Protecting your future with a family trust

This is the third in a series of fortnightly articles in which we explain family trusts and trading trusts.

There are many reasons people move their major assets into a family trust. Most commonly, it is done to avoid unwanted parties (such as children's ex-partners) getting their hands on the family assets or to avoid them having to be sold to pay for resthome care when the person becomes old.

A trust (assuming its trust deed allows it) can buy and hold any type of asset. Typically, people will move their family home, other property, shares, life insurances and other major assets (including items such as heirloom jewellery) into their family trust.

The golden rule for deciding which assets should be moved into your family trust is: all assets which are appreciating (increasing) in value should be moved into the trust. Assets decreasing in value (vehicles, home appliances) should stay outside the trust.

Assets are transferred from a person to a family trust in the same way as they would be transferred between two people - the trust buys the assets from their previous owner(s). A suitable (independent) valuation is established and the correct sale and purchase documentation drawn up and signed.

The debt the trust owes to the person who sold the asset is recorded and then forgiven, usually at the rate of $27,000 a year. Debt forgiveness (usually called gifting) can be done at a higher yearly rate. However, Inland Revenue will collect gift duty (tax) on amounts over this figure.

When a family trust is established, most of the asset transfers will be completed immediately, for this simple reason: as time passes, your key assets gain value and your business, if you have one, gains shareholders' equity. Therefore, the longer you hold the assets personally, the longer and potentially more expensive the process of forgiving the debt will be.

It may take many years for your assets to be debt-free inside your family trust. This delay should be considered like medicine which you must take for neglecting to set up your trust at the earliest possible time, before you accumulated all the expensive assets.

Unfortunately, there is no legal way to avoid this medicine.

Remember that each day that passes without your trust owning your major assets, the longer and potentially more expensive it will be to secure those assets for future generations.

* Glenn Smith is the HomebizBuzz trust and company formations expert.