What is a trust?
A trust is a legal agreement between the person creating the trust (the settlor) and the trustee(s), creating an obligation on the trustee(s) to hold and manage assets placed in the trust for the benefit of a third party (the beneficiary(ies)).
What are the essential elements of a trust?
1. The 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.
2. Property: There must be property capable of being settled in a trust. This may include real property (land, buildings, leases) or personal (chattels and other moveable property).
3. The trustee(s): There may be more than one trustee on any given trust, and a trustee can also be a beneficiary. The trustee could be any person who has the legal capacity to hold property.
4. The 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”).
What are the advantages of having a trust?
1. Protection from the Property Relationships Act: Generally speaking, when spouses split, the Property Relationship Act provides that relationship property will be split 50:50. The trust frequently undermines this, however, as trust assets are generally beyond the jurisdiction of the act and cannot be included into the relationship property pool. Until trust assets are distributed to trustees, they have what is known as beneficial ownership of trust assets, that is, they do not own those assets and they are not relationship property. An exception is contained in section 44 of the Act which allows the Court is able to set aside a disposition (of property to a trust) which was intended to defeat the rights of a spouse or partner. You cannot place relationship property in trust for the sole purpose of removing it from the relationship property pool.
2. Protection from the Family Protection and Law Reform and Testamentary: Promises Acts Divesting assets may be useful in protecting assets against 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 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 to avoid liability for breach of the Income Tax Act 2007. A trust cannot be established for the sole purpose of avoiding tax.
3. 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, caution should be exercised in 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. It is, therefore, important that if assets are to be protected and their transfer to the trust considered valid, this must be done at a time when the settlor is not under any immediate threat by creditors and is not likely to be, in the foreseeable future.
What are the disadvantages of having a trust?
1. Costs: 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 the overall costs.
2. Risk of a trust being attacked as a sham: For a trust to be challenged as a “sham” it must have been established for an invalid purpose. Administration errors will not result in a trust being declared a sham, however, this will probably create further costs. If a trust is declared a sham, property will not belong to the trust, but to the settlor, thereby losing all the benefits he/she hoped to gain by creating it in the first place.
3. 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.
Who sets up the trust?
Usually attorneys or accountants will set up a trust and draft the trust deed for you.
How can we help? Please call us to arrange an appointment. In our first meeting with you, we will explain the law, your options and the outcome you can reasonably expect. We will also advise a fixed fee for your case and the likely time it will take to settle. You can contact us by phone on (09) 309 4647.
“The information posted on this website is prepared for a general audience, without investigation into the facts of any particular case. This information is no substitute for legal advice and does not create a lawyer-client relationship; you are advised to consult with a lawyer on any legal issue.”