Big IdeasIs a trust right for me?
31 October 2018
We are often asked “should I set up a family trust?”. In New Zealand, the use of a trust is a popular way to protect assets and to plan for the future but the answer to the question depends on your specific circumstances and goals.
At the time of writing, a Bill is before Parliament that proposes to update the Trustee Act. Understanding these changes along with the obligations, benefits and disadvantages of using a trust will be key to ensuring that you are set up in a way that will benefit you and those that you care about – now and in the future.
Family trusts have a valuable role to play, but they’re not suitable for everyone. It is important that you understand what you are getting into, how a trust should be administered, and that you a clear on what you seek to achieve. As a starting point, here are some of the pros and cons:
Whether you’re thinking of becoming a trustee for your own family trust or someone else’s, it’s important to know your obligations before accepting the role.
The proposed changes aim to make the law more efficient, provide better guidance for trustees, and allow greater transparency and easier dispute resolution for beneficiaries. Three points of interest are:
A common reason for trusts coming unstuck is that the trustees have been unaware or ignorant of their obligations and responsibilities. Acting as a trustee should not be taken lightly and, helpfully, the trustee’s obligations will be clearly outlined including, for example:
Knowing the terms of the trust
Acting according to the terms of the trust
Acting honestly and in good faith
Acting for the benefit of the beneficiaries or the permitted purpose of the trust
Exercising trustee powers for a proper purpose.
At the moment, when you set up a family trust, it has a perpetuity (time limit) of 80 years. After this period of time you have to wind the trust up and distribute the assets. The new legislation proposes extending this time limit to 125 years. Among other things, this extended time period may involve significant succession planning adjustments.
The Trusts Bill proposes to give most trust beneficiaries the legal right to financial reports on the state of the family trust – meaning they’ll be able to request more information including ‘who’s getting what’. Whether beneficiaries have the right to request this information under our current law is a bit of a grey area. Because this potentially opens a can of worms for trustees, this proposal has been controversial and has attracted a lot of feedback from trust advisers. We will have to wait until later in the year to see what changes (if any) are made to this proposal.
Plan ahead – It is better to have the trust before you need it.
Seek advice– Make sure you seek advice from a lawyer and from other experienced sources. Setting up a trust is a big decision, so do your homework and make sure it is the right decision.
Communicate – In this modern age, keeping in touch should be easy. Remember to keep everyone in the loop and don’t leave things to the last minute. Finding out a trustee is off the grid when you need their signature today can be an expensive and embarrassing situation.
This article offers a basic overview of trusts and their benefits and should not be considered as advice. There are good reasons why you should investigate a family trust structure and we look forward to discussing those more broadly with you.
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