Trusts are building blocks for Asset Planning...
...but only if you know how they work
New Zealand families have created more trust deeds per capita than most countries, but do the people using them really understand what a Family Trust is and what it can do? If you don't, your trust may not be as effective as you think.
This article will hopefully help to shed some light for you.
TRUSTS IN PLAIN ENGLISH
What does a family trust do?
The idea with a family trust is to protect the ownership of your assets. Here’s how trusts work: you transfer the legal ownership of your assets to the trustees while continuing to use and enjoy them as long as the trust deed permits. For example, if your family home is in a trust, you no longer personally own the house – but you can still live in it if that’s what the trust deed allows and the trustees agree.
Benefits of a family trust
Family trusts are designed to protect your assets and benefit members of your family beyond your lifetime. When your assets are in a family trust you no longer have legal ownership of them – the assets are owned by the trustees, for the benefit of your family members.
People usually set up a family trust to get some benefit from no longer personally owning an asset. A family trust may be useful to:
A settlor: The person or company who creates the trust.
Appointor: The Appointor is the person who can appoint or remove Trustees. This is usually the settlor but it can be someone nominated by the settlor. It is important that the Appointor always has someone nominated to replace themselves if they can no longer do the job.
Trustees: The people who manage the trust. The settlor can also be a trustee. It’s also a good idea to appoint an independent trustee who is not a beneficiary. Professionals like lawyers and accountants (or companies they have set up) often act as independent trustees. Your Trustees need to be people you trust to administer the Trust properly and fairly.
Beneficiaries: The people who benefit from the trust, for example members of immediate family.
Guardian: This person has certain powers to keep an eye on a trust’s operation. Where a trust deed provides for a guardian, it will usually require that the Trustees obtain consent from the Guardian before major decisions are made. Often the Appointor and the Guardian may be one and the same person but there are sometimes very good reasons to make those people different.
Special Trust Advisor (previously called an Advisory Trustee): This person advises the Trustees but is not a Trustee and cannot compel the Trustee.Most Family Trusts will not require a Special Trust Advisor, but with an increasing tendency to outsource financial advice there is likely to be an increase in the number of trust deeds involving one.
How long does a Family Trust last?
A trust doesn’t usually end with the settlor’s death – that is one of the main reasons that trusts are created. A trust usually lasts for a maximum of 80 years from inception but as of January 2021 that can be extended to 125 years.
How family trusts work
A legal document called a ‘trust deed’ will formally set up the family trust. It will name the trustees, list the beneficiaries, and state various rules for the administration and management of the trust. The trust deed needs to be very carefully written. The “one size fits all” trust deed will fit as well as badly as most items with that label.
After you have your trust deed prepared, you need to decide what things you own will go into the family trust, and what their value is. In many cases this will be the family home, but other things of value like cash, bank deposits, shares, artwork etc can also be included in the trust.
Once the family trust is formed assets can be sold into the trust, at market value. This is where it can get a little tricky. Although the trust wants to buy, say, your house (and you want to sell it to the trust) the trust may have no money to buy it. How then does the family trust pay for the house?
The answer to this is that you lend the family trust the money. Initially this is a ‘paper’ transaction – you sell the house to the trust, and the trust owes you a debt. However, the debt that the trust owes you is still counted as a personal asset. So you will need to get rid of the debt so you can achieve your aim of owning less in your name.
The way you do this is through ‘gifting’.
Most people who form trusts ‘gift’ away the debt that the trust owes them. IN In New Zealand, before October 2011 there was a limit of $27,000 that anyone could gift in one year without paying a tax called ‘gift duty’ to Inland Revenue. However, gift duty has been abolished and there is no limit to how much you can gift in one year. This means that where previously it would have taken 22 years to gift the value of a house worth $600,000 to a family trust without paying gift duty, you can now gift the whole amount of the debt straight away.
However, the decision of what to gift and when should be considered carefully after receiving legal and financial advice.
Note that gifts are still included in the assessment for a Residential Care Subsidy.
Family trusts can be complex and time consuming to administer. It costs money to set them up and there are generally ongoing (at least, annual) legal and accounting fees.
If a trust is not set up or managed well, there can be considerable inconvenience and cost.
