People usually are not sure whether they should form a family trust or not when they find that their friends or relatives have set up one. It is estimated that around 16% of people have got family trusts in New Zealand.

What is a trust? In a trust, there are three parties involved and these are: The settlor, trustees and beneficiaries.

The settlor is the person who transfers his/her assets to the trust. He/she transfers the same to trust for the benefit of others (may include himself/herself) who are called beneficiaries. The beneficiaries are normally family members and may include children (natural as well as adopted), grandchildren and their spouses or partners. The beneficiaries can be of two types, income beneficiaries and capital beneficiaries. Who you should make capital and who should you make income beneficiaries is a decision which you are to take at the time of forming a trust. The trustees are the persons who manage the trust assets for the benefit of beneficiaries. The settlor can be one of the trustees but cannot be the only trustee. The property transferred to trust is held in the name of trustees as the trust is not a separate legal entity on its own. While establishing a trust, a trust deed is prepared which has the details of beneficiaries, trustees, power of trustees, the procedure for removal or change of trustees etc. 

So if you and your spouse decide to set up a trust, both of you are the settlors and normally you will be trustees as well as beneficiaries in addition to other trustees and beneficiaries.

What are the advantages of forming a family trust?
Tax considerations:
The Trust (called trustee) income is taxed at a flat rate of 33% where as beneficiary income is taxed as per the income tax rates applicable to that individual beneficiary. So, for those who are in higher tax bracket of 38%, it is a good tax saving tool. An example is, Mr. Prasad earns $250,000 from his business. His tax liability in respect of income over $70000 is 38%. He forms a family trust and sells his share in business to trust for $750000. As he is working for the business, he should be paid market salary, let’s assume it is $70000. The rest of profit out of $250000 that is $180000 can be given as dividend to Trust who will be taxed at 33% resulting in savings of $9000 per year. The trust can then give $180000 less tax, means $120000 to Mr Prasad in satisfaction of debt of $750000.

Asset protection from creditors
You can set up a trust to protect your assets from claims arising out of business failure, liability arising out of selling faulty product which may result in substantial loss to buyer and a corresponding claim on you, or a claim arising against you out of your giving wrong advice, medical/legal/ financial or otherwise. In that case, your personal assets will be held accountable whereas trust assets will not be.
Note : It is very important that you should get a trust set up by an experienced solicitor who has got good trust law knowledge and same should be done in conjunction with good financial advice as to how to structure your overall asset portfolio and also which assets should be held in trusts.

(To be continued in next issue of Indian Weekender)

Ravi Mehta is an Auckland based Financial Advisor and can be contacted on ravi.mehta@pfsl.co.nz