Self-Employment and Family Trusts

Nearly everyone has heard of the Family Trust, but beyond a vague understanding that they can protect your assets and provide a tax effective vehicle for high income earners there is widespread confusion about what a Family Trust actually is. This blog provides a simple ABC breakdown of the structure of the Family Trust and its uses.

The ‘settlor’ is the individual who creates the trust by gifting assets to their ‘trustees’. These trustees are persons appointed to hold these assets on’ trust’ for the settlor, subject to the terms of the Trust Deed. We call this "beneficial ownership", because the trustees are the legal owners of the assets, but the ‘real’ or beneficial ownership of the assets remains with the settlor and other beneficiaries named in the Trust Deed. This limits the amount and/or value of assets to which creditors or potential creditors of the settlor has recourse.

This mechanism for asset protection is particularly valuable if you own your own business. Most if not all business owners have creditors at any given point in time, and most major institutions who follow sound commercial practise will require personal guarantees as security when providing advances, credit or any other types of significant financial accommodation. Having the majority of your significant assets in a Family Trust reduces your exposure to liability created by the entering into of personal guarantees.

Under the Insolvency Act, the New Zealand courts are able to overturn transfers to a Family Trust that occurred within a certain time period. It is therefore strongly advisable to establish a Family Trust as soon as possible. The best time to do so is when there is no imminent threat from creditors.

Assets like property and shares are expected to appreciate in value over time and should be placed in a Family Trust in order to capture these increases. If these assets were the property of the Family Trust from the outset of the settlor’s ownership of them, there is less risk the Official Assignee will be able to ‘claw back’ the assets to the settlor in their personal capacity and order that they be liquidated to satisfy creditors’ claims.

The protections discussed in this article are not solely for the settlor’s personal benefit, of course. Those named in the Trust Deed as beneficiaries will also benefit if the settlor is able to protect the Family Trust’s assets from the claims of creditors, as these assets will be preserved for their future enjoyment.

Another benefit of Family Trusts, often overlooked, is that they can prohibit creditors of beneficiaries succeeding in attacking beneficiaries’ assets. A $50,000 gift from well off parents sitting in their daughter’s bank account is easy prey for creditors should the daughter to get into trouble. By contrast, it would be very difficult for a creditor of the daughter to even ascertain the existence of $50,000 sitting in the ‘Smith Toddler Trust’ account with a major bank, subject to a Trust Deed naming the daughter as a discretionary beneficiary. Even if the creditor was able to ascertain this money existed for the benefit of the daughter and ‘tag’ these funds, the funds could potentially be resettled to a different trust and be exceptionally hard to access for the purposes of satisfying a claim.
The information in this blog is of a general nature only and does not constitute legal advice. We strongly recommend you seek actual legal advice if you wish to set up a Family Trust. For further information contact Shane Rohde on - 0275 123485. Alternatively, the contact email is - [email protected]
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