There’s the risk of having the trust declared a ‘sham’, which would mean that the assets are not really the trustees’ but are in fact still yours. If the trust is declared a sham you may lose all of the advantages that you were hoping to gain from it, and the trustees may be penalised as well.
Once you put your assets into a trust, you no longer personally own or control them. Instead, ownership passes to the appointed trustees, who must act under the terms of the trust deed in the best interests of the beneficiaries.
There have been cases of family members suing other family members for a breach of the trust’s provisions. The courts treat claims of this sort quite seriously and they will normally be expensive to resolve.
Forming a trust is a big decision. When going down this route, make sure that it is established properly, for the right reasons, and managed well. Keeping clear records of everything that affects the trust is very important.
Trusts are complex. Legal advice is essential. Accounting advice is also recommended. This article talks about Trusts in New Zealand and there can be significant differences in the way trusts can operate from country to country.
This article is for information only and should not be relied on as legal advice.
This Part 3 of my 3 part series on Enduring Powers of Attorney, explores matters to consider in Preparing an Enduring Power of Attorney (Care and Welfare) (“EPA Care and Welfare”).
You don’t need to have all your answers lined up before you get advice on an EPA Care and Welfare but it certainly helps to process the questions in your mind. The following list includes 10 key things to think about:
1. Do you need to cancel any previous EPA Care and Welfare appointment?
If you have prepared an EPA Care and Welfare before, you may need to cancel the appointment. If so, the attorney/s named in the previous power of attorney need to be formally notified in writing by you, your lawyer or your new attorney/s.
2. Who would you like to be named as your attorney/s – will they agree?
You can only name one attorney to act at any one time in relation to care and welfare matters.
The person you appoint should be over 18 years of age, competent and trustworthy. You should talk with that person or people about the role you are asking them to adopt and your expectations. You will need their full name, address and contact details to complete your instructions.
3. Do you want to name a successor attorney/s (in case the first named attorney is unable to continue in that role) – will they agree?
I recommend you do nominate a successor attorney if possible as it means the document will survive should there be any reason why your attorney is unable to act (and therefore be more cost effective).
4. When do you want your successor attorney to act?
When making an Enduring Power of Attorney you must also determine the circumstances under which your enduring and substitute enduring attorneys will act. For example, you might direct that your enduring attorney act only when they are in New Zealand and that you would like your substitute to act when your enduring attorney is out of the country.
5. Should the EPA Care and Welfare apply to all your Care and Welfare decisions or only to some of your Care and Welfare decisions?
In most cases, I would recommend broad powers with the inclusion of conditions only(rather than limitations on powers) if there are concerns about the way specific Care and Welfare matters are to be dealt with.
6. Do you want to impose conditions on any of those powers?
You might for example want to make it a condition that you need to be placed in care that there are certain things you would like taken into account such as if animals are allowed.
7. Who should your attorney consult with and what should they consult about?
The requirement of consultation is a requirement that takes effect before action is undertaken. Examples of persons with whom you may wish your attorney to consult are numerous but obvious ones might include your Enduring Power of Attorney (Property) or lawyer. You will need to provide your adviser with full names, addresses and contact details if you wish to include people to consult.
8. Who should your attorney give information to and what information should they give?
The requirement to provide information takes effect at any time but usually after an action is undertaken. This might involve an attorney providing information to your children or step children for example. By including a provision to disclose information you can help to ensure that your care and welfare matters when in the hands of an attorney are more open to disclosure. You will need to provide your adviser with full names, addresses and contact details if you wish to include people to inform.
9. Should the attorney be entitled to profit from acting as attorney e.g. should attorneys be allowed to charge for their time?
All professional attorneys are entitled to charge fees. This can prove costly for your estate but may be necessary. You may also wish to reimburse an Attorney, professional or otherwise for expenses they incur in helping you.
10. What other terms and conditions would you like to impose?
There are some things you can do with an EPA Care and Welfare and some that you can’t. Your legal adviser will be able to take you through your options.
Be wary of one size fits all EPA Care and Welfare documents. They are like one size fits all Wills. Often ill-fitting and some times not even valid.
Preparing a sound EPA Care and Welfare takes time and consideration and shouldn’t be left until you are in a hurry to get documents done. Make some notes based on the matters raised above, before you go to meet your adviser and you will be well prepared.
