Money: Trusts get some heartfelt support

By MARY HOLM

Q: Replying to your article last week about setting up a family trust in order to exploit Winz, perhaps people have other reasons to set up a trust, besides trying to fraudulently get superannuation.

I am a 38-year-old mother of two young children, and was diagnosed with advanced breast cancer several months ago. I don't know how long I have to live.

Over the past 19 years my husband and I have worked extremely hard to build up a family home and other assets.

We have recently set up a family trust to protect our children, as it would be naive of me to not expect my husband to remarry, and I feel it seems unfair for his new spouse to walk into a marriage and be entitled to half of the assets we have built up together.

To say that having a trust for this reason is not being honest with the new spouse is utter nonsense, and as most people know, a will or a prenuptial agreement is rarely worth the paper it is printed on.

Perhaps you should spare a thought for the thousands of people in my predicament who are doing the utmost to protect their children.

Perhaps you don't think that children should be entitled to the fruits of their parents' labour, or are you not a parent?

Not everyone is out to dodge tax.

A: Absolutely. That's why I said in the column two weeks ago that there were good reasons for setting up trusts.

And last week, "I can't argue with a family that sets up a trust to, for instance, look after a handicapped child after her or his parents die."

You've given another example of a "good" trust.

And yes, I am a parent. I think it's great if parents can leave something to their children. But I don't think kids are entitled to inheritances, just lucky.

I hope things go as well as possible for you and your family.

I got lots of letters this week about trusts, from many different perspectives. Together, they give a more rounded picture than I ever could.

I'll keep my comments brief, so we can run as much from readers as possible.

Q: I was disappointed with your expert's response regarding trusts.

I believe that I can identify a number of valid circumstances to have a trust:

* Trusts may be used to provide not only for disabled or disadvantaged children, but to protect the interests of any person or his or her family if they become incapable of managing their own affairs.

* If people simply allow assets to pass directly to heirs, the benefit can end up somewhere other than intended - perhaps with a second, wealthy spouse rather than needy grandchildren from an earlier relationship.

* Dissolution and establishment of personal relationships can result in inappropriate treatment of old or new partners, aged parents, or children.

Properly constituted trusts can provide greater flexibility to assist the related people.

* Consider, also, any individual who has accumulated wealth but who becomes subject to a legal action, subsequently won or found to be frivolous. Significant, unrecoverable costs can be incurred.

Should all of the family suffer as a result, or is it reasonable to use a trust to reduce this risk?

* There also appears to be an implied criticism of trusts being used to shelter wealth from creditors in the event of business failure. Is this simply another attack on limited liability?

Anyone uncomfortable dealing with a limited-liability entity can reduce risk by structuring the transaction differently or seeking some other guarantee of performance or protection, such as paying by credit card.

Any citizen is permitted to use means available within the law to structure his or her affairs to maximum advantage.

If the use of trusts to gain state entitlements is perceived to be wrong, change the basis for state entitlements, or the law on trusts, but don't attack the concept of trusts.

But I understand that state agencies already have significant powers to consider circumstances such as existing trusts before granting entitlements.

A: They do. And that's where this whole debate started, a couple of weeks ago.

It seems that some firms who help people set up trusts are not fully informing their clients about how the Government might treat their trusts.

Thanks for a comprehensive summary of when trusts might be justified.

And now, another disappointed reader. Oh dear!

Q: I was much disappointed by your recent attack on trusts, particularly your comment regarding rich people's access to welfare.

Everyone has a right to protect his or her assets. I wouldn't mind betting that fears of property or capital-gains taxes, by this or a successive Government, are the primary motivator of trusts, not escaping debt repayment or obligations to society.

In New Zealand, "rich" people pay extraordinarily high tax rates, 39 per cent marginal, plus 12.5 per cent GST, plus rates, plus various charges, and contribute far more over their working lives than they receive in welfare.

In some countries it would be regarded as highly unjust that everyone receives the same state pension.

New Zealanders' property rights have been consistently eroded by taxation and regulation. It's no wonder that people are increasingly attracted to trusts.

A: Surely you must acknowledge that most well-off people got that way not just through hard work but also because of some of the following: they are bright; they are lucky; their parents gave them a good education and/or financial support; they grew up in a "can-do" atmosphere.

What about the dumb, unlucky ones, born into poor families with negative attitudes? I'm happy enough to see some wealth transferred to them.

Not too much, though. Overall, I agree with you that it's not a good idea to discourage people from accumulating wealth.

I think you're right, our top tax rates are too high. And, to a considerable extent, property rights should be preserved.

But, as I've said before, I draw the line at well-off people using trusts to enable them to get extra from the Government.

Q: I wonder whether my particular personal scenario is commonplace.

My former father-in-law, a wealthy man by NZ standards, set up early in his business years a family trust through which he administered his personal assets.

The ultimate beneficiaries were his (yet-to-be-born) grandchildren, although his two children were often the recipients of trust funding for various lifestyle purchases.

When his son (my ex-husband) and I married, we moved into a flat that my father-in-law had helped his son finance.

Some time after our first child was born, we moved into a property wholly owned by the family trust.

The property had been selected by my husband and his father with little deferment to me. It included a fruit-growing business which would provide us with an income, as my husband was not employed at the time.

We always relied on the trust to prop up our income from time to time, and I was required to provide the trust with monthly financial reports, etc.

However, we laboured hard for many years in an effort to make a success of the business. I eventually realised that we would never experience the normal, joint decision-making that most couples enjoy.

My respect for my husband slowly dwindled because of this, as he was satisfied with the status quo. After almost 13 years of marriage, I decided to leave him.

After two years of protracted legal to-ing and fro-ing, I received a matrimonial settlement of $25,000, from which I paid $8000 legal costs, leaving me with a net sum of $17,000.

I had no entitlement to the trust, and insufficient capital to consider buying a home of my own.

The trust sold the property about a year after our separation and bought another home for my husband. He collected the DPB and became an odd-job man.

A year after that his mother died and left him a six-figure inheritance. A year later his father died and, although our children are the direct beneficiaries of his father's trust, it provides him with regular income and it meets all the children's educational expenses.

So, the bottom line is: he doesn't need to work, doesn't have a mortgage, lives in a brand-new house with brand-new toys, the children are more than taken care of financially, while I work 50-hour weeks, pay $255 a week rent in a modest flat, spend additional money on the children every weekend and yet still have to pay him child support, because as far as they're concerned he has no income.

Sorry that this has turned into such an epistle. But it really just isn't, well, fair. Legally correct; morally wrong.

You won't want to publish this but it felt good getting it off my chest!

A: I do want to publish it - after editing out some of the sorry tale - because it's a good example of a trust gone wrong.

Q: Congratulations on your comments on family trusts - my sentiments exactly.

What nobody mentions is the costs of setting up and running the damn things, which can run to thousands of dollars.

Also, the lack of control of your assets - it must be galling when you want to buy a Ferrari at the age of 85 and the trustees won't let you because they have to look after all beneficiaries.

Keep up the good work.

A: Thanks. You make some good points.

Trusts don't just cost lots to set up and run, they also complicate life.

* Mary Holm is a freelance journalist. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. We won't publish your name, but please provide it and a (preferably daytime) phone number.