Existing assets owned in personal names can be transferred into a trust, free of any tax or duty, so long as existing rules as to gift duty are observed. Alternatively a trust can be used to purchase assets. So long as it does not trade or incur liabilities, assets held by a trust will usually be protected from claims by creditors of the individual. Thus if a business owned by a sole proprietor fails, the home owned by that proprietor will be at risk of being used to pay the claims of those creditors. This risk can be greatly reduced if the home is owned by a family trust, which will generally protect a home from a business failure. This issue is even more important these days now that litigation is so prevalent. A trust can also protect assets in the event of an unsatisfactory marriage or civil union.

(2) Asset/Means testing

Under current rules, an individual who suddenly finds that they need rest home care is forced to consider how they will pay for it. Some people can fund the cost from their own resources, but it is commonplace for many to need state assistance by way of a rest home subsidy. All applications for state assistance must be means tested. Under current rules, an individual is limited to owning just $200,000 in assets, including the value of the home. Any excess over that must be used to fund rest home care, assuming the person requiring care is a widow or widower. On the other hand, a trust can protect what is probably a person’s most valuable asset, their family home, from even being counted in the means testing of the individual, provided it is set up well in advance.

(3) Protection from the Family Protection Act 1955

A claim can be brought against an estate by a person who received no benefit under the will. It is common for the provisions of the will to be adjusted as a result of such a claim. Any asset which has been settled into a family trust is beyond the reach of the Family Protection Act.

(4) Tax minimisation

In the right circumstances a trust can assist to minimise an individual’s tax liability.

(5) Provision for future generations

Many people use a family trust to hold property such as a family holiday home. The trust can empower the trustees to hold that home for the use and enjoyment of future generations.

Is a family trust for you?

Do you:

  • Own a home?
  • Own a business?
  • Have children?
  • Have a new relationship?
  • Want to protect everything you have worked so hard for?

If you do, a family trust may be the best method of protecting your assets and loved ones. Trust law is complex and good legal advice is essential from the outset.

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