Family Trust Basics
Family Trust Basics and Lending in New Zealand for Trusts
FAMILY TRUSTS NEW ZEALAND AND OBTAINIGN A LOAN – TIPS AND GENERAL ADVICE
With financial planning and asset management in New Zealand, family trusts play a pivotal role, offering a range of benefits from asset protection to succession planning. This article aims to delve into the intricacies of family trust structures in New Zealand, particularly focusing on borrowing. We will explore the family trust structure, the pros and cons of establishing one, and offer valuable tips for those considering borrowing within the context of a family trust.
**1. Family Trust Structure:
Types of Trusts: In this article we deal with Family Trusts and Trading Trusts. Each serves a unique purpose, allowing families to tailor their financial structures to meet specific needs.
The Key Players in the Trust Structure:
Settlor: The individual or entity establishing the trust, often contributing a nominal amount initially.
Trustees: Individuals or corporate entities appointed to manage and hold trust assets.
Beneficiaries: Categorized as Discretionary, Final, Primary, Secondary, or Tertiary beneficiaries, they stand to benefit from the trust.
**2. Pros and Cons of Having a Trust:
Pros:
Asset Protection: Shielding assets from relationship issues, safeguarding the interests of both the original owner and their heirs.
Succession Planning: Facilitating the smooth transfer of assets outside the probate process, streamlining inheritance for future generations.
Protection from Creditors: Providing a buffer against potential business failures or financial hardships.
Privacy: Maintaining confidentiality, as trusts are not part of public registers.
Cons:
Costs: Annual accounting and legal fees can be associated with trust maintenance.
Loss of Control: The original owner (Settlor) may experience disputes during their lifetime due to relinquished control.
Creditor Attacks: If not administered correctly, trusts can be vulnerable to creditor claims.
**3. Family Trusts and Borrowing:
Tips for Borrowing within a Family Trust:
Strategic Setup: For those with small businesses, proactively setting up a family trust can offer advantages.
Using a Trust for borrowing: May enable you to circumvent the strict requirements of the CCCFA (Credit Contracts and Consumer Finance Act 2003 Act in New Zealand.
Borrowing Authority: Trustees hold the exclusive authority to borrow. Resolutions, typically drafted by lawyers, are crucial in this process.
Limiting Liability: Ensure that loan documentation explicitly limits the liability of independent trustees to the net assets of the trust.
Risk Management: Consider personal indemnities against trustee losses and, for GST-registered or trading trusts, utilizing a corporate trustee is recommended.
**4. Examples:
Cultural Differences: Some family deals may differ significantly from those in other areas, often requiring a unique approach and understanding of cultural nuances which need to be communicated to the lender.
Why Use a Trust for Lending: Family trusts become valuable tools, especially for borrowers with a history of bad credit. They provide a structured framework that can circumvent strict lending criteria.
**5. Recent Changes to Trusts Act 2019:
Key Changes:
Trusts can now operate for 125 years, up from the previous 80-year limit.
Proactive trust management, including annual meetings and resolutions, is encouraged.
The negligence threshold has changed.
Independent trustees are recommended to prevent the trust from being declared a sham.
Conclusion: In conclusion, navigating the world of family trusts in New Zealand requires a nuanced understanding of their structures and implications. Whether considering setting up a trust or contemplating borrowing within an existing one, careful consideration and professional advice are paramount. By staying informed about recent changes and adopting strategic practices, individuals and families can make the most of the benefits that family trusts offer while managing potential risks effectively.