Family trusts: an increasingly popular method of protecting property and managing assets. In this post we offer an introduction to family trusts for dummies: starting with a brief history of family trusts in NZ.
Creation of a family trust is something many individuals consider – whether as a means to help pass and preserve wealth efficiently, or to place governance and control over the distribution of assets in retirement after they’ve gone.
NZ Family trusts have been around since before the second world war. Whilst their primary purpose is to protect the ownership of assets (including shares, real estate, money, yachts, cars or any kind of asset) for the benefit of that family, trusts in New Zealand were historically often suggested to clients by lawyers and accountants as a means of paying less tax, principally due to the fact that trusts were taxed at a lower rate than the top earners rate of income tax.
Over time, the government came to realise that trusts were being misused as a legal means of tax avoidance and took measures to close the loophole, meaning that the tax benefits of establishing a family trust became less lucrative and only benefitted individuals in certain unique circumstances (we’ll get to this).
Another fairly common (if a little cynical) practice was for trusts to be used a means of disposing assets (by gifting them to trust) in order to ‘preemptively’ pass down wealth to the next generation whilst ensuring that the aging individual taxpayer would qualify for and receive funded residential care via government assistance. Again, this is something that successive governments have taken measures to counteract. Today, gifts to trust over a certain value can be deemed to be actions that deprive yourself of income or property.
Changes to trust law are surprisingly common. The Trusts Act – a bill passed in July of 2019 that will come into effect by 2021 – will have wide reaching consequences for new and existing trusts, while further changes to trust law internationally and in New Zealand can be expected. It can be an expensive business to set up and run a trust given the legal and accountancy costs, so these changes naturally raise the question of whether establishing a trust is still a worthwhile exercise.
Disclaimer: we are not lawyers (we are accountants). When considering setting up a trust, always seek out family trust help from a qualified legal advisor.
Are family trust funds just for the wealthy?
Not exclusively, although the motivation for setting up a family trust is usually to protect assets. This is the moral intention of a trust and there is no prescriptive minimum or maximum value limits to those assets (although trusts can be complex, so it goes without saying that you should have good reason to need to protect your assets through trust).
So, what is a family trust? When might you consider creating one, and what are the potential benefits of a family trust?
A well established and properly run kiwi family trust can offer protection against creditors and relationship property claims, as well as protection against future tax law changes. For example, should an inheritance tax be introduced in New Zealand in the future, established trusts may be exempt.
A NZ family trust ensures confidentiality, given there is no public register of trusts, whilst also allowing most of the same operational activities as a standard business such as trading (in the case of a trading trust), investing in the stock market, holding property, or lending / borrowing money. Because a trust is not a company, the trust cannot be sued nor its assets seized by creditors, meaning that in some circumstances, this may be an enticing benefit.
New Zealand trusts are normally taxed at 33% unless that income is distributed to a trust beneficiary. When income is distributed to a beneficiary, that income is instead taxed through the individual’s income tax.
In ordinary circumstances, distribution of income to beneficiaries must occur before the end of the tax year the income is accrued, else it is added to the capital of the trust (and liable for tax at the 33% rate).
Distribution of trust capital is a little more complicated and is typically where the tax benefits of a trust lie (within the acceptable parameters of the law). Where any capital accumulated over previous years, or capital gained from the disposal (sale) of trust property is distributed to beneficiaries, it is typically not taxable.
Of course, we have no Capital Gains tax in New Zealand, with Prime Minister Ardern indicating that a CGT will not be pursued under her leadership following the report by the Tax Working Group in 2019. This means that (for the foreseeable future, at least), disposal of capital assets will not attract additional taxation, regardless.
However, trusts can be used to pass property or other assets to a beneficiary at less than the market value. Furthermore, any growth in the value of trust held assets belong to the trust and not to an individual personally. Similarly, a trust can income split and benefit from the lower tax rate of a specific beneficiary.
Lastly, trusts are often used as an effective means of protection against relationship property claims, for example from your children’s partners in the event of a marital or relationship breakdown. Where assets are owned by trust or are passed to a trust upon your death, your children (or designated parties) can continue to receive the benefit of those assets without the assets becoming their personal legal property, making them immune to any relationship property claims.
Are there any disadvantages to family trusts?
First and foremost, trusts can be complicated. Expect ongoing legal and accounting costs
Secondly, the main negative to gifting an asset to trust is that you cannot retain individual control over it. Appointed trustees, who must act in accordance with the terms of the trust deed, control the trust and any assets within it. Under the new act to be introduced in 2021, a sole trustee cannot be a sole beneficiary: a law aimed at preventing misuse of trusts and money laundering.
Family trusts explained: secure specialist help and advice
Remember, the primary purpose of establishing a family trust in New Zealand is to protect assets and your legacy. When used for this purpose, the benefit is clear: you arrange the protection of assets for future generations while ensuring you retain control over them whilst still alive (as a trustee).
Note that non-resident trusts and NZ foreign trusts have different rules regarding tax than standard NZ ‘complying’ trusts, with complications such as double taxation agreements and strict requirements for trustee criteria including domesticity rules in place.
Each specific circumstance requires a forensic analysis before making a firm decision.
Agar Fenwick ave been working with clients throughout New Zealand for 40 years, delivering specialist accounting solutions for many NZ family trusts, and boast over 500 clients nationwide. Working in conjunction with lawyers to deliver the best advice for each bespoke situation, the team at Agar Fenwick have got you covered when it comes to setting up a family trust in New Zealand and ensuring it works for you and yours.