Six Reasons Why a Trust Can Still Help
There was a time when coffee table talk was all about your Trust: Skinny flat white: I’ve got a Trust! Chai Latte: Oh, that sounds cool, maybe I should get one too Now conventional café wisdom has swung full circle it seems: Skinny flat white: Trusts are a waste of time. They just complicate things. Chai Latte: Oh, I know!
Really! That is total rubbish!
Despite the new Trusts Act that came in recently, and irrespective of how strong the coffee is, there are plenty of very important reasons why many people should still have a Trust. Even some of you, who have cancelled your Trust on the (dubious) advice of your well meaning coffee buddies, my need to consider if your current plans are going to achieve what you want them to. Here are six reasons why a Trust can be the right thing for you?
Creditor protection – if you are in business you inevitable face certain risks. Even if you operate through a company because chances are you have personally guaranteed the bank loan and the lease. Everything you own is on the line. Plus as a Director of a company you face personal liability if you allow the company to trade while “technically” insolvent. Don’t be flippant about this because you can be technically insolvent in the normal course of business.
Relationship property – because a Trust is a separate legal entity, Trust assets are not part of your relationship property in the event of a split. Generally.
Intergenerational assets – if there are assets, such as a beach house, or an apartment you want future generations to have the ongoing use of, a Trust can be a good option
Family protection – often people have confidence in their own kids but not necessarily who they shack up with. A Trust can provide for the kids in various ways without exposing the family fortune to the risk that your child’s choice of life partner was, let’s say, ill advised.
Flexibility – under a Will you need to provide for your children in roughly equal proportions or face the risk of a claim against the estate. Of course, your kids might not want to make a claim But their spouses might be keen. With a Trust you have a lot more discretion. Also you might want to cater for the children differently – maybe one has helped in the family business for years, one is a multimillionaire and one has gone off the rails temporarily. Do you really want to divvy everything up equally at this point?
Tax – you don’t form a Trust for tax reasons. But is is worth noting that you can distribute income to children over the age of 16, or to a partner who is at home raising the family rather than earning in the workforce. There can be a tax advantage in doing so.
When might a Trust be the wrong thing for you?
You no longer face the same risks as you used to – if you’ve sold the business for example. Maybe the Trust is no longer needed. But you still need to do some crystal ball gazing before deciding.
Simplicity – the fact of the matter is that for some people their situation does not warrant a complex arrangement. And for some others they simply should not have a Trust because nowadays there are some additional compliance matters, plus if they don’t use it properly it can come unstuck anyway. The Trust is not just a slush fund, it’s a separate legal entity.
Your family situation has changed – it may be better to “resettle” the Trust assets so that there is a separate Trust for each of the kids? Or maybe you’ve given up on the idea of ending up in a rest home.
Does it have to be a Trust, or can you deal with it some other way?
There are other tools you can use to manage your affairs and protect yourself and family members including:
Wills – this is essential no matter what. You can do good things with a Will such as leaving a new partner a life interest, with everything to your kids when he or she dies (as long as you’re not expecting that to take forever).
Contracting Out Agreements – this should also be mandatory if you are second time around (and maybe should have been first time around too). Otherwise once you’ve been with your new partner for three years you are sharing everything. Not sure how your kids from your first partner will feel about that.
Bare Trust – can sometimes be useful if, for example, parents buy a property with one of the children. The bank won’t like lending to the parents because they’re retired. They like the child’s income but the child doesn’t have enough equity on their own.
Property Ownership arrangements – ownership as tenants in common may be the way to go if each of the partners have children of their own (who they want to look after) but want to live together.
Companies – believe it or not a company can be suitable if the intention is that each of the owners should have a fixed percentage interest in the property (as opposed to a Trust which provides flexibility).
So, bottom line, Trust are still an excellent tool. There are several tools, and often they work best in tandem. It just depends on your own circumstances because everyone’s situation is different. Even around the coffee table. Call/text Russell on 0274876808 or russell@queenstownlaw.co.nz
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