We should not consign family trusts to history long before their time. Far from being archaic, family trusts are the Madonna of law, constantly recreating themselves and adapting to new situations better than any other legal structure yet devised.

There are often complaints from the Government about family trusts, but trusts have never been outlawed and it is doubtful that they could ever be legislated out of existence.

Trusts are still a favourite with anyone in business or in a profession, particularly company directors, engineers and medical professionals, all justifiably nervous about being sued. Many of them use limited liability companies and have insurance to reduce their risk, but they need trusts as well. The object is to keep their home and some lifestyle assets, even if the worst happens and they lose their business in a financial collapse.

Relationship breakdowns are a classic example of trusts adapting to a situation. Now it is just not divorcees that can lodge claims against the ex’s Remuera home and Pauanui bach. These days a jilted de facto partner (whether of the opposite sex or the same sex) could do the same.

A trust can help considerably in these situations, as long as it is formed before the relationship starts.

Often parents are equally worried that their children may inherit their assets, only to lose them in their latest relationship disaster. This is far less likely to be a problem if parents set up a carefully structured trust.

Others have a prodigal son or daughter likely to squander the family fortune as soon as they receive it. Once again the parents can set up a trust and slowly dripfeed their hard-earned money to any children that would have quickly dissipated larger amounts. This is better than the parents cutting the prodigal out of their wills and far less likely to cause a bitter court battle.

We have been amazed at the number of trust issues causing confusion in the marketplace. The following is a list of myth busters, based on thousands of interviews with clients setting up family trusts:

• Does the settlor (the person who sets up the trust) control it? The settlor may have the power to appoint and remove trustees and beneficiaries, but (unless they are trustees) should not have any direct control over the trust. Even then, the views or wishes of any independent trustee should not be ignored.

• Should there be a long list of beneficiaries to make the trust as flexible as possible? Generally there should be a quite narrow range of beneficiaries, such as spouse, children, grandchildren and perhaps charity. We have seen cases where the settlor’s ex wife is a beneficiary of a new trust, even though they have been involved in bitterly contested divorce proceedings for years. Not a wise move, as any beneficiary has the right to be considered when the trustees pay out any capital or income.
• Do family trusts make it difficult to buy or sell the property? Untrue, although a little more paperwork needs to be signed by all the trustees when a trust is involved.
• Do people with family trusts always pay less tax? Not necessarily true. Trusts can limit the amount of tax to a maximum of 33% (or less, if the trust’s income is paid out to beneficiaries on low tax rates). This is far lower than the 39% paid by higher income earners. Trusts tend to be most tax-effective for people with income from rental properties or businesses.
• If I form a family trust will I qualify for a resthome subsidy? WINZ’s application form now asks a number of questions about family trusts. WINZ has not generally complained about trusts formed more than 5 years before going into a resthome, but it certainly has the power to do so. Family trusts are increasingly unlikely to help you qualify for a resthome subsidy.
• If I keep a life interest in my property will that make the gifting period far shorter? True, but life interests have fallen out of vogue as they can create other problems.
• Do the trustees really need to meet each year, if this incurs legal costs? The legal costs can be far higher if the Trust is not run properly and a problem comes up as a result. In this deceptively complex area of the law, we suggest you use only legal advisers with vast experience. As always quality legal advice doesn’t cost, it pays.