Read below for more information on what a Family Trust is, and some of the rules and options. Family Trusts are often surrounded by a lot of myth and mystery, but the majority of Family Trusts are easy to setup and maintain properly. There is more information in the Members' area.

Use our checklist to work out your Trust requirements. Given your circumstances we'll suggest the Trust type, and numbers of Trustees, beneficiaries, settlors etc.	Use our checklist to make sure you have all the necessary information - and make sure you understand the roles and responsibilities of the people involved.

What is a trust?

Some basic legal principles

A Trust is essentially a method of separating legal ownership of assets from the beneficial enjoyment of those assets.

Transferring assets to a Trust ensures that:

• The appreciation of assets does not accrue to the owner but instead accumulate to the Trust (which could then be distributed to the owner or family members)
• By using a gifting programme, over time the owner can reduce the amount of the debt, and thus also transfer to the Trust the wealth accumulated up to the date of transfer.

Like a partnership, a Trust is not a separate legal entity. Because Trusts are not separate legal entities, generally Trustees are personally liable for all Trust debts.

Beneficiaries of a Trust are not personally liable for debts incurred by a Trust which are in excess of the Trust fund. This puts the beneficiaries in a similar limitation on liability position to that they would enjoy as shareholders in the company.

Ingredients of a Trust

To set up a trust the following are required:

• A Settlor
• Trustees
• Beneficiaries
• Trust property

  Settlor

A settlor or settlors is an individual or two individuals (normally husband and wife) or entity who establishes the Trust, usually by making a gift to the Trustees. The settlor determines in the first instance who the Trustees and beneficiaries are, and the powers of the Trust. The powers usually give the settlor the right to appoint and remove Trustees.

Trusts can be set up without a settlor. In this case the first Trustees make a declaration creating the trust. This is a less common method of establishing a Trust.

Trustee

A Trustee is a person who has positive duties to perform in relation to Trust property of which the Trustees have legal ownership.

A Trust Deed can provide for one or more Trustees at the inception of the Trust.

It is sensible to appoint at least two Trustees at the outset to ensure that there is no break in the Trust's administration in the event of the death or incapacity of one of the Trustees.

We recommend three Trustees as this overcomes any stalemate that may occur. These would generally be you, your partner and an independent. Ideally, the additional person should be someone who is not a beneficiary and not likely to be one. Obviously the person should be someone you can trust, notwithstanding that person has a legal obligation to act in the best interest of the beneficiaries.

• often technical expertise is required to administer a Trust and it is therefore appropriate that an independent person with that "expertise" should be appointed; and
• an independent Trustee may be required to deal with situations in which the settlor has a conflict of interest in dealing with trust assets, for example, where the settlor may wish to purchase Trust assets, or use them as security for personal borrowing.

  The Beneficiaries

Anybody who will, or may, derive a benefit under a Trust deed is a "beneficiary" except those who derive remuneration from administration of the Trust (ie Trustees and their advisers).

As a general rule beneficiaries of a family discretionary Trust are generally confined to a settlor's family, descendants and possibly spouses of descendants. It is however possible to specify a very wide range of beneficiaries. Distribution if any, is made to beneficiaries at the discretion of Trustees. The distribution can be capital or income.

Defining who or what are the beneficiaries is the most crucial issue in the Trust deed.
Two approaches are normally undertaken:

• Named persons can be identified as those benefiting from the Trust assets. This has the downside of not covering within the concept of "beneficiary" those persons who the settlor may want to benefit from the trust in the future but were not in existence at the time the Trust was constituted e.g. unborn children of the settlor.
• Beneficiaries can be defined as a class. This is often described by their relationship to the settlor e.g. "children of the settlor", "grandchildren of the settlor" etc. In defining the "beneficiary" by reference to a class it is important to ensure the requirement of certainty of objects for the Trust is met. In this instance a draftsman must use conceptually certain criteria in defining the membership of the class of objects

Beneficiaries also have certain legal rights vis a vis the Trustee. These include;

• The right to be considered by the Trustees when their discretion, either to act or not to act, is being considered.
• The right to seek court intervention where they believe the Trustees have acted improperly.

As a general rule a Court will not interfere with the way Trustees have exercised their discretion unless the Trustees have refused to consider the exercise of a power, or have exercised it in a capricious or clearly wrongful or fraudulent manner.

Often the prime purpose of a Trust is to provide a home and income for the people setting up the Trust. If this is the intention this should be included in the Trust deed.

