Our Firm throughout its 70 year history has had a specialty in Estate Planning and Trusts.
Trust Law and practice are constantly evolving.The reasons for establishing trusts are varied, but over the years trusts have often provided a critical element of estate planning.
A prime focus is often on asset protection, succession, and family wealth preservation.
As the settlors of a trust advance in age or pass on, often the distribution of assets, resettlement or winding up of a trust becomes desirable. There are complex repercussions.
Care needs to be exercised in this process so that various objectives are achieved.
- Preservation of family wealth
- Optimum structures for second generation
- Proper management and control of the trust
- Tax minimization
You need to discuss with us fully any proposals to distribute trust assets or wind up the trust.
2. Regular Review
To maintain the integrity of the trust and protect against claims against the trust, it is important to regularly review the trust, record decisions and properly exercise trustees’ duties. Especially when we are involved in trusteeship we insist on a review process.
Review, minuting and paperwork guard against overturning or criticism of the trust or the trustees.
In the past, because of gift duty (a 25% tax), most people with trusts carried out a gifting program by annual gifts of $27,000.00 per person.
Now that gift duty is gone, people with outstanding gifting can decide whether to simply making a one-off gift. While this seems a no-brainer to eliminate ongoing gifting paperwork, it may not necessarily be the best decision and it should be considered on a case-by-case basis.
When weighing up whether to make a one-off gift, consideration should be given to various factors:
- Control of Income
If there is uncertainty of access to trust assets a creditor should be cautious about divesting themselves of a loan asset.
- Means Testing
We have never advocated forming trusts specifically to avail of Government healthcare subsidies. But clients with assets below specified threshold levels have been able to obtain subsidies for rest home fees.
The high costs for rest home care have the potential to eat into your asset base to the detriment of future generations.
Currently the Ministry of Social Development (“MSD”) operates a means testing regime to assess whether a person is eligible for a subsidy for rest home fees. The rules regarding eligibility are relatively complex.
MSD can disregard gifts made to a trust in their assessment of your eligibility for a subsidy e.g. Mr White needs rest home care, while Mrs White will remain in the family home. Say Mr and Mrs White had been carrying out a gifting program of $27,000.00 per spouse for the past five years. In other words, they have made combined gifts of $270,000.00 to their family trust over the past five years.
MSD will only allow $6,000.00 in gifting in total in each of the last five years. As Mr and Mrs White had made gifts of $54,000.00 combined in the last 5 years, then $240,000.00 of gifting (i.e. $270,000.00 less the allowable $30,000.00 across the five year period) is added back when determining their assets for rest home subsidy purposes.
This is a bad outcome, but it is worse where a one-off gift is made. If say Mr and Mrs White had not entered into an ongoing gifting program and had instead made a one-off gift of $270,000.00 to their trust 2 years ago. As they made a gift in a single year, they only have $6,000.00 of “allowable” gifting meaning $264,000.00 of gifting (i.e. $270,000.00 less the allowable $6,000.00) is added back when determining their assets for rest home subsidy purposes.
The advantages of ongoing gifting is magnified where the subsidy application takes place more than five years after the ongoing gifting has started, as less punitive “add-back” rules apply to gifts outside five years.
- Claims against your Estate
Under the Family Protection Act, close family members can challenge the previsions of your Will. Also people can claim against your estate under a ‘testamentary promise’. Gifting off the balance of your assets (including loans) to the trust guards against these claims against your estate, because the assets lie in the trust rather than the estate.
Any outstanding loan to your trust will be an asset which the Official Assignee will pursue in the case of bankruptcy. Gifting off the loan in full before things ‘turn to custard’ removes this potential problem.
Consider carefully all factors in deciding whether to gift (fully or partially) to the Trusts.
Please contact us to discuss any issues concerning trusts