People form family trusts for all sorts of reasons. Here are some of the most common:

* Tax
* Asset testing regime
* Asset protection
* Education
* Succession
* Relationship property

Tax

Family trusts can be taxed in one of two ways:

First, any income that comes into the trust which is not distributed to beneficiaries will be taxed at a flat rate of 33 cents in the dollar.

Alternatively, if the trustees choose they can pass income on to beneficiaries who will pay tax on it at their own rate (provided they are not minors – that is, under 16 years). This means that income going to beneficiaries who have little or no other income will be taxed at 19.5 cents in the dollar which could represent a tax saving for some families. Trusts can be very useful for income splitting in this way, however income from personal services (e.g. wages and salaries) cannot be passed through a trust in this way.

Under the minor beneficiary tax rules, some distributions to beneficiaries under 16 years are treated as being “trustee’s income” despite the distribution and are therefore subject to tax in the trustee’s hands at 33%.

Asset testing regime for rest home subsidies

You may be eligible for a Residential Care Subsidy if your assets are at or below the appropriate threshold for your circumstances:

* For an individual or a couple where both partners are in residential care the threshold is $170,000 (house and car included)
* For a couple where one partner is in residential care you can choose between a threshold of $75,000 (house and car are not included) OR $170,000 (house and car is included)

Both asset thresholds will increase by $10,000 each year.

Gifting at any time may be included as an asset however allowable gifting can be excluded. There are many quite detailed rules that apply to gifting, and it is important that you get good advice regarding gifting and/or establishing a family trust.

You also need to remember that only a small number of New Zealanders live in rest homes (6% of all those over age 65) around 57% of this number have a Residential Care Subsidy. You may want to think twice about setting up a family trust just for this purpose.

For more information regarding the Residential Care Subsidy contact:

Work and Income freephone 0800 999 727
Work and Income website www.workandincome.govt.nz
Ministry of Health website www.moh.govt.nz/olderpeople

Asset protection

Many people in business use family trusts to protect their lifestyle assets in the case of business failure.

This means that, for example, the family home might be placed in trust so that if the couple went bankrupt, they would be able to carry on living in the house, and the house would not be available to business creditors.

However, if the couple shift assets in this way only when they are in financial trouble the Official Assignee can later set aside the transaction.

Education

With the rising cost of private tuition and tertiary fees many parents and grandparents have established a family trust and put in some money for the children’s education. When the children get older income from this money, or the capital itself, can be used to pay for tuition and other education costs.

The family trust can be quite specific about the purposes that the money must be used for and the trust can also survive the parents’ or grandparents’ death so you can effectively enforce that purpose for long periods (if that’s what you want).

Succession

Trusts are sometimes used to pass family assets on to future generations. Sometimes an asset like a farm or other kind of business will be held in trust so that it can stay in the family for several generations. Alternatively, it could mean all the children own the asset, rather than just one, and the income can be shared by all.

Other uses of family trusts include making a benefit available to a child only on a certain occurrence (e.g. on marriage or the gaining of a qualification), excluding a particular child from an estate, or the control of spendthrift children. Looking after the interests of a handicapped child after the parents have died is another specific use.

Relationship property

Often people enter into a relationship or marriage with unequal assets. The partner who has more money may want to protect what he or she has in the event that the relationship fails.

One way of doing this is to hold assets in the name of a family trust, so that there is less likelihood of them being classified as “relationship property” and therefore being available for division on separation.

If each partner wanted to keep assets especially for children from a previous family then separate trusts is one way of doing that. Each partner transfers their own separate property to their respective trust. This means there could be three types of assets – “separate property” for each partner, “relationship property” that the couple acquire after they set up home and the property that is in their trusts.

Similarly, many parents are concerned when their children enter into live-in relationships. The parents know that if they should die and their child received a substantial inheritance the child’s partner could be entitled to a portion of it. One way around this is to have the assets held in a family trust so that the children can have use of the assets (e.g. the use of a house or interest from an investment), but do not own it for relationship property purposes.

Source: sorted.org