Are Family Trusts Still Worth It?
Many people set up family trusts – and sometimes for the wrong reasons. Martin Hawes says they can still be useful but might not always be effective.
25 May 2022
Family trusts have been called the coward’s prenuptial agreement.
The basic idea of this is that instead of having to go through all the trouble – and possible embarrassment – of agreeing to and executing a prenup, you can simply swipe your assets off sideways into a family trust and forgo the angst.
I love you forever, but...
There are many people who’ve thought that a trust will save a lot of trouble.
When one relationship ends and a new one starts, the new partners can often have quite different amount of wealth and the standard (and correct) advice is that they ought to enter into a contracting-out agreement, often known as a prenup.
The problem with these agreements is that the couple, hopelessly in love, perceive a conflict between the love they feel for each other and signing an agreement which has a purpose of setting out who owns what when they break up: “I will love you forever, darling, but just in case I don’t, could you please sign this agreement and initial each page.”
Contracting-out agreements are also quite involved and can be expensive. They can also provoke conflict.
Each partner has to get independent legal advice, and the lawyers advising often give advice to advance their client’s position, which is what they are required to do. That can conflict with what the couple has thought they agreed.
And so, rather than go through the trouble, expense, and risk of conflict, wealthier partners often decide to protect what they have by putting all of their assets into a family trust.
The thinking is that if a trust owns the assets, they cannot become relationship property and so, if the relationship fails or one partner dies, they are not available to the other.
Unfortunately for such people trying to take this family trust route, it’s not so easy.
This can be a very technical area of law and there are many instances of people who’ve managed to get assets out of their partners’ trusts when they’ve separated.
For example, imagine that someone had a house in a trust. The other partner may well be able to have the value of that house counted as part of a separation division if they’d contributed to the mortgage or to improvements to the house.
This is an area where there have been plenty of “trust-busting” cases. Lawyers have gone to court for clients and attacked trusts, so that the trust assets are shared.
These attacks in the courts are frequently aimed at showing that a trust is a sham. If a trust can be shown to be only the person who originally settled it, the trust asset may be available for sharing in the event of a separation.
These attacks on trusts have become more frequent in the last couple of decades and a good bit of this increased scrutiny has come through the Property (Relationships) Act.
Most experts would say that it is not enough to put assets into a family trust and expect that will protect your assets if your relationship fails.
It’s a far better thing to be brave, talk through with a new partner what would happen in a separation, and sign a contracting-out agreement.
Even though family trusts are not the easy fix for relationship property issues that some people think, they can have other benefits:
- Asset protection for those who want to protect certain assets if there’s a business failure or insolvency.
- There are some tax benefits, which may be particularly relevant for those on the highest tax rate. The top tax rate in New Zealand is currently 39 cents in the dollar, while the trust rate is 33 cents.
- Succession, particularly for those with large or more complicated assets, like farms.
- Trusts can keep the things that you own confidential to your own family.
- Residential care subsidies may be available for some people who have gifted most of their assets to a trust. However, Work and Income NZ applies rules to this and it’s an area where you need to be well advised.
Run your trust well
Good management is key to a good trust.
The Trusts Act came into force in January 2021 and sets out very clearly the duties of trustees and the things that they need to do to manage the trust well.
Partners and spouses may attack a trust in relationship property disputes, but that’s just one risk.
The Inland Revenue Department may also become involved in the case of income tax, WINZ in the case of residential care subsidies, the Official Assignee in the case of insolvency, and beneficiaries if they feel forgotten when distributions are being made.
The Trusts Act, along with an increase in legal battles, has raised the bar for what is required in trust management.
Trusts can still be useful arrangements for some people, but they frequently come under attack. They have to comply with trust law, and they need to be well managed.
The information contained in this article is general in nature and is not intended to be personalised financial advice. Before making any financial decisions, you should consult a professional financial adviser. Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy, sell, or retain a regulated financial product. Martin Hawes’ disclosure document can be found at www.martinhawes.com.
Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.