KEY POINTS:
People who rush into setting up a family trust may find themselves "imprisoned" by their creations, rather than having their assets protected, say experts.
Nicola Peart, Professor of Law at the University of Otago says people don't put enough thought into setting up their trusts.
"I think the
problem is so many people have no idea what they are doing. With a will they are not around to see the disaster. With the trust they have to face the consequences.
"People just think they need one. People don't seem to get what a trust means. They say 'we have got a trust but my house is still mine'. I still have a lot of concern about that."
It is not surprising family trusts are taking the place of wills, as wills alone are seen by some in the legal community as "a bit of a joke" these days.
As Peart says: "The will is a provisional proposal that may or may not be implemented."
Family trusts used to be the domain of the wealthy but people of all incomes now have them.
Bill Patterson, a trust lawyer from Patterson Hopkins, says the wealthy had trusts because of the 60 per cent death duty. The middle class adopted them to take advantage of tax savings.
Nowadays, says Patterson, trusts are almost universally about protecting individuals, the kids and a lot of awareness about the Property Relationship Act (PRA).
The total number of family trusts is not known because only the tax active have to register with Inland Revenue which has between 200,000 and 300,000 on its books.
Kevin Peacock, manager of private financial services at Guardian Trust in Remuera, says setting up a family trust is more on people's radar now. "There's a move toward protecting yourself for the future, it's more proactive."
The growing number of "blended families" has driven the demand for family trusts, as people seek to provide for their children from first or subsequent marriages.
There was a lot of uncertainty following the PRA, and a lack of case law. "People are wanting to take control over these uncertain things.'
Wealth can have little to do with it.
"We had two cases of couples - one with a lot of money who didn't seem to be interested in protecting it, while the other had a reasonably sized property [and a reasonably sized mortgage]. They didn't have the cash to pay for the trust, they put it on credit card," says Peacock.
Organising assets into a trust between relationships is strongly advised. Peacock remembers a widow in her 50s who was urged by her daughter to think about a trust for the assets from her first marriage. Just 18 months later when she remarried she avoided the difficult discussion with her new partner about a pre-nuptial agreement.
But growing numbers of people who rushed into setting up a trust have found they can't change with evolving family life.
"You do have to pay attention to the ongoing management to make sure that you don't end up with a nasty surprise. You have to do things in a certain way to make sure the trust is valid," says Peacock.
The "McDonaldisation" of family trusts is causing problems already.
Peart was called in to sort out a mess where a husband and wife had set up a family trust for their family home. The kids were beneficiaries but the couple had not bothered to make themselves trustees. When their marriage broke up and they wanted to divide the property, they were at the mercy of their children about taking assets out of the trust.
"The trust was the couple's only asset. Neither had a clue what they had done," says Peart. Her advice was "good luck!"
Many people are not doing their research, she says.
Guardian Trust conducted a small survey and found that three-quarters of respondents took a year to decide on the type of trust they wanted, and half of them took two years. But many others are doing it in a rush with their family accountant or - much worse - on the internet.
Peacock says everyone needs to know that a trust fund comes with various duties.
As a trust costs $2000 plus to draw up, the business is attracting sharks.
Says Patterson: "If you walk along the street, you'll see chalkboards for drawing up trusts for just $500.
"There's a lot of skill involved. You need a person who can analyse a range of potential clauses, it's not just a case of pushing a button. A lot of people talk about them but there's not many who feel really confident about them," he says.
Parallel trusts can work well for blended families, says Patterson. Each partner comes to the marriage with a trust containing assets from the previous relationship. If they buy a new property they keep things separate, owning half the property in their respective trusts, with the assets from the former relationship.
"The parallel trust is much more flexible if they break up," he says.
Barrister John Brown, and author of The New Zealand Master Trusts Guide says one idea for absent parents wanting to make sure their first family is taken care of, is to take out a trust under life insurance legislation.
The policy should come with instructions to leave the life insurance money to the first family. Meanwhile, the second family benefit from the remaining estate amassed during the subsequent relationship. It is quite a fair way of doing things, says Brown.
Contesting a trust - and there are cases currently in court - is an extremely expensive process, the experts warn.
"You don't run one of these difficult trust cases without spending $500,000," says Patterson.
Peacock: "When structuring the trust you try to anticipate what's around the corner, but you can't future-proof everything."
Financial adviser Susanna Stuart is happy to recommend trusts but realises there are traps and is keeping an eye on court cases.
If well done, trusts can be used to get rid of tension between the former family and the current one; done badly the reverse can be true.
Jeff Matthews, senior financial adviser at Spicers Wealth Management, is a trustee of a number of family trusts. He says you should choose your independent trustee carefully.
One of the children of a trust recently approached him wanting $150,000 for a renovation.
"I said no, go and get a loan like everybody else. If I say 'yes' everyone else will want one."
