Settlor is the thrust of a trust

This is the second in a fortnightly series of articles in which we will try to explain family trusts and trading trusts.

Our first article described the history of trusts and gave a brief overview of how they are used in New Zealand.

Here, we describe the various parties to a trust and, in particular, the responsibilities of the settlor, trustees and beneficiaries of a family trust:

The Settlor

This is the person who sets up the family trust.

It is common for a husband and wife to both be settlors of a new family trust.

The settlor will typically be the person who owns the property that will be transferred into the trust.

It is the settlor who sets out in the trust deed who will be responsible for the assets of the trust (trustees) and who will be eligible to receive any benefit from the trust (beneficiaries).

Settlors will usually (but not always) appoint themselves as a trustee and also as a beneficiary of the family trust.

A settlor must have a genuine reason for setting up a family trust. He or she must sign a carefully written trust deed (usually drawn up with the help of a trust expert) and must appoint the trustee(s).

A settlor cannot be the sole beneficiary of the family trust. If he or she was, then a court would surely deem that no actual trust exists.

Trustees

These are the people who own and control the assets that are placed in the family trust.

As trustees of the family trust, they now have legal ownership of the property, but they must act in the interests of the beneficiaries.

There is no specified number of trustees that a trust can or cannot have.

An independent trustee may be someone known to the settlor, or he or she may be a lawyer, accountant or someone who specialises in the area of trusts. It is important that an independent trustee has a good general knowledge of trusts as well as specific knowledge of the goals and desires of the settlor.

All trustees must be consulted before any decisions are made regarding the trust or its assets.

Therefore, independent trustees must be at least as available as the other trustees. Trustees are obliged to sign minutes outlining trust decisions.

There must be no suspicion of absent trustees "rubber-stamping" decisions once they have been made. This will place the credibility of the trust in doubt.

Beneficiaries

The beneficiaries are the people who the settlor(s) wish to benefit from assets in the trust. The beneficiaries specifically named in the trust deed are deemed to be the "primary beneficiaries".

Primary beneficiaries should not include any company, but tax-exempt charities are allowed to be primary beneficiaries. At the establishment of the trust, the settlor(s) elect who they wish to benefit from the trust. Beneficiaries named at this point are usually the settlors, their spouse or partner and close blood relatives. In other words, people for whom the settlor has "natural love and affection".

This term is used in trust and IRD laws to identify those people who can be beneficiaries of a trust. The trust deed may allow for more beneficiaries to be added later.

You may wish to add a particular individual or you may provide that new beneficiaries be added when they come into existence.

It may be that when a new grandchild is born the trust deed provides for the grandchild to become a beneficiary automatically.

All benefits paid to beneficiaries are usually made at the absolute discretion of the trustees.

* Glenn Smith is the Homebizbuzz company formations expert.