Family or trading trusts can protect hard-earned assets

This is the first in a series of articles in which we will try to explain family trusts and trading trusts.

For a long time, trusts have been thought of as exclusively for the rich and powerful. However, a trust is now within the reach of every New Zealander and there is no comparable asset-protection tool available.

Family trusts have existed for almost 1000 years.

From the early 13th century, trusts became commonplace in England where land was conveyed to people (today called trustees), who held the land for the benefit of others (today called beneficiaries).

Parents could not legally pass land to their children when they died. When a person died while holding feudal land, their adult heirs had to pay the feudal lord a sum to "re-purchase" the land, pay subsequent profits from the use of the land.

However, these payments could be avoided if the land was conveyed to a third party (a trustee) so that future generations of the original "owner" could use the land even though they never held title to it. 

During the 18th and 19th centuries, trusts began to be used for commercial purposes as well.

In New Zealand, they have become increasingly popular in the past 50 years, first among farmers protecting their land holdings, then among other business people wishing to separate personal assets from business risks.

A trust is a legal tool that reduces the chances of people losing what assets they already have and those they accumulate in the future.

Assets are placed in a trust by a settlor and are managed under the control of trustee(s) who must deal with the assets for the benefit of other people called beneficiaries. An individual person may be the settlor, a trustee and a beneficiary of a trust.

A family trust helps to separate personal and business activities and protects assets in case of matrimonial or relationship problems. This is especially important since the introduction of the Property (Relationships) Amendment Act 2001 and the Civil Union Act 2004.

A family trust also helps people to keep their assets so their later years aren't spent in poverty, which can be the case if they have to sell property and assets to pay for rest home care.

A trading trust is very like a family trust, except that it is able to operate as a business with the added advantage of being able to pay money (profits) to the beneficiaries without them having to work in the business (unlike a company). This is attractive to people running a company who have non-working children over 16.

* Glenn Smith is the HomebizBuzz company formations expert. For more on trusts contact him at Home Biz Buzz (link below).