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Family trusts - What every adviser should know

The family trust appears to be as popular as ever in New Zealand. Guardian Trust business development manager Mark Cassidy explains how they should be used.

Monday, August 24th 1998, 12:00AM

by Philip Macalister

The discretionary trust (more commonly described as the family trust) appears to be as popular as ever in New Zealand. Only this month Consumer magazine is running its cover story entitled "Trusts in the future".


Take heed
At Guardian Trust we receive a steady flow of enquiries from people eager to know what the advantages of setting up a family trust are, and more particularly how they can prevent the Government, creditors or unwanted family members taking a share of their assets.

Although these are genuine concerns for many people, it is my contention that, these concerns should not be the basis for establishing a family trust. Such reasons tend to concentrate the client's thinking on the immediate benefits for themselves rather than the long-term reasons.

A discretionary trust is designed to protect their assets not only for themselves but also their immediate family, and from one generation to the next.

The shopping list approach described above misses the very essence of what trusts are designed to do and can lead to dangerous and unintended consequences.

I have heard all too often a client saying that they had a family trust once but the accountant no longer uses it because there are no longer any tax advantages for him.

Trusts have been with us since the Middle Ages and grew out of the natural desire of the noblemen of the time wanting, on their deaths, to retain for their families the estates that had been given to them by the crown for past services. They were seen as long term arrangements (the longer the better) and certainly not as short-term solutions to current concerns.

Indeed it was the potential longevity of trusts that gave rise to the Rule against Perpetuities, which prevented the trust from existing in perpetuity and thus enabling the crown to regain lands or, more likely, levy taxes at some designated point in the future.

It was recognised early on that there are two certainties in life, namely death and taxes. To that can be added, the certainty of change. It is not surprising therefore that practitioners, judges, and legislators over the years have extended adapted and regulated trust law to meet those changing circumstances.

It is in this context that the family or discretionary trust has evolved as perhaps the most flexible form of ownership that exists under English based law to date. It is the trusts' very flexibility to adapt to changing circumstances whether they be family, statutory, or fiscal that makes it a unique planning tool and not the immediate short term benefits which are bound to change with the complexion of each successive Government.

Near enough is not good enough
For the arrangement to be successful and achieve its desired results it is important that the trust is not only correctly established but, as is becoming increasingly apparent to trustees, properly administered.

It is not good enough simply to get the initial documentation right only to negate its effect by failing to administer the trust correctly.

As will be seen this normally arises either through people setting up trusts with no clear intention to create a trust in the first place, or through lack of knowledge as to what is required to correctly administer the trust.

The former would render the whole arrangement invalid ab initio with the Trust Deed not being worth the paper it is written on and the latter, though possibly not proving fatal, leaving the trustees potentially liable to the Inland Revenue Department and beneficiaries for back taxes, penalties and damages.

Either consequence is unintended and certainly undesirable.

As advisers it is paramount that we ensure our clients fully understand, not only the immediate benefits that might be available at the time the assets are settled into trust, but also precisely what the responsibilities and rights of the various parties involved are. It is only by the settlor(s) and the trustees fully understanding what is required of them can the integrity of the trust be maintained, asset and succession planning achieved and the tax benefits from time to time available be realised.

As the Consumer article points out it is important that the client chooses "someone who can explain things clearly and answer all your questions".

It would be fair to say that from my own experiences, practitioners generally speaking have in the past not done this particularly well.

Over the next few months I shall be writing a series of articles on topical issues relating to family trusts designed to address not only what is new but to look at what the practical consequences are for settlors, trustees and their advisers.

This will hopefully enable you not only to understand more fully what to look for when seeking trust advice but also to ensure that it is given to you in a way that is easy for you and your clients to understand.

The first article will be on trust establishment and will cover the structure of the trust(s) - single mirror, parallel trusts, the drafting of the deed and what assets to settle into the trust. Subsequent articles will be on trust administration, trust investments, recent changes in legislation, the taxation of trusts and trading trusts.

Mark Cassidy is a business development manager with Guardian Trust based in Wellington. He has over 20 years experience in asset and succession planning in both the United Kingdom and New Zealand. He can be contacted on email

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