FAMILY TRUSTS ?
TRADING TRUSTS WITH
Garth Melville is a Chartered Accountant with 30 years experience in chartered
accountancy and business. He is the Managing Director of Company Solutions
Limited based in Auckland, which specialises in advising and forming companies,
family trusts and other tax effective business structures as well as advising on and
registering trade marks.
He formed his first family trust in 1981, and further trusts for his own family‟s use, and
has since specialised in family trusts by providing advice on and forming trusts for
The concept of a trust dates back to the time when the
Normans conquered England mid-way through the 11
century. The trust concept has been developed over the
centuries, and has now become one of the most effective
asset protection, tax and estate planning techniques
The trust concept under English law has been described as the “the gifting of a sum
of money or item of property (the settlement sum or initial trust fund) by one person
(the settlor) to another person or corporation (the trustee) to be held and
administered for the benefit of a class of persons (the beneficiaries) in accordance
with specified instructions (the deed of trust).” (see Appendix 1)
Family Trust is a conventional trust but is prepared with the principal parties being
within a family.
The majority of early family trusts in this country were prepared for farming families in
main farming districts such as Canterbury, Hawkes Bay, Waikato and Taranaki. Also
for wealthy families and professionals who had access to the information. In more
recent years improved access to this information on family trusts, and with the fees
becoming affordable many other New Zealanders have been able to take advantage
of this entity.
? Company Solutions Limited 2003
Reasons for considering a Family Trust
1) Asset Protection and Estate Planning
i) Separates the personal assets from business risk. Companies achieve this from
a shareholders point of view, but a company director still has business risk.
Trusts can assist in protecting your assets from creditors‟ claims.
ii) Many people have their assets jointly owned. In law, all jointly owned assets
automatically pass to the surviving partner. Also many people leave all their
assets in their wills to their surviving partner, then on his/her death to his/her
children. This results in the survivor and later your children inheriting your joint
savings later in life, with few asset protection options available.
iii) If you do not plan at an early enough age, you could lose much of your hard
earned wealth through user pays charges and taxes. E.g. rest home or long-
term hospital costs, capital gains tax, estate duty and/or superannuation and
tertiary level student subsidy.
iv) The trustees can often better control distribution of estate wealth to beneficiaries
by way of trust distributions, rather than by total inheritance by children. This
can prevent a child from wasting the capital inheritance as well as preventing
your children‟s partners benefiting.
v) Relationship considerations. Could be more effective than only pre-nuptial
agreements. Better control in protecting assets from Property (Relationships)
Act 1976 claims if you marry or remarry as well as claims from de facto or same
vi) Enables repositioning of mortgages on real estate and can result in improved
interest deductibility (see Appendix 2. for example).
vii) Flexibility is retained for future changes to your family circumstances, legislation
and Court decisions.
2) Tax Benefits for a Trust earning income (see
Appendix 3. for example) stFrom the 1 of April 2000 persons pay income tax at
the rate of 19.5% on income up to $38,000, 33% on
income above $38,000 but below $60,000, while
above $60,000 the rate is 39%. Since the beneficiaries
of the Trust are usually family members (spouse,
children etc.) income can be shared amongst all family
members in many situations, enabling each person in
the family to earn no more than $38,000. Thus savings can be achieved of 19.5%. The Labour Government has introduced a 33c
tax on trust distributions to minor beneficiaries, (those under 16 years of age). There
is however an exemption of the first $1000 of the distribution which attracts a tax rate
? Company Solutions Limited 2003
of 19.5% Thus this particular tax savings has been reduced for those with minor children.
Note: For IRD purposes any savings in tax must be incidental to the overall purpose of the Trust. Care is required when venturing outside the tax square.
Other considerations prior to establishing a Family Trust
1) The net asset value of the individual (or partners). Is there sufficient value to warrant a trust?
2) Are the assets likely to appreciate in value? (e.g. real estate, shares, yes. Most vehicles, no)
3) Age of the Settlor/s- how many years will it take to gift the value of asset/s transferred?
4) Can income be earned by the trust, and if so can tax savings be achieved? 5) Confidentiality. There is no register of family trusts. However if the trust earns
income it must be registered with the IRD and tax returns filed. Land titles and
Share Registers make no mention of a trust. Instead all the trustees names are
listed as the joint owners.
6) The designated recipients life insurance policies will likely need to be changed to the trust.