There’s been a rise in the number of reported cases of people contesting wills. This has led some, incorrectly, to suggest that there’s no point in making a will. Rather than not making a will at all, and leaving the fate of your estate to very rigid rules laid down by statute, below are 11 practical steps you can take to help to protect your Will from being contested.
1. Meet the formal requirements for a will.
When writing your Will make sure you comply with the formalities set out in section 11 of the Wills Act 2007. Apart from minor exceptions, for a will to be valid it must meet the following criteria:
2. Understand the effect of the Property (Relationships) Act 1976.
The Property (Relationships) Act 1976 provides for your surviving spouse, civil union partner or de facto partner to choose whether to apply for a division of relationship property under that Act or to take what is left to them under your will, or, where there is no will, under the laws of intestacy. In deciding what to gift your spouse or partner under your Will you should take this into account. You will need independent legal advice if you aim to gift less than half of your estate to your spouse or partner.
3. Protect your estate from claims under the Family Protection Act.
IFor a person to bring a claim under the Family Protection Act (1955) they must firstly, be eligible to do so and secondly, demonstrate that the way in which a person’s estate has been disposed of fails to make reasonable financial provision for them. The court can take many factors into account, including a person’s financial resources, the size of the estate and any other relevant factor.
As such, if you are considering excluding or limiting the provision for any one of the following :
Alternatively it may be worth considering leaving a smaller gift (taking into account the potential costs of a claim and prospects of success) perhaps with a clause to say that if that person challenges your will then they forego their gift. While this in itself is unlikely to prevent a claim, it can discourage a person to bring a claim.
4. Take care to properly document promises made by you.
A person can make a claim against your Will under the Law Reform (Testamentary Promises) Act 1949 if you have promised to leave that person something in your will in return for services rendered or work done, and you have not kept that promise. For example, the person may have taken care of you when you were ill or looked after your property, and in return you may have promised to provide for the person in your will.
It may not be necessary to prove that a promise was made in writing. The court may be prepared to infer from the surrounding circumstances that there was a promise. If the court finds that such a promise was made then it can award the claimant payment out of your estate which it decides is reasonable, considering all the circumstances of the case. Documenting your promises will reduce the risk of this happening. Putting legal agreements including promises into writing is a really important thing to do anyway.
5. Ask a medical practitioner to provide a report about your “testamentary capacity”
One of the main grounds upon which wills are challenged is on the basis that a person lacked the necessary mental capacity to give instructions for and sign their will.
If you suspect there will be questions over your mental capacity, if you have had a diagnosis that could affect your mental capacity in the future or if you are elderly, ask a GP or suitably qualified medical practitioner to provide a report or letter confirming that you have testamentary capacity.
Testamentary capacity is a legal concept. Given the specific nature, it is best to have a lawyer request a report on your behalf to ensure that the medical practitioner knows precisely what they need to determine. The letter from your lawyer and the report from your medical practitioner would then be stored with your Will.
6. Store your will in a safe place.
You don't need to leave your Will with your lawyer, just make sure it is safe, and also make sure your Executor knows where to find it. Many requests to prove a Will in court (referred to as “Probate”) are made on the basis of either a copy will or a lost will. While some of these are accepted, many are rejected because where an original will cannot be found, there may be a legal presumption that it was deliberately revoked by the person who made it. In that case any earlier will, (or, where no such will exists, strict legal rules) may dictate how that estate is dealt with.
7. Keep detailed records of your wishes
Ensure that your lawyer takes detailed attendance notes of your meeting, conversations and instructions when they prepare your will.If someone wishes to contest a will then usually they will request a copy of your will file from the lawyer who prepared your Will.
The more thorough the notes of your wishes, and the more obvious it is that the terms of your will have been discussed in detail with you, and that you have received legal advice about your wishes the less likely it is that someone will successfully contest a will. If you are making any significant changes that have not been reflected in any previous wills you have made, discuss these with your lawyer. Again, the likelihood of a successful claim is reduced if there are statements recording the reasons behind your wishes.
8. Destroy any previous original will
Although in most cases any previous will may be revoked on signing your new and correctly executed will, provided that will has a revocation clause dealing with any earlier wills, once you have put a new valid will in place, ensure any old original wills and any copies you have of them are destroyed so as not to cause confusion on your death. This is particularly important if you believe people who were previously provided for but now you are removing from the will may find your old will among your possessions and use that to justify bringing a claim to challenge your will.
