Asset Protection in case of relationship property

There may be occasions when a couple has got substantial jointly owned assets. If one of the spouses dies, the other spouse will become sole owner of those assets. The surviving spouse may enter into relationship with another person. The property held in his/her name will become relationship property. After lapse of 3 years, the new partner may be entitled to half share in those assets. But if the assets are held in trust in the first instance, these are protected from becoming future relationship property.

Similarly your assets are to pass on to your children after your death. Their partners will be entitled to share in those under Relationship act. If you want to protect your assets and want those to go to your children and not to their spouses, in the event of their separation, a trust can be a good solution.

Entitlement to rest home subsidies

Entitlement to rest home subsidy is dependent on your asset position. You can have assets up to a certain amount to qualify for it. But only assets held in your personal name and not held under family trust are taken into consideration for calculating your eligibility. So having assets under family trust and not under your personal name is a good solution. 

Disadvantages of forming a family trust

The major disadvantages are-
When you transfer the assets from your name to trust, you lose personal ownership. Although you may have control as a trustee, you are to act in accordance with wishes of other trustees as well.

There is more administrative and accounting cost.

There is one time cost of setting up a trust and transferring the assets to it.

Sometimes spouses do want to undo the trust in the event of split, which is difficult to do once you have transferred those to trust.

Some of disadvantages can be overcome by careful planning and thought at the time of formation of trust.

The trust deed should be drafted carefully by specialist trust lawyer or Trustee Company.

Regarding cost involved, yes, there is a cost. You buy insurance to protect your assets and to protect your income earning capacity and for that you pay insurance premium throughout your life. By setting up a family trust also you are protecting your assets, so you should be ready to bear the cost.

What is the right time to form a family trust?
In New Zealand, one can gift $27000 in any 12 months without paying gift duty. Suppose you and your spouse have assets of $540000, it will take 10 years for gifting to be completed and assets to be protected

in case you and your spouse decide to set up a family trust and transfer those assets to it.
With time, the value of those assets should go up, so if you decide to set up the trust and transfer the assets after few years, the gifting process will take longer. So it is in your interest to transfer the assets to trust sooner.

If you buy a house today in your personal names and transfer the same to family trust later on, it will be more expensive as compared to if you had bought the house under family trust in the first instance.

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.

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