Your money: Know the jargon, follow the rules

Who are the parties associated with a trust?

* Settlor(s): The person (or persons) who originally establishes the trust.

* Trustee(s): The person or entity to whom the trust property is given. The trustee(s) must hold the trust property as directed under the terms of the trust and also generally must observe the duties and obligations placed on trustees by law.

* Beneficiaries: The person(s) for whose benefit the trust is established. In a straightforward trust, there might be assets held for a child or grandchild. In a family trust there might be a group of beneficiaries ranging through grandparents, parents, children, grandchildren and any other persons specifically named or provided for.

What are the trustee's duties?

* Making sure they know the terms of the trust. While this seems obvious, it can be a problem for inexperienced persons who must not only have read and fully understood the deed, but also need an understanding of the law that could affect interpretation of the trust.

* Taking control of and protecting the assets. This includes obtaining documents of title, insuring the assets and making sure they are physically protected.

* Meeting legal obligations. The trustee will have to meet any legal obligations imposed by the trust deed or by law. For instance, a tax return must be filed, proper records kept and annual accounts will usually be required.

* Investing the assets. Unless otherwise specifically instructed by the trust deed, when formulating an investment policy a trustee must take into consideration the amendment to the Trustee Act 1956 which was made in 1988. The law change was introduced to help protect beneficiaries from trustees who invested assets poorly and failed to follow proper investment practices. There are now examples of cases where trustees have been taken to court for not acting in a prudent manner in relation to investments.

* To act impartially. The trustee must take account of the interests of all beneficiaries and act without favour. This can sometimes be a problem where a family member or friend is the trustee.

Why consider a professional trustee?

Impartiality can be very important. A professional such as Tower Trust will stand in the middle, listen to all points of view and encourage a reasoned and fair solution. If a decision must be made we will do so impartially.

A private individual might die part-way through the trust and then another person might be appointed trustee. That can create problems of understanding, particularly regarding family circumstances and background knowledge.

Security is important too. What if something goes wrong with the trustee's personal circumstances? Could the trust assets get mixed up and lost? Will the private trustee always be reliable? Can you trust him/her well into the future?

As well, very few private individuals are specialist trustees.

Placing Assets in the trust

When placing assets in a trust, it is important to take account of the Estate and Gift Duties Act. It limits the amount that can be gifted by any person during any one year before gift duty must be paid.

At the time of writing, it is possible for any one person to gift $27,000 during any 12-month period. If all gifts made during any 12-month period, added together, exceed $27,000, then gift duty must be paid.

The gift can be money or property, in which case the value of the property will be the market value at the time the gift is made. Where over $12,000 is gifted, a gift statement must be declared and filed with the Inland Revenue Department.

Generally, small gifts such as Christmas and birthday presents will not be counted.

Gift duty does not apply to gifts made to charitable trusts.

There should be proper documents as evidence that a gift has been made.

Gifting Assets to the trust

This is the most common means of transferring assets into a trust, and there are several forms a gift could take.

For example, cash or an asset could simply be gifted to the trust. Or, the trust could purchase the asset, leaving a loan owing back to the seller. That loan can then be gifted away - or in effect forgiven by the seller over time - depending on the value.

Remember that, if an asset is to be gifted it must be valued on a market basis, otherwise the short paid value may be deemed to be added to the gift.

A newly established trust will often not have any assets other than those transferred into it when it was set up. That could be a very nominal amount. If a larger asset such as a property or an investment is later to be placed in the trust, then an outright gift of the asset could create a gift duty liability.

The most common method in these circumstances is for the trust to purchase the asset from the person transferring it.

For example, a house property is sold to the trust at its current market value of $140,000. The trust now owns the property, but owes the seller $140,000.

That debt can be reduced over time by a gifting process. The gift would simply be by way of a deed of forgiveness being completed by the seller whereby he or she acknowledges that the debt is forgiven by a certain amount - usually, the maximum of $27,000 a year.

Where the property was placed in the trust by joint owners, each of them would be acknowledged as being owed half of the debt. In this way they could each gift $27,000, a total of $54,000 each year.

* Article provided by Tower Trust.