New issues arise with management of family trusts

The past decade has seen a massive surge of interest in trusts, but that boom is now giving rise to major management issues.

The growth in trust numbers has been driven by several factors including the former National government's decision in the 1990s to means test superannuation to charge students higher tertiary education fees. Trusts were also being used by the self-employed to protect their assets, and parents were using them to help further their children's education.

While no hard and fast numbers are available it is thought that more than 100,000 new trusts were formed over the course of the decade.

Other factors such as the advent of a Labour-Alliance government in 1999, with the suspicion the new regime would re-introduce some form of inheritance tax, also fuelled the boom.

a higher and The past year has seen a further surge in trust formationsdue to the Government's Property (Relationships) Act which was passed last year and came into effect recently.

However many of the people who set up trusts are now finding themselves with unexpected management issues.

"There is still a widespread belief that all you have to do is set up trusts and leave them ticking over," Guardian Trust’s Mark Cassidy says.

"However when the nature of the asset in that trust changes then the administration of the trust needs to change as well. Unfortunately there is a lack of basic administration of many of these trusts."

For example, someone might put their house into a trust, as a way of protecting their assets, but a few years later move out of that house and rent it out.

Suddenly that trust is earning an income, and the income from that house belongs to the trust, a fact that is often neglected.

The Property (Relationships) Act looks set to exacerbate thissituation. The new law means people in de facto relationships are moving to protect their assets by way of trusts.

That in turn has meant a younger cohort of people are now setting up trusts again raising ongoing management issues as the trusts are likely to exist for a long time.

"It’s raised the need for people to start planning their asset protection strategy much earlier," Cassidy says.

"People really need to make sure they ring fence their assets before they go into relationships. Younger, high achieving, high net worth people in their 30s are having to think about it – even if they are not in a relationship."

One development expected to slow down the formation of trusts was a bill passed by the Government last year.

This bill was designed to stop people avoiding tax by putting assets into a trust on behalf of children. Under this bill children under 16 are now taxed at the trustee rate of 33%, rather than the minor's marginal tax rate, which can be as low as 19.5%.

However this change has not led to any major drop off in the number of trusts.

Cassidy says these changes have been a thorn in the side rather than a barrier, and financial planning practitioners have found ways around the more difficult rules.

In any case, most of these trust have been set up to help pay for children's tertiary education – and as the new rules apply only to children under 16, the problems have been fairly minimal.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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