By Peggy Davis,2014-07-10 15:51
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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

    Family Trust is a conventional trust but is prepared with the principal parties being

    within a family.

NZ background

    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.

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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

    sex partners.

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

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    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.

Effects if you delay actioning a Family Trust.

    There is a combined effect of assets increasing (real

    and inflation) in value and your age increasing. Both

    work together to further increase the time that it takes

    to transfer your ownership to the trust. You may

    transfer, free of gift duty, $27,000 of your net assets

    per partner per twelve months. To calculate the period

    involved for your gifting situation, divide the total value

    of the assets to be transferred, less mortgage, by

    $27,000, (or $54,000 with a couple).

The Main Types of Trusts

    It is vital that the correct type of trust is provided for the client. Our questionnaire needs to be completed to aid in assessing your situation. This is generally followed by an interview with the client. The information sourced then enables us to specify the most advantageous type of trust. In terms of what purposes the family trust is involved with, the main types of family trusts are:

1) Traditional style of family trust (non-trading). Often described as ‘Passive


    This type is normally used where an asset such as the family home and holiday home are transferred primarily for asset protection.

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    2) Traditional style of family trust (non trading and income producing) ‘Passive


    Used to transfer income earning assets such as rental properties, share portfolios etc.

    and aim to protect assets and well as spread income to beneficiaries. These trusts

    can also be used to own assets which can be rented to a trading company. This

    assists with asset protection as the assets are separated from the trading company.

    It also assists with flowing income into the trust.

3) Trust as shareholder of a trading company. ‘Passive Trust’

    This alternative provides many advantages. The business is operated by the trading

    company which has limited liability. Income is passed to beneficiaries via dividends

    from the company. This results in tax being required to be funded at the higher

    company rate of 33%. Beneficiaries on the 19.5% (or lower) rate of tax are either

    able to use the resulting tax credit to offset against tax on other income, or if this

    other income is not present, then carry forward the unused portion as a loss to the

    following year.

    This will often not have a desirable outcome from an income tax reduction situation where there are beneficiaries who are on the lower rate of tax.

    4) Trading trust with a Corporate Trustee

    Again this is used for asset protection and income splitting.

    This trust has as its sole trustee a limited liability company.

    The persons who would normally be trustees in their own

    name in a trading trust instead of taking these positions,

    become directors of this trustee company. Thus a company

    and trust structure are linked. The advantages of full

    limited liability protection for the business and also

    personally for the Trustees is achieved. Also the ability to

    trade with the company using a name that is completely

    different from the trust, is achieved.

    There is the ability to not necessarily pay salaries to the

    principals which attracts A.C.C. levies. An alternative is to

    pay all profits by way of beneficiaries income and thus

    avoid these levies. (It may be preferable to independently insure against this risk.) The trading trust can often allocate income to various

    beneficiaries in a more effective way than the example in 3) above.

    Trading Trusts Can Overcome Tainting of Rental Properties

    The trading trust is the most effective structure to overcome tainting of rental

    properties through association. Tainting of properties occurs when a person trades,

    or is a developer, or builder or is a subdivider of land. By being „associated‟ with

    ownership of rental properties, these individuals will through an associated ownership,

    taint the rental properties. Tainting means the capital gains which would be expected

    to result from the sale of the rental properties, will not occur. Instead all profits made

    on the sale will be fully taxable.

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    5) Mirror trusts

    These were used particularly by people endeavouring to avoid estate duties. Under the estate duty legislation a settlor of a trust could not get a benefit from it. Thus two trusts were formed. One by the husband as settlor and the other by the wife as settlor. Each settlor would have the other spouse as well as their children as beneficiaries. Each trust can own its own separate property, and /or say 50% of these assets, or form a partnership to own the total assets as partners.

    As estate duties were abolished in December 1992, there have since been fewer of these types of trusts formed. However the current government has stated that they may consider introducing estate duties at probably a lower threshold of $400,000. Because of this, as well as other political and tax uncertainties, I am recommending each client‟s circumstances need to be individually considered in depth and the trust structured according to the specific requirements.

6) Dual Trusts

    These are similar to Mirror Trusts. The difference

    is that both partners are beneficiaries of each of

    the dual trusts. This enables both partners to

    receive the benefit of both income and capital from

    both trusts until, or if, estate duty is reintroduced.

    The intention is to then restructure each of the two

    trusts by eliminating the offending partner from

    their own trust. However in the event of estate duty

    being reintroduced, the restructuring needs to be

    completed by removing this beneficiary, 3 years

    before the date of the persons death.


    Lease for Life (note this is an option, now less in favour than previously) This is a lease for the lifetime of the owner/s of the property prior to sale to the trust. The effect is to provide a guarantee of occupancy. Also the value of the property being transferred is considerably reduced.

    E.g. a person in their mid thirties has a house valued at $240,000 with a $50,000 mortgage. His lease for life is $160,500 leaving the value to be transferred to the trust of $29,500.

