Should I Own My Home in a Trust?
The use of trusts in New Zealand has become increasingly prominent over the years, with some estimates suggesting there are now around 400,000 in existence. When combined with New Zealanders love affair of property, the ownership of real estate in trusts is incredibly popular. However, while the use of trusts has been popular, in the last few years their usefulness is being questioned.
As a result, a question often asked by clients is “do I even need a trust?”
Benefits of a Trust:
Like anything in life, the answer always depends on your circumstances, but there remain valid reasons for using a trust, such as:
1. Succession Planning – a trust can be a very useful vehicle to hand over your assets to the next generation. They can be set up while you are still alive in accordance with your wishes, which can make the transition on death more seamless.
2. Asset Protection – keeping your family assets safe, remains a strong benefit of a trust. This is especially relevant for those with potential liabilities if they own a business or are a director in a company. Also, it helps to protect against claims by former partners or your children.
3. Flexibility – a key benefit of a trust can be the ability to distribute income and capital gains when compared to other structures. This can become quite beneficial when it comes to property ownership.
However, these benefits need to be balanced against some of the pitfalls of using a trust, such as:
1. Cost – a trust is only valid if it is well maintained and administered. As a result, there are often greater costs involved than simply owning property in an individual’s name. This includes set up costs and the ongoing annual administration, such as preparation of financial statements, meetings, recording decisions and other matters.
2. Control – a trust is a separate legal entity, which means if you were to set up a trust and transfer your assets, you are relinquishing your ownership of those assets. This separation of ownership can create problems so should be thought through in advance.
3. Responsibility – a trust requires trustees to hold assets on behalf of beneficiaries. This comes with a lot of responsibility and thus, there can be quite extensive liability. Again, it is very important this is thought about carefully and the responsibility should not be undertaken lightly.
4. Taxation – there are specific taxation rules that apply to trusts that you need to be mindful of, particularly when it comes to making distributions to beneficiaries. On one hand this can offer greater flexibility as noted above, but getting it wrong can be costly. Also, when non-residents are involved this can increase the complexity both in New Zealand and overseas.
There are still good reasons for establishing and using a trust to own property, but like all things, it needs to be tailored to your needs and must be set up and run properly. Therefore, it’s important that you get the appropriate advice upfront.
By Daniel Gibbons - Property Tax Specialist, Crowe Horwath
This advice is general in nature and has been prepared without considering your personal circumstances. Before acting on it you should seek independent professional advice.