Good trusts and bad trusts

By MARY HOLM

Q: I have always had a sneaking feeling that many people created family trusts to ensure they could maximise their wealth and take advantage of Government subsidies in their old age. Rest home and hospital care in old age is very expensive.

My parents lived on their own until they were 96 and 91. They then moved into a rest home and hospital care for the last two years of their life.

My father retired on a Government pension. With this and New Zealand Superannuation he managed his finances to ensure, as far as was possible, there would be enough income to pay for rest home or hospital care.

He saw it as his responsibility to look after himself and his wife, and if there was something left over for his children that would be a welcome bonus.

If he outlived his own resources, he knew that the state would provide, and that was reassuring for him.

My parents died within a year of each other, having paid for all their care. There was a small inheritance for the four children.

I think he is still smiling that he managed to achieve those two goals. All without a family trust!

A: Good on him.

What worries me is that self-reliant people like your Dad might stop smiling and start to feel like fools for not jumping on the trust bandwagon.

I had thought we'd done our dash on trusts last week.

But, once again, so many good letters came in that I've decided to go with this issue for one more week.

Q: The Good Trusts/Bad Trusts debate comes down to where one draws the line.

On the one hand there is a trust to look after a handicapped child after her or his parents' demise, which is something that I certainly have no problem with.

Then we go on down through trusts to prevent a new spouse disinheriting the earlier children; trusts to reduce commercial risk; and finally trusts to enable one to conceal one's assets so as to apply for state assistance on the grounds of poverty.

I suspect that few would support this if it were not skilfully dressed up as "preserving one's assets".

You have to decide where you draw the line, in the same way you have to decide whether to jump into a raging river to try to save someone at one extreme, through to wading in to save someone (widely expected but not legally required), through to the illegal action of pushing someone to their death, and all stages in between.

For most people the line is drawn well to the humane side of where it becomes illegal.

So it is with trusts.

There is an industry of articulate professionals who gain clients and fees from advising and administering trusts.

Or to put this less charitably, there is a buck to be made by dressing up trusts so that the client can feel noble while deliberately making themselves dependent on the state.

If I was destitute, I'd see no shame in asking for a handout. But I do have difficulty imagining how one can justify deliberately engineering this while assets accumulate in the trust.

Each to his own!

A: Well put - especially the river bit!

But should we simply let people draw their own line? The next writer doesn't think so.

Q: Last week's letters miss an important point of my original letter (Money Matters October 6), which is that all the purposes of trusts that could be considered as socially or morally desirable can be achieved by other means.

And a major tightening-up on trust law would only stop people avoiding responsibilities imposed by other legislation.

The second letter last week (in which the writer gave "a number of valid circumstances to have a trust") throws in enough red herrings to feed a boatload of refugees for a month.

* There is no need to have a trust for somebody who is incapable of managing their own affairs. A power of attorney is easier, cheaper, and better.

* Justifying a trust on the basis that it allows one to control the destination of assets in the event that the patriarch disapproves of a daughter-in-law is just scary.

Look at last week's letter from the lady of limited income who has to pay child support to her wealthy ex-husband.

Passing assets on to your children is wonderful, but controlling them from the grave is just a dynasty.

* The comment about being a possible victim of frivolous legal action is just that - frivolous. It is not common, and it is not the main reason many trusts are formed.

* Trusts are not needed for limited liability. You put some capital into a limited liability company and, if the venture fails, the capital is lost, but not the family house, car or other investments.

Creditors can look beyond the company for payment only if it was allowed to trade while insolvent. Insolvent trading is illegal and puts the homes of the suppliers at risk.

My position is not an attack on limited liability. It is an attack on the ability to deceive creditors by an insolvent company trading, and then avoiding responsibility.

* The suggestion that concerned suppliers should get payment by credit card is pathetic.

Remind me to tell the subcontractors of the failed construction companies they should have asked for payment by credit card. Please!

Although some trusts are formed to reduce tax, to admit it would immediately render them invalid as a tax dodge.

* Most tax-dodging trusts are set up with a whole raft of supposed purposes, with an "incidental effect or purpose" being tax saving.

Any trust for the purpose of saving tax, while purporting to be for some other purpose, is a fraud on New Zealand citizens.

If tax rates are too high, vote in a change of government.

The lady with breast cancer in last week's column is a perfect example of a trust for absolutely valid reasons, but what she is doing could be achieved in other ways.

For example, put the family assets into a company with her and her husband being the two shareholders.

Her shares are willed to the children, with the current trustee as director with power of attorney to vote the shares at any company meeting. If they wanted, the children could be joint shareholders of the other half with her husband.

The historic reasons for trusts are obsolete, and in the modern world all assets need an owner.

If I want to give away assets during my lifetime, then the assets should have a new owner. To give them to a trust where I am a discretionary beneficiary is legal make-believe.

It is time that trust law was brought into the 21st century.

A: I'm a bit worried that getting rid of trusts altogether would be throwing the baby out with the bathwater.

There might be other ways to achieve everything that trusts achieve but are they as good?

Your proposal for the woman with breast cancer, for instance, sounds more complex than a trust. And I'm sure she doesn't need complexity.

I agree, though, that it would be great to see a major review of trust law.

What about it, Parliament? Or have all you MPs with family trusts got too much vested interest in the status quo?

One final note: To the man who gathered, from a Q&A about trusts a couple of weeks ago, that NZ Super is means-tested, no it isn't, once you're 65.

But if one spouse is 65 and the other younger, the couple can sometimes receive more than just the 65-year-old's Super. To get that extra, they must be on a low income.

And, to come full circle, some well-off people use trusts to make their incomes low.

* Send questions for Mary Holm to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. Letters should not exceed 200 words.