www.123rf.com/photo_14615670Putting your property, investments and even businesses into a family or discretionary trust can be a good idea for asset protection. But this is only the start. You must ensure that the trust is properly managed and administered each year otherwise there is a good chance that the trust will fall foul of the current tax laws. The IRD in New Zealand is very active in paying attention to trusts that do not conform to the regulations and takes action against those Trustees. As a result many Trustees have received heavy financial penalties for failing to administer their trust correctly.

Why do you need to administer a trust?Family trust lawyer,Albany

Many people make mistakes with a trust because they still think that they own those assets that are now held by the trust. To be clear, they do not own those assets. Therefore they must be able to show interested parties what they have done on behalf of those parties.

Some of those interested parties include other trustees, beneficiaries of the trust, family members and the tax department.

What admin is necessary for a family trust to be compliant?

The simplest way to think of the administration for a family trust in NZ is to document everything. You must be able to show a paper-trail for every transaction that the trust undertakes.

There are a number of different tasks that need to be carried out each year for the trust to run in accordance with the tax rules. These include:

  • Annual accounts
  • Gifting or forgiving the debt of the trust.
  • Minutes of any transactions
  • Annual General Meeting
  • Paying any tax that is due.

As the Trust is a financial entity which owns various assets, it is likely that there will be various transactions which need to be recorded.

However, the trustees cannot simply decide to buy or sell an asset. They must record a minute of that decision in the Minute Book. This shows that the transaction was agreed by the Trustees.

Again, since it is a financial entity, it is obvious that the trust needs to have a full set of accounts collating those transactions. The accounts must be verified by a qualified accountant.

The Trust also needs to have an AGM which reviews and accepts those accounts. The AGM also needs to follow a strict protocol including appointing trustees, advisers and making sure that the documentation for the year is correct.

There are other admin tasks too and of course paying bills and tax that might be due.

Trustee responsibilities

The trustees are responsible to make sure that all of those administrative tasks are carried out correctly. Even if they do not undertake the task themselves, it is their responsibility to ensure they are done.

The trustees should act in the best interests of the beneficiaries. This can sometimes be a challenge when family members so not agree with the decisions of the trustees.

If any of those trust management tasks are not carried out and the IRD decides that the trust is not compliant, it is the Trustees who will be held accountable and be personally liable for any penalties that are applied.

How to ensure trust management is correct

Trust law is complex and the management of a trust is intricate and very detailed. Most people do not understand the requirements nor do they have the skills and patience to follow through with all the necessary tasks.

The easiest way to ensure your family trust does not incur penalties from the tax office is to hire a trust administrator. Often your lawyer who set-up the trust will also have a trust administration department. These people will be fully aware of any changes in the law and will also know what task need to be carried out by what date to make sure the trust remains compliant.

If you have a family trust and want to avoid penalties then it makes sense to contact a North Shore family trust lawyer who has a dedicated trust administration department.




jscreationzsLots of Auckland, North Shore residents and business owner consider establishing a family trust. It is often believed that this is a good method for protecting assets and making some tax gains too. While this is correct, there are some rigid guidelines and obligations that a trust must adhere to. If the trust does not, then the status of the trust can be questioned by the IRD and the trustees might be liable to financial penalties. This post is not legal advice so before you go any further, consult a North Shore trust lawyer who will be able to help you avoid these pitfalls.

Is your trust set up with the correct intention?

A trust can be tested in court to establish if it was set up with the right intent or not and many trusts have been declared null and void for having the wrong intent. For example, if you think you can lower your income tax by placing assets in a trust, which is an illegal tax motive and will probably be successfully challenged in the courts. Also, if the owner of assets sets up a trust to prevent a spouse from gaining access to shared relationship property, then that is the wrong intent and is likely to fail in court.Trust lawyer, hands in pockets

In 2011, the IRD was awarded a landmark case in the NZ Supreme Court against two business owners artificially lowering their income to avoid paying the correct amount of tax. This case was against two surgeons, Drs Penny and Hooper who set up trusts and paid themselves lower salaries to avoid tax. Subsequently, the IRD offered a voluntary disclosure option to other trustees whereby they could pay tax arrears for two years. For those who did not come forward, there would be no leniency and they would have to repay all outstanding tax.

So it is plain to see that it is essential that your family trust is created in the right way for the right reasons. A trust lawyer on the North Shore will be able to help anyone interested.

Some other thoughts about forming a family trust

As long as your intention is right and you follow the advice of a competent trust lawyer, then you will be fine. However, you do need to bear in mind some other issues.

Control and ownership of assets

Once an asset is transferred to a family trust, the trust is now the actual owner. The previous individuals who owned that asset are not the owners from that date onwards. This can create some headaches for people especially if they have placed their main residence into a trust. It can be a challenge to remember that you cannot treat the home as you own it. For example, if you want to build an extension, then you have to get the approval of the Trustees. The issue of home ownership can become even more complex if the trustees decide to sell the dwelling and the family is still living in it.

A lawyer will help you understand the potential issues if you want to take this route.

Fees for forming a trust

Many people think they only fee they will incur when setting-up a trust is the charge from their lawyer. Certainly there will be a fee for creating the Trust Deed but you will probably face other charges from the lawyer and 3rd parties too.

To avoid any potential challenges from the IRD, assets have to be transferred at the current market value. So for a house or business that you may want to transfer, you will need to organise professional valuations that can be presented to the tax department. Obviously these will attract fees.

But your lawyer will also have to go through a formal sale and purchase process to legally transfer those assets. It’s just like selling a house in the normal way. So you will also be charged for that too.

Seeing as you are selling the property to a new owner, you may also be liable to mortgage-break costs depending on the terms of any property mortgages. Your lender may be a bit lenient of the trust is going to take out a similar mortgage with them but be prepared for that cost.

Ongoing fees

One of the other major requirements for a trust is that it is managed correctly. There are lots of minute details that absolutely must be followed for the trust to remain lawful. If these tasks are not carried out, the IRD can claim that it is a tax avoidance issue with appropriate penalties.

Given the intricate requirements for the administration of a trust, it is best practice to use a specialist trust administrator. This can be an accountant or a lawyer.

You should also remember that a trust is required to produce a set of Annual Accounts verified by an accountant.

Obviously, both of these will incur annual charges.

Forming a family trust – a summary

From the above it is clear that there are significant issues to take into account when forming a family trust. With the complex legal issues involved, it is best to talk a specialist family trust lawyer on the North Shore before you go very far down the track. This could save you a lot of money later on.