9. Protect yourself from the risk of undue influence.
If you believe that you are being pressured into making a will then talk to your lawyer, family, friends or anyone else who may be able to help and, if necessary, record your concerns in writing.
If you have concerns that someone will, unjustifiably, argue that you were forced or coerced into making a will, or that the provisions were not your true wishes, there are steps which you can take to avoid this.
If possible, ensure that anyone who benefits under the will is in no way involved in the will making process. If using a lawyer, book the appointment yourself, rather than relying on someone else to do this, ideally attend alone and be clear that the wishes are your own and ask your lawyer to make a clear attendance note.
10. Give your Will a regular 'health check'
The law and family circumstances change. Tax laws, births, deaths, marriages, divorces and even remarriages can all have an impact on your will and the extent to which any will reflects your wishes.
Once in place, review your will at least every few years and especially so if your personal situation changes e.g. on marriage, divorce or death, or if your financial position changes, for example, if you have provided for one child by gifting them a large asset in your Will but you subsequently sell it.
11. Invest in professional advice and drafting
Ultimately, the best protection is to have your will professionally prepared by a lawyer with estate planning expertise. Your lawyer should make your will clear and unambiguous and will consider your assets and your gifting wishes to work out the best, most secure way to achieve what you want to happen. You spend years working to build up your assets. It is well worth paying a relatively small cost for an experienced professional to ensure peace of mind and that you have done your best to safeguard your will and your loved ones’ interests.
Planning and the Aged Care Subsidy
It’s estimated that on average people under the age of 50 will spend the last 3 years of their lives in residential aged care with the present aged population spending between 1.5 years to 2 years. But who should fund this?
Not everyone will spend time in a rest home, but if they do the cost is high with a current estimated average of up to $80,000 being spent per occupant.
In New Zealand, the obligation to pay for rest home care has been means tested so that the taxpayer only covers the cost if the person needing care is judged to be poor enough to get Work and Income's Residential Care Subsidy.
The maximum subsidy for ordinary aged care is just over $1000 a week showing what a person can expect to pay as a base level if they don’t get the subsidy.
It’s been a feature of Estate planning for some years now to use family trusts, and gift away assets to descendants, to try to keep wealth in the family, and achieve relief through the Residential Care Subsidy if Rest Home Care is required.
But with growing public funding concerns surrounding an increasing life expectancy and a growing, aging population, the means test is becoming harder to meet and however carefully your estate plan is carved, it is getting more difficult to beat the system.
Work and Income is on the lookout for people who have "deprived" themselves of assets and income, and are quick to deny subsidies to people who've done it.
The way Work and Income approaches the means test is complex, so it’s important to get legal advice before trying to protect assets and in any event as early as possible before the need arises to approach Work and Income with an application.
WHAT IF YOU ACT EARLY?
Acting early to protect assets would be my number 1 recommendation. If you're looking to rearrange your assets because you are likely to go into care in the next few years, it could be too late.
The longer that a trust has been in existence, and the longer the period between the financial gifting and the time you apply for rest home subsidy, the more likely that Work and Income won't take the gifting into account when calculating your wealth.
As far as Work and Income is concerned, its mandatory to include gifts made in the five years before someone applies for subsidy when they calculate the asset means assessment so, paying for a granny flat to be added to your children’s home during the five years, for example, needs to be carefully documented as such an arrangement would come under very close scrutiny.
During the 5 year period, people can give up to $6500 away each year, and it will not be included in the asset means testing. Outside the 5 year gifting period, people can gift away up to $27,000 in any one year.
But even "allowable" gifting can still result in failing the means test.
The effect of shifting property into trusts is to "deprive” yourself of assets. If those assets are income earning assets then Work and Income may form the view that you have deprived yourself of income that would have been available to help pay for care.
In effect, while there is "allowable" gifting of assets, there is no allowable gifting of the income that can be earned from those assets.
When it comes to income, people entering aged care are allowed to keep only a weekly personal allowance from their income, plus an annual clothing allowance. The rest of their income goes to help pay the rest home bill, and reduces the subsidy Work and Income will pay.
There are rules about what income is counted in the test, but it equates to roughly everything for a single person, and half of the income of a couple where one is not going into care.
