Do I need a Family Trust?

[mamaJ]

Hello,
My husband and I want to develop our family property (1/4 acre, Terrace House/Apartment zone, in Auckland).

We will be applying for building finance soon, and I'm wondering what ownership structure would be best for us.

We have a large family, with adult children living at home. Some of them work fulltime, some work/study part time.

How can we structure the property ownership, so that the children can contribute as they are able?

Any suggestions/advice very welcome! Especially if you can recommend a local professional for advice.

Jillian

[Nick G]

Hi Jillian

Happy to introduce my property accountant. Email nick(at)ifindproperty(dot)co(dot)nz and I'll forward you on.

Nick

[Hound]

Think long and hard before putting other people in control of your assets. Even if they are family. More people involved, greater likelihood of issues happening over time.

[mamaJ]

Hello,
My husband and I want to develop our family property (1/4 acre, Terrace House/Apartment zone, in Auckland).

We will be applying for building finance soon, and I'm wondering what ownership structure would be best for us.

We have a large family, with adult children living at home. Some of them work fulltime, some work/study part time.

How can we structure the property ownership, so that the children can contribute as they are able?

Any suggestions/advice very welcome! Especially if you can recommend a local professional for advice.

Jillian

Thanks, have sent you an email.

[mamaJ]

Think long and hard before putting other people in control of your assets. Even if they are family. More people involved, greater likelihood of issues happening over time.

I'll keep that in mind, thanks.

[Rosco]

Hi Mamaj, this may be of interest to you.


DO YOU NEED A TRUST?

What Do You Want a Trust For?
Relationship Property? A Trust isn't bullet proof and you would need to get some expert legal advice around relationship property, and most likely have a relationship property agreement too.

To save tax? For most property investors, a Trust will be less tax effective, as any losses stay within the Trust and cannot offset personal income (so no tax refunds). For business and property owners that are making a real profit after a fair owner wage, a Trust is a great entity to spread income to other beneficiaries and minimise tax.


The main reason is asset protection.





The first part to consider is what are you protecting your assets from? What is your or your partner’s risk of being sued? I look at:

• Director risk: If you are a director in a company (such as a finance company, for example), then you have director responsibilities and risk. In a worst case scenario, you could be sued as a director.
• Trustee risk: Are you a Trustee in another person's Trust. If so, you could be liable as Trustee.
• Have you given personal guarantees?
• What is your potential risk to Health and Safety? If you are in the construction industry, this could be quite high! And it's not just owners who can be liable. Any employee could be held to be liable.

You need to consider these items and any others that might affect your risk or your chance of being liable.





If you have high risk, then a Trust would help to separate your assets from your risk. Generally, this would mean putting your personal home in a Trust to start with. For investment properties and businesses, you need to consider the structure carefully and there can be lots of catches or costs to restructure.

Setting up a Trust is only part of the process and you need to be aware of the ongoing administration and compliance requirements:

• New Trust laws (due to come in late 2017 or early 201 setting higher obligations on Trustees.
• Normally you would have an independent Trustee. A charge might be $75 + GST per year for this service.
• For signing of documents as Trustee (e.g. Finance documents), a charge might be $75 + GST for this.
• If we are a Trustee, we require a compulsory annual meeting, normally done by phone. A charge might be $100 + GST for this phone meeting.
• Gifting. A normal charge might be $255 + GST.
• Annual Financial Statements, Minutes and tax returns for the Trust. This can vary widely depending on the work required, but is likely to cost at least $500 + GST per year.
• Trust Minutes and discussion for major transactions.
• Separate Trust bank account and keep Trust affairs separate to personal.

Setting up a Trust is done through a lawyer and normally costs $2,500 to $5,000 depending on what is included and what property needs to be transferred into the Trust.

In my opinion, when should you be looking seriously at a Trust?

• High risk as above
• Profitable business making $50,000 or more after fair owner wages
• Profitable rentals
• As your overall equity builds up to $1million plus, it is worth considering Trusts as you have more to lose.

I haven't put these items here as a 'sales pitch', but I hope they give you a realistic idea of the ongoing costs for a Trust and that all the little things can add up!

