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Your beginner guide to Family Trusts

on Tuesday, 17 September 2013. Posted in Latest Articles, Trusts

What is a family trust?

A trust exists whenever one person, a settlor, gives property to another person, a trustee, to hold for the benefit of a third person, a beneficiary. A family trust is therefore a relationship amongst:

  1.  The settlor, who creates the trust and decides what goes into the trust deed; and
  2. The trustees, who hold title to the trust assets in their own names and deal with them as instructed in the trust deed; and
  3. The beneficiaries, who receive the benefits from the trust. They may include:
    • discretionary beneficiaries, who may receive a benefit from the trust at the discretion of the trustees;
    • final beneficiaries, who are entitled to whatever funds are still left in the trust when it is wound up; and
    • primary beneficiaries, who are discretionary beneficiaries given some sort of priority ahead of the other beneficiaries.

For most purposes, a trust is treated like a separate legal person. Income and assets owned by a family trust are not owned outright by either the trustees or the beneficiaries. Trust assets only become the property of the beneficiaries when trustees transfer the assets from the trust to the beneficiaries personally. As a result, trusts can be used to achieve a number of objectives, including those summarised below.

What are the advantages of family trusts?

Creditor protection

Assets in a trust are usually protected from any creditors of the beneficiaries or the trustees personally. This is because neither the beneficiaries nor the trustees own the trust assets for themselves, but under the relationships established by the trust deed.

Protection against relationship property claims

If you give personal assets to your children during your life or in your will, those assets may, in certain circumstances, become available to their partners under the Property (Relationships) Act 1976. However, if your assets are owned by your trust, or are given to your trust on your death, your children can continue to receive the benefit of those assets but the assets do not form part of their personal property, and therefore cannot be subject to claims by your childrens’ partners.

If you transfer your assets into a family trust before you enter a relationship, your new partner will not usually have any claim against those trust assets if you separate. This issue is explored in more detail in this article.

Protecting property from spendthrift beneficiaries

During your life, or in your will, you can simply give your assets to your children. However, you may be reluctant to do this if you have concerns about the ability of your children to manage their financial affairs. If you give your assets to a family trust then the trust can provide your children with income and/or capital to meet their cash requirements as they arise. This can protect the long term value of your family’s assets.

Protecting children with special needs

Family trusts offer possible protection against means testing of Government benefits such as sickness or invalid benefits. A family trust may also protect a child with special needs from other family members who may assume control of family assets when you die.

Protecting assets for future generations from potential tax law changes

Family trusts may provide protection against various forms of wealth tax that may be introduced in the future, such as death duties or inheritance tax.

Possible protection of eligibility for income or asset tested benefits

Government benefits such as the widows’ benefit and long stay residential or hospital care subsidies are subject to asset testing. Assets held in a family trust may be excluded from asset testing applied by various government agencies, provided certain conditions have been met. We will be able to advise how the rules may apply to your family property.

Trusts make an excellent final beneficiary under a will

You can leave your personal assets to a trust rather than directly to named family members when you die. This gives much greater flexibility than a conventional will. The trustees of a trust can decide when to make payments to the trust beneficiaries and even whether to make such payments available at all.

As an alternative, you can leave your estate to trusts established by your children. Your children can benefit from this type of arrangement, particularly where significant assets are involved, as it allows your assets to be transferred directly into trust without the risks associated with absolute gifts.

Reducing or preventing claims against your estate

The Court can effectively rewrite your will under the Family Protection Act 1955 if it considers that members of your family have been disadvantaged by its provisions. However, the Court cannot rewrite your trust for Family Protection Act purposes.

General flexibility to deal with changes in the law

Modern trust deeds normally allow limited rights of variation to deal with changes in the law.

Tax saving on beneficiaries’ income

Trusts are a separate entity for tax purposes and must file a return if they receive income. Trust income is taxed in the following ways:

  • “Beneficiaries’ income”: this applies where the trustees pay income to the beneficiaries and the income is then treated as if the beneficiaries had earned it themselves. The beneficiaries’ income will be added to their other income and they will, in most cases, be taxed in the usual way. If the beneficiaries are not already receiving a significant income they may be able to take advantage of the lower rates of tax available to them.

  • “Trustees’ income”: this applies where the trustees elect to retain the income and results in a flat tax rate of 33%. Taxation issues are dealt with in more detail in this article.


Family trusts are not publicly registered and the details of your family trust arrangements can therefore be kept confidential.

What are the disadvantages of family trusts?

Loss of ownership of assets

If you transfer your personal assets to a trust then the trustees of that trust will control the assets. Although you can retain some control by holding the power to appoint and/or remove trustees, or even by being a trustee yourself, it is important to remember that assets you transfer to a trust are no longer your own. If you continue to treat the assets as your own then the trust could be open to challenge as a sham.

Additional administration

If you establish a trust you need to allow for the time and cost involved with meeting the trust’s annual accounting and administrative requirements. These requirements are explained in this article.

Cost of formation of the trust/transfer of assets

There are costs involved with establishing a family trust. These will depend on the complexity of your trust and the nature of the assets to be transferred.

Future law changes

Possible changes to legislation or trust law may remove or affect some of the original objectives for the trust formation.

Is a family trust appropriate for you?

In some cases an immediate financial benefit can be achieved by establishing a family trust. However, most family trusts are formed to reduce the impact of changes which may or may not occur such as:

  • claims from business creditors;

  • the need to apply for asset tested benefits such as residential care subsidies; or

  • relationship breakdowns.

In these cases a trust can be compared with insurance against sickness where an insurance premium is paid but no benefits arise if the insured does not get sick. For a family trust the initial set up cost and ongoing annual costs can be regarded as a sort of insurance premium.

A trust may not provide any benefits if the risks protected against:

  • never arise;

  • arise too soon (because new trusts are more vulnerable to legal challenge, particularly by creditors); or

  • arise after the law has been changed so that the protection originally offered by the family trust structure is no longer available.

Are there limits to the protection offered by a family trust structure?

There are limits to the protections offered by a family trust arrangement. For example:

  • A family trust cannot be used to avoid current and legitimate claims by the IRD, business creditors or relationship partners. If you are already subject to such claims then setting up a family trust now will not protect you or your family.
  • If you become technically insolvent as a result of setting up your trust, the trust structure could be set aside by the Courts. When setting up your trust, you therefore need to ensure that you retain enough assets to meet all of your potential liabilities (including liabilities under guarantees).
  • Asset testing applied by Government agencies for various benefit applications may treat trust-owned assets differently from usual legal rules. This may result in the trust ownership providing you with little or no benefit.

What will it cost?

Establishing your family trust

Give us a call and we will be able to provide you with an estimate of the fees you should budget for to establish your family trust. The fee estimate will cover:

  • meeting with you to discuss your intentions and requirements;

  • preparing a trust deed to match your particular situation;

  • preparing a memorandum of wishes;

  • preparing new wills and enduring powers of attorney;

  • discussing asset transfer options with you;

  • completing the transfer of your assets; and

  • if required, arranging for the restructure of your financial arrangements (such as the lending secured over any property to be transferred to the trust).

Ongoing costs

Depending on the nature of your trust and its assets, you will also need to budget for the legal and accounting work required to administer your trust.

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