Are Trusts Dead?
Having appeared to have fallen out of fashion with the demise of some tax benefits in the past decade there has been some debate about the place and value of trusts in managing and protecting ones assets and wealth.
However trust are far from disappearing ,they continue to be utilised for a wide variety of reasons, with the law commission estimating in its 2013 review that the number of trusts operating in New Zealand to be somewhere between 300,000 and 500,000.
Trusts are an effective way to hold and protect your asset for the future, they separate the ownership of property from those who benefit from that ownership, and allow assets to be held collectively rather than individually.
They are being used by families to hold their wealth collectively, by charities, by businesses who seek a flexible governance structure, by financers for complex transactions and Maori groups managing Maori land or Treaty of Waitangi settlements.
One of the biggest motivators for using trusts, currently, is around protecting assets. Therefore anyone starting a business should consider a trust as an option. Similarly a trust may be considered by those who have assets they wish to protect such as property or shares.
One of the benefits which comes as an extension of asset protection is that the trust doesn’t die when you die. Trustees will continue to manage the trust and its assets, on the basis of the trust deed. So, if there’s a rental property in the trust for example, the trust is not required to sell this after the settlor’s death which would be advantageous if the property market was flat or in decline.
While some of the focus around tax has been reduced, trusts still remain an effective way for a family or business to manage overall taxation. Families are able to access the low tax rates available to members 16 or older creating annual tax savings. Similarly there are opportunities for businesses to reduce tax rates firstly by way of their use as beneficiaries of trust income and secondly as vehicles that are established by the trust to hold income producing assets that might otherwise be held by the trust directly. Both of these approaches will reduce the tax rate to 28% vs the trustee rate of 33%. While there are potential tax savings trusts should be created for reasons other than simply tax benefits.
When considering a trust it is important to keep in mind that they do not suit every situation. Professional advice is a necessity in order to tailor a trust and the asset you are planning on putting into the trust to your specific circumstances and objectives.
A trust comes with responsibilities and must operate according to the trust deed and meet the regulatory requirements on an annual basis which include arranging trustees meetings, managing gifting, preparing annual accounts, and being registered and up to date for tax. Trusts can be struck down in situations where it can be demonstrated that the trust is not acting as a trust.
Are trusts dead? – Far from it they are alive and well although they require careful administration and management to ensure they deliver the protection that they are intended to provide.v