What is a trust?
A trust creates an obligation on the part of one party (“the trustee”) to hold property on behalf, and for the benefit of, a third person (“the beneficiary”). The trust is written down, in accordance with legal requirements in a ‘trust deed’, and it is governed by the specific terms contained in that deed.
Why should I create a trust?
- Protection from the Property Relationships Act Generally speaking, when spouses split, the Property Relationships Act provides that relationship property will be split 50:50. Until trust assets are distributed to trustees, they have what is known as ‘beneficial ownership’, that is they do not actually own those assets and they are not relationship property.
- Protection of personal assets Trusts can be useful in protecting assets from claims under the Family Protection Act 1955 and the Law Reform and Testamentary Promises Act 1949. When a person dies, and family members feel they have not been adequately provided for under the will, they have the ability to make a claim against the estate. Others who claim they were promised a share of the estate before the person’s death but were not provided for, may also claim against the estate. If a person transfers their assets to a trust before their death, those assets will not form part of their estate. This means they will not be vulnerable to the kinds of claims outlined above.
- Tax efficiency Trusts can be a useful means of reducing exposure to income tax. While this is valuable in both personal and business situations it is important to exercise caution as there is a risk of liability for breach of the Income Tax Act 2007. A trust cannot be established for the sole purpose of avoiding tax.
- Creditor protection By transferring assets to a trust at an appropriate time, those assets can be protected against future claims by creditors. It is common for family members to be beneficiaries of a trust and therefore they have the right to use of assets contained within it. Again, remember that a trust cannot be created for the sole purpose of avoiding claims by creditors. If assets have been transferred for that immediate purpose then they can be subject to a challenge by creditors and may not be protected.
How much would a trust cost me?
There are a number of costs associated with establishing and maintaining a trust. Initial start-up costs may range anywhere from $480 to $3,000 depending on the complexity of the trust, which would include the process of transferring property and administration. There are also likely to be overheads in maintaining a trust, particularly if it contains income earning assets as tax returns will need to be filed and annual accounts kept. Often, to counteract the risk of a trust being labelled a sham, professional trustees may be appointed to ensure it is run properly. This can add to overall costs.
What are the risks of having a trust?
- Risk of a trust being attacked as a sham For a trust to be considered a “sham” it must have been established for an invalid purpose. Administrative errors will not result in the trust being attacked as a sham, however this will probably create extra costs. If a trust is declared a sham, property will not belong to the trust, but to the settlor, defeating all the benefits he/she hoped to gain by creating it in the first place.
- Loss of control and ownership of assets in trusts Once assets are transferred to a trust, the settlor no longer personally owns or controls them. The ability to manage the assets passes to the trustees who do so in the best interests of the beneficiaries. So, depending on how the trust is set up, the settlor may lose considerable control.
What elements do I need to set up a trust?
a. The three certainties
- i. Certainty of intention – that is, there must be a clear intention that a trust is to be created;
- ii. Certainty as to subject matter – the property which is subject to the trust must be clearly identified;
- iii. Certainty as to the object of the trust – the beneficiaries of the trust must be clearly identified.
b. Structural elements
- i. Settlor The settlor is the individual who creates the trust, by “settling” property to be held and managed by the trustees for the benefit of the beneficiaries. The settlor may be a trustee and/or a beneficiary.
- ii. Property There must be property capable of being settled in a trust. This may include real property (land, buildings, leases) or personal (moveable property).
- iii. Trustee(s) There may be more than one trustee on any given trust and it can be any person who has the legal capacity to hold property. If the settlor is to be a trustee it is best that there is more than one, perhaps with the allocation of an “independent trustee” who has no beneficial interest. This would help to ensure the trust is not vulnerable to being treated as a sham. The role of the trustee includes managing trust property in a way which is in the best interests of the beneficiaries.
- iv. Beneficiary(ies) The beneficiaries are those people who may benefit from the trust. They are the persons provided for in the deed and it is important they are clearly identified as specific individuals or a class of individuals (i.e. “the children of the settlor”).
Is there a time limit on trusts?
Yes. The Courts have tended to prevent property from being tied up in trust unnecessarily or for too long, to the point where it cannot be used. Where a trust creates an interest in property, that interest in property, that property must vest in the beneficiaries no later than 21 years after the death of those who were alive when it was created. Alternatively, a settlor may specify a date no more than 80 years away. Assets may be transferred out of the trust however, if these assets are being transferred to another trust, the second trust must have no more time to run than the first. Trustees cannot transfer assets to other trusts for the purpose of extending the time they are in trust.
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