ASSETS OWNED SEPARATELY
Couples may argue that assets are not co-owned, but Work and Income is unlikely to accept that argument.
Even if the partner regards his or her assets as their own separate property, they are still included in the means assessment.
Even so called 'pre-nup agreements' can be ignored. If subject to a Property (Relationships) Act 1976 agreement, then separate property assets will still be taken into account unless the couple have separated (bona fide).
WHO PAYS IF NO SUBSIDY IS GIVEN
If the subsidy application is declined, family or family trusts will have to pay. This use of funds may be inconsistent with the terms of the family trust, thus opening a whole new can of worms.
THINGS TO WATCH OUT FOR IN ASSET PLANNING
While every single case is reviewed on its own merits, arrangements Work and Income are unlikely to accept, include where people:
There may be no way around making a contribution to yours or your family’s residential care but if you want to know if there is in your circumstances get legal and accounting advice as soon as possible.
These Questions and Answers reveal 10 Very Good Reasons you should have a Will.
1. Who decides what happens to your assets?
If you die without a valid Will, your estate is divided up according to the law and you will have no say in how it is distributed. A Will is a legally binding document, especially if it is written correctly, and it lets you say how you want your estate to be dealt with upon your death. Having a valid Will helps to minimize family fights about your estate, because it clearly spells out “Who What and When” for your Estate.
2. Who will raise your children?
By making a Will you have a say in who will take care of your children. Without a Will, the Court may take it upon itself to choose among family members or a government appointed guardian and there may be no regard to your views about those family members.
3. Who will control your Estate?
With a Will, you get to decide who will control (administer) your Estate. You can choose the person or institution you think will be most likely to responsibly follow your instructions without applying their own preferences. Because Executors play the biggest role in the administration of your Estate, you’ll want to be sure to appoint someone who is honest, trustworthy, and organized. This may not always be a family member!)
4. How long will it take to administer your Estate?
A professionally prepared and valid Will greatly assists the cost-efficient administration of your Estate and the early distribution of your assets to the beneficiaries named in your Will. Most estates will need to go through a process of being proven by the Court (Probate). Having a Will speeds up this process. When you die without a valid Will, the Court makes the decision who will administer your Estate and how to divide your Estate without any input from you. This can cause expensive delays.
5. What if you want to exclude someone from receiving a benefit from your Estate?
Most people don’t realise that they can exclude beneficiaries or give unequal amounts to beneficiaries. It might be as simple as a loan or gift being taken into account. It’s really important to have a professionally prepared Will if that is your intention. Also, if you want to protect what you give a beneficiary, that provision needs to be in a Will, or in alternative documents you can prepare when you are doing your Will. It’s a complicated area and it certainly pays to get this right.
6. What if you want to make donations to charities?
There is only one binding way to make a bequest to a charity upon your death and that is by having that bequest written into a Will. Again, gifting to charities in your Will can be complicated and you should talk this through with a professional.
7. How can you avoid legal challenges to your Will?
For a start, if you don’t have a Will you have no protection against challenges against your Estate. Preparing a valid Will with professional advice increases the protection your beneficiaries have. Wills can be challenged but most valid well written Wills are not – it’s as simple as that.
8. What do you do if your circumstances change?
Well, circumstances do change. Life changes such as births deaths, marriage, and divorce all create situations where having a Will and changing that Will are essential. Wills should be reviewed regularly – depending on what is happening in your life – as regularly as every year to every three years. Don’t invest in preparing a Will and then leave it in the back of a cupboard.
9. What will your defacto partner be entitled if you die?
If you die without a Will your defacto partner may not be automatically entitled to any of your Estate. He or she may stand to lose all of the assets and treasured mementos you want them to have.
10. Does having a Will mean your intended beneficiaries are provided for?
Not necessarily. It depends very much on how your assets are structured and owned. If you prepare your Will with the advice of a solicitor you will be able to review all of your estate planning needs including appropriate arrangements for your incapacity, and a review of your business succession, as well as any trusts. life insurance and superannuation.
Note from the Author
I get plenty of time to think about legal matters while I am on the road.
This blog shares those thoughts and also answers some of the many questions people ask me. Hopefully there is something of interest to you. If there is a subject you would like covered then let me know!
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