In order for a family trust to be properly constituted, some form of asset must be transferred to the trustee to hold upon trust for the benefit of the beneficiaries. The family home, investment properties, securities, a family business, artwork and cash are all examples of assets that are put into a trust.
Gifting is a common way of transferring assets to a trust. Gift Duty was abolished in New Zealand in 2011 which in certain circumstances allowed settlors to make unlimited gifts to trusts. In New Zealand, it is very common for the family home to be held in a family trust.
Consideration For Trustees
Trustees must be very mindful of the implications of accepting a gift and take into consideration any potential consequences. The nature of the gift must be taken into consideration. For example, if a gift of cash is given to a trustee, it is important that the gift is clearly documented as a gift in order to avoid any future claims that the gift was actually a repayable loan to the trust.
Transfer Of Ownership
It is crucial that trustees ensure that the appropriate formalities to transfer the asset to the ownership of the trustee are complete. These formalities will vary depending on the asset being transferred to the trustee. For example, the transfer of shares may include the execution of stock transfer forms, cancellation and issuance of share certificates and updating of share registers. The transfer of ownership of real estate or artwork will involve different formalities.
A gift may be voided if it is found that the settlor/donor was insolvent at the time of making the gift.
Intention To Defraud
A gift to a trust may be set aside by the courts if it is discovered that the settlor made the gift with the intention of hindering or defrauding creditors or tax authorities. It is important for the trustees to be assured that at the time of making a gift, the settlor is solvent and able to pay their debts and that they have legitimate reasons for making the gift.
Gifting By Way Of Debt
Gifting may occur in the form of a release or reduction of debt whereby an asset such as the family home is sold to the trust for a debt owed by the trust to the settlor.
NOTED FOR CONSIDERATION: You need to explain why selling a home TO A TRUST might take place where the trust OWES a debt to the Settlor. This is a common method of transferring assets such a real estate to a family trust where Gift Duty would be levied if the property was to be gifted to the trust.
This debt may be forgiven in part or in full. In this case, trustees need to be very mindful of the tax implications of such a transaction(s) and take it into account when proposing distributions from the trust. Trustees should also consider any part of the debt that may not have been forgiven and may be called up at any time. Any debt owed to the settlor by the trust remains an asset of the settlor.
Recording A Gift
Under the Tax Administration Act of New Zealand, trustees must keep a record of all gifts received. In some cases, regular advances may be made to the trust so it is important to maintain up-to-date and proper books of account to record all advances together with trust expenses.
Family trusts and associated property transfers can be quite complex. The formation of a family trust should involve a professional trustee. The trust must be created for legitimate reasons, properly constituted and managed in order to achieve the desired outcomes.