Ross

[mamaJ]

Hi Ross, thanks for that.

I think we do need to consider a trust, since a couple of those reasons apply to us.

Jillian

[hawkeye]

My Mum left part of her estate in trust to grandchildren who live in other countries for when they turn 20 with me as trustee along with a lawyer who lives in a different city. It has been a very frustration process, expensive and slow to move money to change assets, and I wouldn’t wish that on anyone else! Every time I wanted to anything including paying the children their shares he had to sign off everything which involved emails back and forth each one costing the kids some of their money. Eventually I just left money in a on call account as it was a better return than investments with higher returns that involved more active management after paying legal fees.

LAJ

[mamaJ]

Hi LAJ, thanks for your contribution

It has been suggested to us that we could form a company, owned by a family trust . . . so we'll look into that as an option.

Still just getting started on the whole concept, but everyone's advice is very helpful.

Jillian

[Perry]

Trusts Are Not Necessarily Complicated

It has been suggested to us that we could form a company, owned by a family trust . . . so we'll look into that as an option. Still just getting started on the whole concept, but everyone's advice is very helpful.

While there's a lot to consider, none of it is (or needs to be) overly complicated.

From earlier comments, you will have gained a couple of indicators.
1) If you use an accountant or lawyer as a Trustee, that has costs in both inconvenience and money.
2) It is imprudent to have children (or their spouses) as Trustees.

When you mention a company, you appear to have been either misinformed or perhaps mis-understood. Or have I? It is not uncommon to form a Trust that has a corporate Trustee company as its sole Trustee. The Directors of that company being (say) the 3 people who would have otherwise been Trustees of the Trust. Changing Directors is far easier and less expensive than changing Trustees. But having a Trustee Company will have some costs. One being filing an annual return with the companies office and paying the $45 filing fee. That's a DIY job - no professional fees required.

Your Trustees or company Directors would usually start out being you, hubby, and one truly independent person. As in, independent of your children, or their spouses. It could be a capable, long time friend of you or your husband, one who is at least your age or younger and someone who knows all your family well, including your children and the family dynamics / foibles.

There is a necessary element of trust in Trusteeship. When considering the Trust Deed content, ponder the opening of the necessary Trust bank account. Specifically - one signature required, or two?

Do keep records. As a minimum, an annual meeting of Trustees. Nothing formal required: you can all go out for a dinner meeting. But your Trust Minutes do need to record certain things. Who will maintain and have possession of the Trust's records?

Make sure your Trust Deed / Company Articles detail who can appoint additional and/or replacement Trustees/Directors, including allowing appointment by Will (or transfer of company shares) by you and hubby. Someone a generation younger, too! (That matter can be a little complicated and you may need advice on that. I don't use a corporate Trustee and there may be implications to consider in case there is ever a matrimonial break-up.)

Appreciate the difference between a Settlor (original and subsequent), beneficiaries, (discretionary and final), etc., and the implications for the future, if (for instance) the Trust Deed requires the Settlor's assent for certain things. Keep in mind your relationship with grand children, when drafting the Trust Deed.

There are a couple of books around which may help you. I think one's by Martin Hawes. Another is NZ Master Trusts Guide - John Brown. That one is quite a detailed tome (over 220pp) and you may find Martin's less forbidding.

I'm a lay person, but I have (successfully) formed a Trust for my parents, my sister, my son and my late wife and me. But I am very fortunate that I have as a lifelong friend, a retired accountant who is well versed in Trusts, has a raft of excellent templates, and I "hang on his every word" as the saying goes. I've learnt a lot and I'm still doing so.

So - though I have covered only a few aspects - you can see that there are quite a lot of things to ponder. But don't be put off: they do not necessarily mandate a great deal of legal complexity or mind-numbing legal jargon comprehension.

[mamaJ]

Hello Perry,

Thank you for your comprehensive and useful reply.

I'll definitely get those books and do some more research.

I realise that before we get any professional advise, we need to do lots of thinking about what exactly we are trying to achieve, and the possible solutions.

As a newbie, its hard to know how good people's advice is "you don't know what you don't know!"

Thank you for your encouragement, and practical advice.

Jillian