New Zealand has a love affair with family trusts.
It is estimated there are as many as 500,000 trusts in New Zealand.
Many new clients are often curious to understand if a family trust is right for them, particularly when considering protecting the ownership of assets like the family home or family farm when they are self-employed.
Family trusts became fashionable in the 1980s and 1990s, and they still are popular today. Although the protection they afford, the nature of gifting, and the level of responsibility for trustees has come into sharp focus in recent times after years of trustees failing to fully take their responsibilities to beneficiaries of the trust seriously.
Discretionary family trusts are governed by the 1956 Trustee Act and common law (case law).
A discretionary family trust is one way to protect assets when the ownership of those assets is transferred to a trust for the benefit of the beneficiaries of the trust, which can include the original owner of the asset. The trust is managed by trustees, who may include family members, a lawyer or accountant, for the beneficiaries of the trust.
Some people have been motivated in the past to set up a family trust to avoid the cost of long-term rest home care in their later years. This is a very bad reason to go to the trouble and expense of creating a family trust. There is a mistaken belief that by not owning the trust assets the settlors (people creating the family trust) are exempt from paying for rest home care. The hope is that by putting their assets into a trust they may qualify for a residential care subsidy in the event they need to go into a rest home, dementia care facility or geriatric hospital for an extended period.
In reality, this isn’t a good reason to set up a trust. Less than five percent of New Zealanders end up requiring long-term rest home care. Also, subsequent governments have eroded the protection afforded by family trusts when assessing if a person qualifies for a rest home subsidy. When being assessed for a residential care subsidy, assets gifted to a family trust may be counted (there is more detailed information on Work and Income’s website on this) – so there is little benefit to setting up a family trust if this is your only reason for doing so.
In my opinion, family trusts are only appropriate if you are trying to protect assets from creditors, which is particularly relevant to people who are self-employed. If something happens to your business – if you incur debt or go bankrupt – then a family trust ensures that the family home is protected from creditors. This is an accepted way for small business owners and self-employed individuals to limit financial risk, important for those of us with dependent children. As a single mum with a young son, I understand the vulnerability of the self-employed – and recommend self-employed individuals take legal advice and set up a family trust when starting a business. New Zealand as a nation, is full of self-employed people and SMEs, so family trusts are valuable for this group.
In the next column, I’ll look at who is involved in a family trust, and the role and responsibilities of trustees.
If you have any questions or law-related topics you would like me to tackle in future columns, please let me know.