Points to Note:

• Minors: If a minor is identified as a beneficiary or a potential beneficiary it is necessary to decide at what age they will receive their entitlement. If none is stipulated then a receipt can be taken by the Trustee when the beneficiary attains the age of 20.
• A person cannot be sole Trustee and beneficiary as the legal and beneficical interest in the Trust property would reside in the same person and there would be no Trust.

What is Trustee and beneficiary income?

There are two levels of taxation in respect of a Trust (not including a unit trust):

• tax at the trustee level; and
• tax at the beneficiary level.

Trustee income

Trustee income is defined as gross income derived by the Trustee of a Trust which does not vest in the beneficiary or is not paid or applied to the benefit of the beneficiary during or within six months after the end of the income year. All income derived by a Trustee which does not become beneficiary income is taxable to the Trustee.

Beneficiary income

Beneficiary income is gross income derived during an income year by a trustee which:

• Vests absolutely in interest in the beneficiary in that income year ; or
• is paid or applied by the Trustee to or for the benefit of the beneficiary during or within six months of the end of the income year.

Beneficiary income is subject to income tax at the beneficiary's marginal rate of tax at present. From 1 April 2001 beneficiary income distributed to a minor (under 16) will be taxed at 33%. Other distributions (including distributions of property settled on the trust and capital gains or profits) are tax free.

Allowable deductions (in gaining the income) may be taken by the Trustee before the income is vested in or paid to the beneficiary.

Generally, beneficiary income retains its character. For example, if the Trustees receive dividends and distribute them as beneficiary income, the beneficiary will be regarded as receiving dividend income.

Trust Deed

The Trust is established by the preparation of and signing of a Trust deed. The Trust Deed in essence is the document that defines the Trust. It states the powers of the Trust, who has the authority to use these powers, who can benefit from the Trust and the power of those authorised to determine to what degree these people benefit from it. It is an important legal document.

Trust records

Trustees must keep minutes of decisions made. Trust minutes are required whenever Trustees meet. At a minimum, Trustees should meet at least annually even in the case of a Trust where the only asset is a family home. Annual accounts should be completed and taxation returns are required even for Trusts where there is no taxable income. It is also wise to prepare a wish list. This is advice to the independent Trustee of how the assets of the Trust are to be dealt with on the death of the other Trustees.

Trust property

It is normal for the Trust as soon as it is formed to purchase the assets that are to go into the Trust from the persons who have decided to establish the Trust. These have to be at a fair value otherwise gift duty can be charged by the Inland Revenue Department. Normally the family home can be transferred at Government valuation. As the Trust starts with virtually no funds the Trust initially owes the person transferring the assets for the value of these assets. It is then usually decided to gift off this loan. Individuals can gift $27,000 in each 12 month period so that gradually the loan is reduced until it is fully gifted off. This requires completion of a gift statement which is filed with the Inland Revenue Department.

Not sure if you need a trust?

It has been said that by the time you need a Trust it is too late...This is in part true, although a good lawyer may be able to help you!

In essence, if you have or will in the future have assets that you want to protect for your children and family then a Trust is for. You may be protecting the assets from future business dealings going awry, or other unforseen creditors (Government included). While a Trust is not instant protection it does protect the gain in asset values from the start and makes it more difficult for creditors to get money off you personally. It is possible for the courts to reverse Trust transfers and gifting for a fixed period of time so the longer you have the Trust the more asset protection it gives.

A Trust can be seen as an inexpensive insurance policy both against creditors and to ensure your loved-ones are taken care of when you are not there to do it. There are numerous examples but picture this:

Your daughter is 20, her boyfriend has been living with her at her expense for the past year - he has not worked. You find out you have terminal cancer - you have 6 months to live and have left everything 50:50 in your will to your two children.

On your death, the money left to your daughter will go in trust for her unill she is 21. At this point her boyfriend has been with her for more than 2 years, and so he will be entitled to half of her share of the will money!

With a Trust your assets are held by the Trust with a loan back to you for the value of the assets at the time of transferring them to the Trust, less any movements since that date. Your will forgives this debt. On your daughter's 21st birthday, the money owed to your daughter will usually be nil. Your daughter can be looked after: the Trust can even lend her and the boyfriend money to buy a house or any other assets the trustees feel fit, but if the boyfriend leaves that money must be repaid, thus protecting your money to benefit your daughter and not her ex-partner.

This is an extreme example but does happen!