Asset Protection
Transferring your assets into a Family Trust, if done properly, severs the ownership link between you and those assets.
If something then went wrong with your business and a creditor pursued you for a debt, the assets now owned by the Trust would not be immediately available to service that debt should the creditor be successful in their claim against you.
This is particularly important if you give personal guarantees in your business dealings. Often people don’t realise they are giving personal guarantees when they are dealing with other businesses or suppliers, as the guarantees are buried in the fine print of Terms of Trade. If something went wrong with that particular deal the person who signed that guarantee could find that all their assets are on the line when the dispute kicks off, rather than just the value at stake in that particular transaction.
Some business owners assume that setting up a limited liability company structure will protect their assets in the event of a claim against that company.
Unfortunately, although a company structure does provide a degree of protection by establishing a separate legal entity to contract with creditors, the Directors Duties set out in the Companies Act 1993 still impose personal obligations on company directors.
A company director’s personal assets may be at risk if they are held to have breached those duties. It is crucial that the Family Trust is set up at a time when things are going well with your business and there is no actual prospect of a claim from a creditor.
Otherwise, the Trust’s assets could still be made available to a creditor who is successful in a claim against you, on the basis that you knew the assets should be used to pay that specific creditor and you were attempting to evade that obligation.
Maintaining intergenerational assets
Some people choose to put the family bach or other property into a Family Trust for the long-term benefit of future family members, rather than passing it to their children who may choose to sell it instead of preserving it for the next generation.
The Family Trust would typically name the family members who are intended to benefit from the bach (or other property) and should include instructions for how the property should be used and managed.
Careful attention should be given to what will happen to the property at the end of the Trust’s lifetime (typically between 80 – 125 years).
Will it be sold and the proceeds split amongst the grandchildren? What if some grandchildren are not yet born at the time of sale?
If you think a Family Trust would be useful for this purpose, we recommend reviewing your Will at the same time to ensure your wishes align and can be properly carried out after your death.
Support of a specific family member
Inheritance Trusts are a type of Family Trust that can be used to hold money or other assets for the benefit of a particular family member who is unable to manage the funds themselves. That family member may have an addiction problem, or a disability or the parent may simply feel that it would be unwise to leave a large sum of money to the person directly.
During a parent’s lifetime, they can transfer assets into the Inheritance Trust and give the trustees instructions on how those assets should be managed to benefit their child.
After the parent dies the Trust will continue to exist and their child will continue to benefit from the Trust’s assets in a sustainable manner with the support and assistance of the Trustees nominated by the parent.
Although the parent-child scenario is common, the structure can be used to benefit many different family relationships, for example providing ongoing support for nieces and nephews after your death if some or all of them are not yet born.
Other benefits
Addressing family disputes
Some families have a difficult relationship with one another , e.g. a parent who considers their adult child has been violent or offensive toward them. That parent may not want that adult child to receive their assets after they die.
Historically, a Family Trust could be established during the parent’s lifetime to prevent those assets going to the violent or offensive adult child after the parent has died.
However, recent Court decisions indicate that in extreme circumstances such a Trust can be challenged after the parent has died, and assets made available to adult children on the basis that the parent was the abusive person in the relationship. Care is needed when establishing a Family Trust with this benefit in mind.
Relationship property
In conjunction with a Relationship Property Agreement, a Trust can be a useful tool in supporting blended families to manage their affairs in a way that benefits everyone.
If a couple are both bringing children from a previous relationship and want to benefit their own children separately, each partner may want to set up their own Trust to protect their children’s interests from the new partner and potentially the new partner’s children.
Relationship property protection for your children
For children whose parents set up a Family Trust many years ago, that Trust may still provide good protection against the adult child’s new partner or spouse , should the adult child’s relationship end by separation or death.
It can often be worth continuing with the existing Trust structure to preserve that relationship property benefit provided the Trustees are careful to keep the Trust’s assets separate from the pool of potential relationship property.
If this is your primary reason for keeping a Trust going, please contact us to make sure the Trust is being managed in a way that preserves this important benefit.
How do I set up a Family Trust?
A Family Trust is typically established by the preparation and signing of an appropriate Trust Deed.
Once the Trust Deed has been signed we would then assist with preparing the documentation to record the transfer of your assets into the Trust, and with the required documentation for decision-making and annual meetings going forward.
There are a range of different issues that can come up in the decision to establish a Family Trust and we recommend contacting Jessica Temm to discuss your circumstances if you think a Trust might be useful.