Setting-up a family trust – some issues to consider
Many people living or working on the North Shore consider setting-up a family trust thinking it is an easy way to avoid tax and protect assets. Those two issues may be true providing the trust is set-up and managed correctly, according to some very strict rules. Failure to follow the correct procedures can render the trust null and void. Further, the Trustees of the trust could be liable for penalties too.
Do you have the right intent with your family trust?
There also needs to be the right intent for its formation too otherwise the trust can be challenged in court. If the Trust is established with the primary intent of preventing an eligible person from having a share in ownership or from receiving what is due to them, for example, a share of relationship property, then it is quite common for a court to rule that the trust was set-up with the wrong intent.
Also, if your intention is to reduce your personal income tax liability, by sheltering assets or businesses in a trust with a lower tax rate, you are in for a nasty shock.
The IRD has been active and also successful in pursuing people who have taken this route. The precedent was set when they won a case against a couple of orthopaedic surgeons, Mr Penny and Mr Hooper, who were found to have benefited from substantial tax avoidance by transferring assets to a trust. Other business owners, rather than waiting for the IRD to catch them, have felt it a better option to own-up to the IRD about their intentional personal tax avoidance. These people have received penalties but that was a better course of action than waiting for the inevitable high cost court process.
So the moral of the tale is, be sure your intent is fair and justified. Your trust lawyer on the North Shore will be able to advise you.
Do you have the right intent with your family trust?
There also needs to be the right intent for its formation too otherwise the trust can be challenged in court. If the Trust is established with the primary intent of preventing an eligible person from having a share in ownership or from receiving what is due to them, for example, a share of relationship property, then it is quite common for a court to rule that the trust was set-up with the wrong intent.
Also, if your intention is to reduce your personal income tax liability, by sheltering assets or businesses in a trust with a lower tax rate, you are in for a nasty shock.
The IRD has been active and also successful in pursuing people who have taken this route. The precedent was set when they won a case against a couple of orthopaedic surgeons, Mr Penny and Mr Hooper, who were found to have benefited from substantial tax avoidance by transferring assets to a trust. Other business owners, rather than waiting for the IRD to catch them, have felt it a better option to own-up to the IRD about their intentional personal tax avoidance. These people have received penalties but that was a better course of action than waiting for the inevitable high cost court process.
So the moral of the tale is, be sure your intent is fair and justified. Your trust lawyer on the North Shore will be able to advise you.
Other factors to consider before setting-up a family trust
You need not be scared nor put-off from the idea of starting a family trust. If your intention and set-up are correct, then you have nothing to worry about. However, there are some significant issues to bear in mind first.
1 Cost for setting up a family trust
The first is for the short-term is the cost for forming the trust. You will face legal fees for drawing up the Trust Deed and the initial capital to transfer into the trust. There are likely to be additional legal fees necessary for transferring assets into the trust. This is because in effect, you are selling your assets to the Trust which therefore needs the appropriate Sale and Purchase agreements to be processed. This may also require changes to mortgage documents too which will entail even more costs.
2 Ownership and control
You also need to fully understand that when an asset is transferred to a trust, you are no longer the legal owner. Lots of families put their family home into a trust and still believe that they own it. This can cause some confusion to people especially if they are not Trustees. Decisions can be made by Trustees which can have unwelcome effects on the residents, for example, deciding to sell the house. A specialist family trust lawyer can give you advice around this when you set-up your trust.
3 Recurring costs
Other factors that many people overlook are the administration and compliance costs.
A trust must be managed or administered to precise legal requirements in order to maintain its status. Failure to do so can result in penalties for the Trustees. The admin is best handled by an expert in trust administration. This can be an accountant or some law firms have a trust management department. Clearly there will be a cost each year for this service.
Also, a trust has to prepare an annual set of accounts and submit tax returns each year. Again, this will incur a cost from your accountant.
Summing up family trust set-up issues.
This post has covered some of the issue involved with setting-up a family trust but there are various other issues that you need to think about too. Given the complexity and the tight legal regulations, you should go to talk to a North Shore family trust lawyer as soon as possible. They will be able to advise you about your own personal circumstances and whether setting-up a trust will benefit you and your family.
You need not be scared nor put-off from the idea of starting a family trust. If your intention and set-up are correct, then you have nothing to worry about. However, there are some significant issues to bear in mind first.
1 Cost for setting up a family trust
The first is for the short-term is the cost for forming the trust. You will face legal fees for drawing up the Trust Deed and the initial capital to transfer into the trust. There are likely to be additional legal fees necessary for transferring assets into the trust. This is because in effect, you are selling your assets to the Trust which therefore needs the appropriate Sale and Purchase agreements to be processed. This may also require changes to mortgage documents too which will entail even more costs.
2 Ownership and control
You also need to fully understand that when an asset is transferred to a trust, you are no longer the legal owner. Lots of families put their family home into a trust and still believe that they own it. This can cause some confusion to people especially if they are not Trustees. Decisions can be made by Trustees which can have unwelcome effects on the residents, for example, deciding to sell the house. A specialist family trust lawyer can give you advice around this when you set-up your trust.
3 Recurring costs
Other factors that many people overlook are the administration and compliance costs.
A trust must be managed or administered to precise legal requirements in order to maintain its status. Failure to do so can result in penalties for the Trustees. The admin is best handled by an expert in trust administration. This can be an accountant or some law firms have a trust management department. Clearly there will be a cost each year for this service.
Also, a trust has to prepare an annual set of accounts and submit tax returns each year. Again, this will incur a cost from your accountant.
Summing up family trust set-up issues.
This post has covered some of the issue involved with setting-up a family trust but there are various other issues that you need to think about too. Given the complexity and the tight legal regulations, you should go to talk to a North Shore family trust lawyer as soon as possible. They will be able to advise you about your own personal circumstances and whether setting-up a trust will benefit you and your family.