Family trusts serve an important purpose – they can protect your assets against claims, preserve your children’s inheritance and ensure assets are kept in the family.
But there are several disadvantages to having a trust, which should be taken into consideration before setting one up.
In this article, Hannah Blewden covers the advantages and disadvantages of having a family trust and gives some insight into whether a trust might be right for you.
Advantages of a family trust
1. Protection against creditors
If you feel you’re at risk of being sued in your personal capacity (perhaps because you’re self-employed or involved in a high-risk business like construction), a trust can offer some protection for your assets.
When you move your assets into a trust, they’re no longer owned by you personally. This means that, in most cases, they won’t be available to meet any judgments that may be made against you personally in court.
2. Flexibility in estate administration
A trust allows for flexibility and discretion in the distribution of assets after your death.
For example, if you’re concerned about your child losing some of their inheritance to a relationship property claim, you could arrange for your child to access their inheritance in a way that protects it from such claims. There are a couple of ways this could be done:
- The trust can retain ownership of the inheritance and advance it to your child, so if your child and their partner or spouse break up, the trust can call it back
- You can put conditions on any distributions from the trust to your child (e.g. your child won’t get their inheritance until they enter into a contracting out agreement, also known as a prenup, with their partner)
This kind of flexibility can also be useful if you have a dependent with unique needs and requirements (e.g. a disabled child or one who suffers from substance abuse).
Having assets in a trust means that after your death, the trustees can make money available as appropriate (e.g. they can make payments direct to providers or pay medical bills rather than outright distributing money to your child).
3. Continuation of long-held family assets
Assets like baches and farms are often held in a trust, as it’s common for this type of asset to benefit multiple generations and stay in the family for a long period of time.
If you have an asset that’s not held in a trust, your only option is to leave it to your beneficiaries in your will, in which case the asset might be liquidated after your death or spread amongst too many people in too many shares.
Under a trust structure, however, the asset will remain owned by the trust and can continue to benefit multiple family members.
4. Protection against Family Protection Act claims
If someone believes they haven’t been adequately provided for in your will, they may have grounds to make a claim against your estate under the Family Protection Act 1955 (‘FPA’). This type of claim is usually made by a spouse, partner, child or grandchild.
If you think there’s a risk of your estate being subject to an FPA claim, a trust structure may help.
Having assets in trust generally prevents these assets from being available to meet an FPA claim. However, the Law Commission has recently recommended that this rule be abolished, so there’s a chance trusts will no longer offer this type of protection in the future.
5. Protection against relationship property claims
If you’re worried about a relationship property claim, trusts offer a small amount of protection in this regard.
However, the effectiveness of this has been eroded quite significantly in recent years and it’s anticipated that it will continue to be eroded over the next few years. We generally recommend a contracting out agreement (also known as a prenup) for relationship property protection.
Disadvantages of a family trust
1. Reduced freedom
When assets are held in a trust, there’s a lot less freedom in terms of what you can do with them.
If you have assets in your own name, you can essentially do whatever you like with them. But when assets are in a trust, the trustees need to comply with certain duties when dealing with the assets.
In addition, trustees have a duty to consider all the beneficiaries of the trust when making decisions.
2. Disclosure obligations
If assets are held in your personal name, there’s no obligation to tell your children or family anything about them, but when assets are in a trust, the trustees have disclosure obligations to the beneficiaries (often your children).
Some people don’t like the idea that the trustees have to give certain information to beneficiaries about the trust’s assets, so it’s important to think about this when considering a trust.
3. Increased compliance
There’s a lot of compliance that goes along with having a trust, including:
- Anti-money laundering rules
- Compliance under the Trusts Act 2019
- Increased reporting obligations to the IRD (which means your accounting is more complicated too)
These compliance obligations can be expensive and time-consuming.
4. More paperwork
When you set up a trust, you will quite often have an independent trustee, as this provides the best protection for the assets held in trust.
Generally speaking, trustee decisions must be unanimous. This means all trustees must sign off on any decision made by the trust, which some people find frustrating.
There’s also extra paperwork required when trustees take action or make decisions (e.g. trustees need to document some decisions in the form of a written resolution).
Is a family trust right for you?
If there’s a good reason for you to have a trust – for example, you’re a self-employed builder or have a child with unique needs – the advantages of having a trust almost always outweigh the disadvantages.
However, there’s no point setting up a trust without good reason. You’ll be dealing with increased legal costs, larger accounting bills and the hassle of compliance, so it’s important to ensure there’s a clear benefit to having the trust.
How we can help
If you’d like to speak with us about setting up a family trust, please get in touch on enquiries@armstrongmurray.co.nz or 09 489 9102.
This article is brief and general in nature. You should not treat it as legal advice and should seek professional advice before taking any action in relation to the matters dealt with in this post. Armstrong Murray accepts no liability for losses suffered by any person or organisation who may rely directly or indirectly on this post.
