Estate duty was zero rated in 1992 and then abolished in 1999. However, up until then trusts were a proven method of protection against estate duties.
So trusts still have their place, and if you have substantial assets, you should look into trusts seriously.
However, when trusts are set up for the wrong or questionable reasons, they can be simply a waste of money.
Up until 2008 you had to pay your own rest home fees if you needed fulltime care, and had to keep paying them until you were down to your last $15,000. This disinherited quite a lot of children and was seen as very unfair, so a lot of trusts were formed in the 1990’s for this reason. Then the last Labour government changed the rules and now you can keep a lot more of your money, even if you need care e.g. a widow or single person in care can currently keep $213,297.
A lot of people had set up a family trust for this single reason and incurred considerable costs of $2,000 to $5,000 for little or no benefit. The moral of the story is you should almost always have 3 good reasons to form a trust.
Trusts sometimes have tax advantages, but beware of this reason. Tax rules can be changed (like rest home fees) by any government, at any time, and negate all the benefits you were pursuing.
Check out this list and see if you can find 3 good reasons in your own case:
Provision for someone with special needs (a sick or disabled child).
Protection against the re-introduction of estate (death) duties.
Preventing wayward children from wasting their inheritances.
Protection of your childrens’ inheritances if their marriage fails.
Timing of the distribution of your estate to your children after your death.
Succession planning – keeping a farm or business in the family.
Continued ownership of “core” family assets.
Protecting assets from creditors – commonly done by many professionals.
Protecting assets in the event of your 2nd marriage (or 3rd or 4th or 5th).
Protection from will disputes.
Weaker and probably not good enough reasons
Possible access to government subsidies if and when you need extensive care.
Protection from increased asset or means testing in the future.
NB: Perhaps the one, and maybe the only, exception (to the 3 good reasons rule of thumb) is provision for someone with special needs (a sick or disabled child).
Trusts are not free and typical costs are accountants and lawyers consultations, drawing up the trust deed, and conveyancing of property ownership to the trust. Up front costs can quickly reach $3,000 and can be much more.
On-going costs can include the need for an extra tax return too.
You Might Need an Independent Trustee
General opinion is that a trust must be a separate entity and not just be run by a husband and wife. Otherwise, future IRD or court judgements could rule that it is just husband and wife, in which case the protection of the trust may be set aside.
Therefore, it is generally agreed (but not by everyone) that a trust should have an independent trustee who cannot receive money from the trust (not a beneficiary). However, this is not a job a lot of people want, due to the liabilities that trustees can be responsible (and sued) for.
Indeed, if you are asked to be a trustee by your brother/sister/friend, decline, or at least hold off until you get advice.
Always make sure you can get a good independent trustee before you start. Some solicitors and accountants have set up trustee companies for this purpose, which seems a reasonable idea.
There are many “schools-of-thought” on family trusts and sometimes it seems that nearly every trust company, accountant and solicitor has a differing opinion. In the end you may have to use common sense and make the decision yourself, perhaps using the 3 good reasons test.
And of course it needs to work for you on a cost versus benefit basis. Remember the KISS principle too and “keep it simple”.
Please see our next article - how well drawn up wills might partially do the job a trust might have done.