    Special consideration and expert advice needs to be taken before proceeding, as this area is fraught with difficulties such as reversing the process should a sale take place, as well as potential taxation difficulties.

Flexible Provisions required within the Trust Deed

    Modern trust deeds should have flexibility. E.g. Ability to change the terms of the deed, appoint or remove Trustees, add and remove beneficiaries, ability to resettle the assets of the trust on another trust (without adding new beneficiaries), indemnity of trustees from liability beyond the assets of the trust, winding up of the trust at any time within the maximum possible life of 80 years from formation.

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    Name of Trust

    It is not necessary to use either your family name or the word “Family”. However the

    word “Trust” must be present.

    E.g. David and Claire Johnston may call their family Trust “The Willow Trust”.

Costs (incl. GST)

    Ensure you are dealing with a specialist in the area of family trusts and obtain a

    complete quotation in writing before proceeding. Costs can be broken down into:

    The cost for establishing the trust would competitively be in the region of $1500.00.

    This would include the preparation of the Trust Deed and the Memorandum of


In the event you have existing properties owned personally, consideration needs to

    be made for transferring properties (including mortgage) from your personal

    ownership to the trust. This could be say $600-700 for each property. In addition:

    initial Trustees Minutes Deed of Acknowledgement of Debt, Initial Deed of Reduction

    of Debt and gift statements as well as possibly new wills and enduring powers of

    attorney could add a further $400. If a company is involved in a trading trust this

    could involve a further $400.


    A family trust provides a new asset owning form, separate from the persons initiating

    the trust. Therefore any assets (real estate, shares etc.) which are transferred into

    the trust are no longer owned by the initiating persons. However these persons

    should still have effective control over their former assets, (in their new capacities as

    Trustees) and are able to use their discretion to distribute the income, generated by

    these assets to beneficiaries).

    Is the expression everyone needs a

    Family Trust valid?

    Taken literally this expression is an

    overstatement. However for the majority of

    people a family trust can potentially be of

    substantial benefit providing they are not

    too old when commencing the trust.

    Make the right choice and use a


    ? Company Solutions Limited 2003













    ? Company Solutions Limited 2003






    EXAMPLE 1.

    1) Joe and Joan Savewell own a home in Auckland worth $280,000, with a

    $10,000 mortgage at 8% interest and pay $800 interest a year which is non

    deductible for tax. They have savings of $30,000.

    2) They decide to purchase a new home for $300,000 and rent out their existing



    The rental property (old home) has deductible interest each year of $800 to offset against rents received. This results in the rental property making a taxable profit. The new property has been purchased for $300,000 less their deposit of $30,000, requiring a mortgage of $270,000. Their non-deductible interest is therefore $270,000 at 8% which is $21,600.


    Joe and Joan Savewell do the same as above but form a family trust to which they sell their old home. Being a separate new taxable entity, the new trust can raise the full purchase price of $280,000 on mortgage (the mortgage would straddle both properties). The trust would pay the $280,000 to Joe and Joan, who would in turn repay the original $10,000 owing personally. They have a net $270,000 available to invest in their new home plus their $30,000 savings.


    They have no personal, non-deductible interest. The family trust has $22,400 deductible interest (being $280,000 at 8%) to offset against rents received. This results in the rental property probably making a taxable loss after other expenses including depreciation are taken into account. The taxable loss could then be offset against other family trust income. On the top tax rate of 39c in the dollar this would save over $8,400 every year!!!

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    Joe and Joan Savewell who have 3 children over 16 years of age, both work in a family business and earn $140,000 which is split $70,000 each. Each pays $18,570 in tax, totalling $37,140 for the family.

    After taking advice they decide to take better protection of their assets and make provision for more suitable estate planning.

    They form a family trust with a corporate trustee J & J Savewell Limited, and then sell the business to this trust. Incidentally their home is sold to a separate trust to separate the business risk from their personal assets.

    They receive independent written advice that the market rate for their employment is $40,000 each. The balance of the income made by the family trust ($140,000 less $80,000) $60,000 is spread evenly between the 3 children, at $20,000 each.

The total tax bill is now:

    Father and Mother $8,070 x 2 = $16,140

    Children $3,900 x 3 = $11,700

Total Annual Tax Bill $27,840

Previous Annual Tax Bill $37,140

Incidental Saving in Tax $ 9,300

    'Family Trusts and Trading Trusts‟ is prepared by Company Solutions Limited. It is not

    intended to be fully comprehensive nor is it intended to be a substitute for individual structuring advice. Your Company Solutions Limited advisor can update you with the most current information. Professional advice should be sought before applying the information to particular circumstances. Whilst care has been taken in the preparation of this guide, no liability is accepted for any errors. Copywrite for this material is retained by the proprietors Company Solutions Limited 412 Lake Road, Takapuna, Auckland, New Zealand.

    ? Company Solutions Limited 2003


? Company Solutions Limited 2003

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