Family trust no excuse to plead poverty

By MARY HOLM

Q: Some time ago my accountant suggested we set up a family trust to "protect my assets".

My wife and I are in our 50s, and it was suggested that we do this ASAP, so that the assets would be safely "protected" for a long time before we would be caught up in possible future means testing for superannuation, or that one day one of us might need high-level residential care. Also mentioned was "creditor protection".

Our accountant is just doing his job, and it is nice to see him looking out for our interests. But we declined.

We have accumulated assets in order that we can support ourselves in comfort through a long old age (should we be so lucky) - not to hide away so that we can present ourselves as helpless supplicants to beg for state assistance in order to save everything for our children to inherit.

Our assets are our provision for the future, not the foundation of a dynasty.

Likewise, "creditor protection". If we run up a debt, we will pay it.

(Lest it be thought that we are naive about business risks, I should perhaps add that we are in business, and have had plenty of projects that lost us money. We just manage the risk by tracking projects closely and pulling the plug on the failures in time to pay all the bills and live to try again.)

When I read of trusts, I get this image of someone parking the car round the corner, putting on beggars' rags, and standing at the street corner rattling the cup.

Have we become a nation of beggars, that the chief objection to trusts is that Winz might be on to them?


A: I hope not. But I share your concern.

When New Zealand was one of the first countries to set up a welfare state, I bet those behind it didn't expect to see wealthy citizens holding out their hands.

The rich and middle class are lucky enough to get universal Super. In many countries only poorer citizens get a state pension.

But some New Zealanders who set up trusts want more from the Government. How can they justify it?

Let me quote from an article that landed in my letterbox recently, by someone in a large company that sets up family trusts: "I believe we all have a desire to assist our children if possible, and would all rather pass our assets on to our family than the Government."

Who could argue? They make trusts sound as wholesome as motherhood and apple pie. In fact, they almost imply, you're a poor parent if you don't have a trust.

But hang on a minute. There are some other kids to think about, too.

They're the ones falling behind richer kids because their schools can't afford enough computers - while the rich kids' grandparents sit around in rest homes at taxpayer expense.

Q: The question (Money Matters, September 29) about a trust and Winz raises a question for me.

Although I have formed a trust, and know it is lawful, I wonder what are the honest and equitable purposes of trust law.

There seem to be three classic reasons for forming a trust:

* To give protection from creditors in the event of business failure.

This is the purpose of a limited liability company, but many suppliers want a shareholder's personal guarantee, and the trust is there to avoid the guarantee if the business should fail.

Forming a trust for this purpose is effectively fraud on the business suppliers. They provide credit to the business on the strength of the guarantee, only to have the assets shuffled into a trust, and out of reach.

* To keep assets separate in the event of second and subsequent marriages, to protect the inheritance of children of the first marriage, or to control the asset division in event of separation.

As far as I can tell, this situation is better addressed by specific agreement with the new spouse.

Including a trust in the arrangements is unnecessary, unless the person setting up the trust does not want to be truly honest with the new spouse. (What a way to start a new relationship!)

Some people could consider that to be committing fraud on the new spouse.

* To pass the responsibility for care in old age to the state, even where the person has assets and income. This is simply fraud on taxpaying New Zealanders.

Those of modest means do not have the resources or advisers to set up a trust, and so pay their life savings away in rest-home fees, while more affluent people will be fully subsidised by Winz, and pass on a large inheritance to their already affluent children.

It seems to me that all the main reasons for forming a trust are based on deceit, allowing a person to have the use of assets and access to the income from assets, yet at the same time being able to say (legally) that they do not own anything and are effectively paupers.

Trust law predates company law, and is well outdated.

The effect of a trust is that assets are held for the benefit of a small group of people, usually family members, yet are owned by nobody.

I think it is time for the law to be changed to permit charitable trusts only, and that all other trusts should be dissolved (perhaps over five to 10 years), so that ultimately all assets are owned by an individual (either directly or via partnerships or company shareholdings).

If I have missed something, please explain how trust law contributes to our society.

A: As will be obvious after you've read today's first Q&A, I'm not the best person to debate this with you. I'm on your side.

So I recruited Bill Patterson of Minter Ellison Rudd Watts, who defended family trusts against Winz in last week's column, to respond to your points.

He starts by saying that trusts "came to be imposed by the Chancery Courts in England to prevent unconscionable behaviour".

"I do not think it could be said even now that the pendulum has swung so far that trusts are now designed to permit unconscionable behaviour.

"In fact, if you look back into history, trusts were used for very similar purposes to the way they are used today.

"A modern trust in New Zealand was predominantly used to avoid the impact of death duties (as trusts don't die) when those duties were very high.

"When income tax rates increased dramatically they became popular as a way to split income tax liabilities.

"Both were recognised as quite legitimate in many court cases.

"Today both reasons remain valid. (Although death duty has been abolished, who is to know that it will not be reinstated in the future?)," says Patterson.

At this point, I can't resist putting in my tuppence-worth.

From everything I've heard in recent years about possible death duties, I would be amazed if they were introduced for any but the really wealthy.

And I wouldn't be opposed to that. I don't like seeing people taxed heavily on their own income. But I wouldn't mind huge inheritances being reduced to large inheritances.

As for income splitting, I don't think it's fair.

If two people each earn $50,000, they should pay less total tax than if one earns $100,000 and the other nothing. In the latter case, only one person is working.

Back to Patterson: "Probably the most important single reason for forming a family trust is for the protection of the family, both the immediate family and future generations. Again there is nothing wrong with this.

"It would take too long to deal with your correspondent's specific objections.

"There is some merit in some of those comments (but equally the law has provided remedies in many such cases).

"Overwhelmingly, however, the community has recognised that trusts have been around for a long time and have a useful purpose to play."

Patterson offers three examples of how trust law contributes to our society:

* "If a person is left destitute, the state has to pick up the tab. Destitution can arise through unfortunate circumstances or even being 'ripped off' in some way.

"Remember how in Victorian times trusts were used to protect daughters against the then property rules."

* "Few young people start out in business without family help.

"Is it unreasonable for the family to want to protect their financial assistance and the children? A trust is usually the best way.

* "It is often said that we need risk-takers in society.

"People are much more likely to be prepared to take risks in setting up new businesses if they know that the essential core of their assets is protected.

"If they did not have this comfort, why take the risk, why create business opportunities, why create jobs?"

Me again: Today's first correspondent addresses that issue.

Also, I worry that, for every financially troubled business person who doesn't lose the family home because they have a trust, others may lose their homes because they weren't paid by the person with the trust.

Perhaps they should have trusts too. Perhaps everybody should have them. And then where would we be?

In an increasingly complex society. And it's far from clear that it would be a better one.

Having said that, I can't argue with a family that set up a trust to, for instance, look after a handicapped child after her or his parents die.

As Patterson concludes, "Let the debate roll on."

* Mary Holm is a freelance journalist and author of Investing Made Simple.

* Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.