It’s a question likely being asked by thousands of mum and dad settlor/trustees around New Zealand.
The Trusts Act 2019 imposes positive duties on trustees, including those in relation to disclosure to beneficiaries. You may have been told about the new Trusts Act and be thinking:
What? Do I have to tell my kids and their spouses about the Trust?
In many cases, the answer to that question is going to be yes. Even if the trustees can find a reason not to tell some beneficiaries about the trust (the Act provides a number of reasons), they should still record that they have considered those reasons and that they have decided not to tell those beneficiaries. In our view this consideration and any information disclosure to beneficiaries should be done at least once a year.
Where the Trust has a professional trustee who charges for their time in attending to Trust matters, mum and dad have to deal with a fee each year (at least) from the professional trustee as part of the trustees’ compliance with his or her obligations under the Act. In many cases, the only Trust asset is the family home, which does not earn income, so for those mum and dad settlors/trustees, the fees come out of their own pockets. Many are retired and expenditure can be a key consideration for them.
Given these out of pocket costs for the settlors, it is natural that they may look at winding up the trust to avoid those annual fees.
In deciding whether to wind up, there are a number of factors you should consider.
Protection of personal assets from business creditors
Is there a family business in which mum and dad have given personal guarantees or under which they may otherwise be personally liable? Winding up the family trust may expose your personal assets to third party creditors.
Keeping family assets in the family
It is a sad reality that relationships break up, whether it be mum and dad’s marriage or that of one or more of their children. A trust can help provide protection in respect of relationship property claims.
There are also various ways to legally challenge a person’s will, however the same laws don’t apply when a property is owned in a trust– so a trust may help to prevent challenges to your succession planning.
A trust may also simply be a flexible mechanism for holding property for the benefit of multiple family members at once, or for family members who face particular difficulties.
Residential Care Subsidy
Presuming you have complied with the allowable gifting limits, keeping assets in a trust means that they cannot be considered as personal assets for purposes of asset testing when applying for a Residential Care Subsidy. Annual administration costs for the trust could be a small price to pay for the benefit of obtaining a RCS when the time comes.
If you are grappling with the question of whether to keep your trust, please chat to one of our Trust team members.