How Can A Trust Protect Your Assets

And Lower Your Taxes?

Careful tax planning and trust administration can help

Lots of families create a family trust with the aim of reducing their tax and protecting their assets.  However, you cannot simply transfer your assets – house, business and investments - to a Trust thinking that all will be protected and you will pay less tax from that point.  Both of those aims are possible but every step must be managed precisely both before and after to avoid challenges from the IRD and even the risk of prosecution for the Trustees.

Why have a Family Trust?

There can be many reasons for setting up a Family Trust but a common one is for business owners or investors to protect their assets in case of unwanted circumstances. For example, you invest time and money to grow your business, perhaps have some rental properties and enjoy a nice home. But all of these are at risk if your business runs into problems.  Remember, more than 85% of small businesses in New Zealand fail, often for reasons outside the owner's control such as a major supplier or client going of business.

If you have used your family home as security with your bank, then there is a very real danger of you losing your house.  However, if you have protected your home and other investments using a Family Trust in the correct way, you can feel safe that your assets should be free from creditors.

A trust can also reduce your tax bills however, you must be very meticulous about how you set up a Trust and the way you manage it.

Do you have a sham trust?

Many families think they are protected because they have a Family Trust but if you did not have the right "intent" then any benefits from tax planning or estate planning may be lost.  There are cases of business owners putting assets in a Trust and drawing minimal salaries from their businesses to keep income in the Trust. But the IRD has won cases and expensive fines and interest have been imposed on the trustees.

The first thing to realise is that you no longer own the assets in a Trust. The Trust is the owner and they should be managed for the Beneficiaries not for your personal benefit. 

This is a common error people make with their trust planning. 

Thorough trust administration

Sometimes unintentionally people can end up with a sham trust because they did not understand the rules regarding trust management and admin.

So that any Trust and Beneficiaries can carry on enjoying the benefits of being a trust, the Trustees must ensure that the correct reports are maintained and filed appropriately.  This includes:

• Having minutes of meetings
• An Annual Meeting
• Preparing and filing tax returns
• Paying taxes
• Maintaining records

If you do not follow this, then the Trust could lose its status and the Trustees may be liable to personal penalties or even prosecution. The problem is that it is tedious work so many people put off doing it.  That is why you need a trust accountant who is paid to handle the administration for you.

Call us on 444 9004 or email us at geoff@gtyler.co.nz for an initial free consultation.

 
 

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