Is your family trust still relevant?

Chris Guillemot, accounting and business advisery partner at Findex Hawke’s Bay.

Opinion

With the signalled change in the trustees tax rate to 39 per cent, along with the recent changes to the Trustee Act that confirm the duties and responsibilities of trustees, it is very timely to consider why you have a trust and if the need or purpose is still valid.

Managing a trust requires a certain level of compliance as well as a commitment to being an active trustee. You cannot be passive and must be engaged in running the trust. If the trust has run its course as discussed below, then simplifying the way business and personal affairs are managed can also be a compelling reason for winding up a trust.

New Zealand has a very high number of trusts compared to other nations, and those who do not often understand the nature or purpose of them cast suspicion that they must be there for some nefarious purpose.

While some may operate in that way, the reasons for trusts are still as valid today as they were 40 years ago.

Some (but not all) of the common purposes of establishing a trust are:

• Protection of assets from business risks such as legal action or financial failure;
• Use as a vehicle for the family inheritance;
• Holding assets until certain beneficiaries come of age;
• Keeping property separate from any relationship property.

Another perceived benefit of establishing a trust is potentially being able to qualify for residential home subsidies, as holding no assets as an individual could mean the Government would subsidise.

While that may be the case in some situations, the Ministry of Social Development undertakes rigorous reviews where trusts are involved and looks back over many years. If transactions appear out of the ordinary or are not documented properly, there is a high chance that a trust may be looked through to determine the overall asset position.

As you move through your business life cycle, the original reasons for establishing your trust may no longer be relevant, so a review of the purpose from time to time is good practice.

Do you still have the business risk that the trust was established to protect from? Has the business now been sold, and that purpose no longer exists? Has the family succession been dealt with? Have other circumstances changed that mean the trust is adding little value?

If any of these situations may apply to you, then it would be timely to discuss with your advisers the relevance and purpose of your trust.