Property problems: A trust can provide protection for assets

Q: I've always wanted to set up a trust but really know little about what's involved. Can you give me a very basic run-down?

A: This article gives you a basic understanding of trusts and how they can help you. Next week we will explain how you can transfer assets to a trust.

Q: What is a trust?

A: A trust comes into existence when individuals wishing to create the trust (called the settlors) transfer ownership of assets to the trustees to be held on trust for certain persons (called the beneficiaries). The trustees own and manage those assets for the benefit of the beneficiaries of the trust according to the terms of the trust deed.

Beneficiaries can be you, your partner, your children, grandchildren and any other persons or organisations you nominate.

When a trust is wound up, its assets will be distributed according to the terms in the trust deed.

Q: What are the benefits of a family trust?

A: A family trust is set up primarily to benefit you and members of your family. It is often considered to be a better independent owner of assets than, for example, a family company.

The trust, its terms and operation are confidential to you and the trustees. In a company the identity of the shareholders is a matter of public record and changing shareholders requires a formal share transfer which has to be registered.

Trusts are flexible. You can set up your trust in such a way as to give you the flexibility to change the beneficiaries at any time. You may:

1. Nominate additional beneficiaries;

2. Appoint final beneficiaries (who will share in the trust's assets when it is wound up) during your lifetime or by the last will of the survivor of both of you; and

3. Specifically state who cannot be a beneficiary under your trust.

Q: How can a trust be used to protect your assets?

A: If you transfer your assets to a trust, they are no longer your assets. However, it is possible to get the benefit of these assets as a beneficiary of the trust. Once the time limits (which we will discuss in Part 2 ) have run out, these assets will be protected, against:

1. Potential business claims/director's liability claims against you; and

2. Possible seizure of assets by your creditors;

There are also advantages in some situations involving matrimonial property disputes your children may have.

The advantages of trusts over wills are:

1. The trust may continue after your death;

2. Distributions may not be contested in the same way that gifts under a will may be challenged under the Family Protection Act 1955; and

3. Trusts can be a useful way of providing for future generations.

You will, however, still need a will.

Q: Are there any tax benefits in setting up a trust?

A: At present a trust is taxed at the rate of 33 per cent on its income. If the trustees distribute income to the beneficiaries, the Inland Revenue Department will generally tax that income as the beneficiaries' income at the rate applying to each of them, provided that the beneficiaries are 16 years of age or older. Income distributed to a beneficiary who is under 16 years will generally be taxed as trustee income (ie, at 33 per cent ) even if the beneficiary is on a lower marginal tax rate.