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  • winding up family trust

    Hi, my Mother has the family house in a family trust with herself and 3 children as beneficiaries. The house is mortgage free and all gifting is complete. She will be moving in with me and we intend to sell the property. I would like to know whether the trust should be wound up and then the house sold or do you just sell the house in the trust? Also then can the funds be split between the 4 beneficiaries or are there taxes that will apply in this situation? Our current lawyer doesn't have enough experience with family trusts and we will have to find one, so any recommendations for family trust lawyer in Auckland would also be appreciated. Thanks for any advice.

  • #2
    Hi Alaska,

    Is it really in your Mothers best interests to take the money out of the Trust?

    Normally if the property is sold, the proceeds would stay in the Trust to protect the cash. Then if the Trustees decide you would loan the money to the 3 children beneficiaries. This way if the Trust needs the money back, it can demand the loans are repaid.

    Or if one of the children splits up with their partner, the loan has to go back to the Trust first, so stops a partner taking half of the Trust money.

    I presume your Mother is the primary beneficiary of the Trust, therefore why take out money for the children anyway? Wouldn't your mother be best to keep this for retirement? I suppose what I'm trying to say, is why do you want to do it this way?

    Ross
    Book a free chat here
    Ross Barnett - Property Accountant

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    • #3
      Ross' answer above is excellent, lots of things for you to think about.

      Just quickly to answer your actual tactical questions. Should the trustees see it as the best course of action, and such an action is allowed by the trust deed, the house can be sold by the trust and the money distributed. If the house has been a rental in the past there could be tax to pay on depreciation recovery, or if the house has been owned for less than two years it could be caught under the bright line test. But otherwise there should be no tax implications here - any distributions to the beneficiaries would be of capital nature and no tax need be paid.
      AAT Accounting Services - Property Specialist - [email protected]
      Fixed price fees and quick knowledgeable service for property investors & traders!

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      • #4
        Thanks Ross and Anthony. Hadn't thought of keeping the proceeds in the trust, so this could be an option - although I guess the on going costs of the trust would be a negative as opposed to investing the money.

        The main idea is that there is a lot of money in the house which has been held for 40 years and this would provide the cash for her retirement/rest home, and also allow her to distribute some to her adult children as she would like to do before she passes. thanks again.

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        • #5
          Nothing to stop the trust investing the money. Nice well diversified high-dividend share portfolio and some bonds or or something, and sell it down slowly over time as required. The trust would need to register for an IRD number and pay tax if it doesn't already, but the protection benefits of the trust are probably worth keeping.
          AAT Accounting Services - Property Specialist - [email protected]
          Fixed price fees and quick knowledgeable service for property investors & traders!

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          • #6
            Originally posted by alaska View Post
            Although I guess the on going costs of the Trust would be a negative as opposed to investing the money.
            Originally posted by Anthonyacat View Post
            The protection benefits of the trust are probably worth keeping.
            Agree with Anthony. Further, Trust admin can be zero, if you (or another family member) does the administration. If you know what you're doing, it's not particularly onerous, at all.

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            • #7
              If your mother was to go in to a home and the money is fully gifted to the trust does that mean she or the trust doesn't have to pay rest home fees? Just interested in how it works.

              LAJ

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              • #8
                They go back 10 years. Happened to us with my mum. Their position is the person has deliberately divested themselves of an asset that they should have kept to fund their care. So unless gifting completed more than 10 years ago they will disallow it. We were 9 years and 10 months so she got no assistance.

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                • #9
                  Originally posted by Bobsyouruncle View Post
                  They go back 10 years. Happened to us with my mum. Their position is the person has deliberately divested themselves of an asset that they should have kept to fund their care. So unless gifting completed more than 10 years ago they will disallow it. We were 9 years and 10 months so she got no assistance.
                  They can go back as far as they like! But they're stricter in the final few years - I thought 5, but perhaps it's 10. They still allow a more limited amount of gifting, I think $5k per year. But as most people's gifting programmes are $27k, that doesn't work so well.

                  But the fact is, if the person has the assets, should they really be eligible for the subsidy? Can be a tough argument.
                  AAT Accounting Services - Property Specialist - [email protected]
                  Fixed price fees and quick knowledgeable service for property investors & traders!

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                  • #10
                    Yep I can see both sides of the debate.

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                    • #11
                      Have sent you a PM recommending a lawyer.

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