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How can trust funds be used to minimise tax? |
How can trust funds be used to minimise tax? A Family Trust is a Trust created for the benefit of the family of a specific person or couple. A Family Trust is a separate legal entity like a company. It must have its own IRD number and file income tax returns if it earns income. It is created by signing a document called a Deed of Trust. A Trust is created when a person gives property to another person upon trust for the benefit of someone else. The Trust is the obligation under which the person having control of the property (called the Trustee) is bound to deal with it for the benefit of someone else (called the Beneficiary). A simple example of a Trust is when a client gives me money to complete the purchase of a house. I must bank the money into my Solicitor's Trust Account. I am bound by a Trust to use the money only for my client's purchase. I will commit a breach of trust I use the money for something else. Reasons For Creating A Family Trust People create Family Trusts because they see long term benefits for themselves and their children if their assets are transferred out of their names and into the names of Trustees. Some people wish to protect their property from "creditors and predators". The Trust becomes the owner of the property which is transferred to it. The Trust is entitled to the income which the property earns and to its increase in value as time passes. Examples of Long Term Benefits: To protect assets from the risk of claims by present or future partners ( married or de facto) for a share of property. This includes protecting children from such claims by future spouses or partners. The Property (Relationships) Act is a new law which came into force on 1 February 2002. This Act is about how the property of couples is to be divided up if they separate or one of them dies. It applies to married couples and couples who have lived in a de facto relationship. The Act says that everything which partners in a relationship own (separately or together) will be divided equally unless they have signed a formal Agreement saying that they want something different to happen if they split up. The Act does not apply to property which is owned by a Trust. It does apply to loans which a person has made to a Trust and which have not yet been repaid. To protect assets from problems which children might encounter if they owned the assets themselves after your death. For example, business or relationship problems. To protect assets from business risks. For example, claims by future creditors and claims arising from business mistakes, actual or alleged. To save income tax for the family as a whole by allocating income to beneficiaries (usually children or spouse ) who pay a lower rate of tax than the main income-earner. When Trustees pay income to a person under twenty, they make the actual payment to the parents as the guardians of the infant beneficiary. To protect family assets from government policies which are perceived to penalise people who own valuable assets such as their own home or investments. Also, to reduce the financial impact of Government policies. TECHNICAL TERMS Deed of Trust The Deed of Trust is the legal document containing the terms of the Trust. It is prepared by the solicitor and must be signed by the Settlor and the Trustees. Settlor The Settlor is the person who creates the Trust and provides the initial Trust Property (usually $10.00). The Settlor is usually a senior member or a close friend of the family which is intended to benefit from the Trust. The Settlor can be one of the Trustees. Trustees The Trustees are the people who have control of the property and are bound to carry out the obligations of the Trust. The Trust property is registered in their names. A Family Trust usually has two or three Trustees. One of the Trustees must be an "independent Trustee" ie. someone who is not a beneficiary of the Trust. This is necessary in order to show that the Trust is "at arm's length" from the people who receive its benefits. If a married couple creates the Trust, the Trustees are usually the couple plus a third person who is not a beneficiary. The third person is usually a solicitor or accountant who can give professional guidance to the other Trustees. If a single person is creating the Trust, the Trustees are usually that person plus a relative or close friend plus a solicitor or accountant. The Trustees must act unanimously unless the Deed of Trust allows them to act by majority decisions. Beneficiaries The Beneficiaries are the people who will benefit (receive money from) from the Trust. They need not be alive when the Trust is created (future children). A Trustee can be a beneficiary. In a Family Trust there are usually two classes of beneficiaries. They are called "Final Beneficiaries" and "Discretionary Beneficiaries". Final Beneficiaries These are the people who will share the capital of the Trust Property when the Trust ends. They are usually the same people who you would give your property to in your Will. Discretionary Beneficiaries These are usually the person or couple who wish to create the Trust plus their children and anyone else who is named in the Deed of Trust as a Discretionary Beneficiary (parents, brothers, sisters, nephews, nieces etc). They include the Final Beneficiaries. These people can receive income and capital from the Trust Property during the Trust period. How much each of them receives depends of the terms of the Deed of Trust. Usually the Trustees have an absolute and uncontrolled discretion as to whom they should pay the income and capital of the Trust during the Trust period. Trust Property This is the property (capital and accumulated income) which is held by the Trustees. This usually begins as an initial gift to the Trust of a small sum of money ($10.00) and is added to as more property is transferred to the Trustees (land, cash, company shares, investments, life insurance policies etc). Trust Period This is the period during which the Trust will exist. In a Family Trust the trust period is usually the maximum allowed by law (80 years). This may be shortened if the Trustees wish. Breach of Trust This is an act or omission by a Trustee which is not authorised or excused by law or by the terms of the Deed of Trust. The Beneficiaries have the right to sue the Trustees if there is a breach of trust. Appointor This is the person who has the power to appoint or discharge Trustees. The Appointor is usually the person who creates the Trust and transfers property to it. In the case of a married couple, the Appointor is usually the husband and wife jointly or the survivor if one of them dies. Trustees' Resolution The law says that all important decisions by the Trustees must be recorded in writing. The writing is called a Trustees's Resolution and is glued into the Trust Minute Book. Important decisions include the decision to open a bank account, to purchase a property, to invest money, to pay money to a beneficiary. Trustees's Resolutions are necessary in order to prove that the Trust is "at arm's length" from the people who set it up and receive its benefits. Trustees' Investment The Trustee Act 1956 imposes upon the Trustees a legal duty "to exercise the care, diligence, and skill that a prudent person of business would exercise in managing the affairs of others". There is an additional legal duty imposed on a solicitor or accountant Trustee to exercise the care, diligence, and skill that a prudent solicitor or accountant would exercise in managing the affairs of others. Failure to perform these duties is a breach of trust for which present and future beneficiaries can sue the Trustees. Copyright 2002 Philip Khouri Solicitor klaw@ihug.co.nz ==============================... This bigpond website talks about a book called Family Trusts A plain English Guide for Australian Families of average Means by N E Renton (Wrightbooks, Second Edition, 2001) Source(s): http://homepages.ihug.co.nz/~rake/family... http://users.bigpond.net.au/renton/trb.h... Trust funds are traditionally used to avoid taxes to your estate or give your loved one(s) security at a certain point in their life. I have a trust fund upon which only I pay the taxes when it kicks in. The individual setting up the trust fund does not pay taxes in America. |
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