Philip and Barbara had set their trust up when they owned their business, a small engineering firm which had been very successful.
They had three adult children and five grandchildren. The trust owned their family home, a bach in the Bay of Islands, the commercial property that the business was run from and an investment portfolio with a well regarded funds management company.
Philip and Barbara’s eldest son, James, had worked in the business since finishing university and five years ago, he had bought the business from Philip and Barbara’s trust. The trust had lent James the money to buy the business. There was no interest being charged and James was slowly paying off the debt over time. Their two other children, Jonathan and Megan were in vastly different circumstances. Megan was a solo mum - her marriage having split up three years before. She worked as a primary school teacher and Barbara and Philip were often helping her out with both childcare and the odd “little extra” to help her make ends meet. Jonathan was single, a successful real estate agent, who was doing extremely well for himself in the current property market boom.
Barbara and Philip had read a bit about the changes to trust law and of course, it was often the topic of conversation when they met up with their friends. Many of their friends were considering winding up their trusts and Barbara and Philip thought maybe it was something that they should consider. They talked to their accountant who suggested that they meet with a specialist trust lawyer. He said that trust law was becoming far more specialised, and a bit like going to a cardiologist rather than your GP for chest pains so it was wise to seek advice from someone who specialised in trusts.
They got in contact with the lawyer who he had recommended and went along with their large file of trust documents and an open mind. The lawyer explained that there were a lot of people who had trusts who no longer needed them – especially as they aged and they wanted to simplify their personal affairs, but there were still very good reasons for lots of people to still have trusts.
She said that even though Philip and Barbara no longer had any business risk and that kind of asset protection was no longer required, their family circumstances warranted retaining the trust. Philip and Barbara were very keen for Megan to receive additional funds in the event that they both died, and a trust was a great platform to provide that flexibility. Barbara was particularly concerned that if she died and Philip met someone else, that the assets would remain protected for the children. She had seen her own inheritance diminish significantly when her father re-married after her mother passed away. He had ended up giving a lot of his wealth to his new wife’s children during his life time and Barbara would not want that happening to her children. Due to the significance of their assets, the lawyer explained that continuing the trust would be a sensible idea given that concern.
Both Philip and Barbara also wished for the Bay of Islands house to stay in the family for as long as possible and a trust is the perfect vehicle for long term hold of assets. The trust would also assist with making sure that whatever they passed on to their children would be protected for their children and grandchildren, and would not become relationship property and then divisible if their relationship split. This was a real concern, especially seeing how vulnerable Megan was after the split from her husband. The lawyer explained that a really good will could also alleviate these concerns, but coupled with their other needs, it was best to keep the trust going.
The trust was also paying school fees for the grandchildren and this offered a tangible tax benefit, as the trust gave the flexibility to be able to tax those income distributions to the grandchildren at their lower tax level.
Barbara and Philip felt hugely relieved after seeing the specialist trust lawyer. She had put them at ease by explaining the structure they had was best. She also gave some good advice around how they could improve on how they managed the trust and also how to make sure the trust was ready for the new changes to the law.
If you feel you could use some specialist trust advice, don’t hesitate to contact Tammy McLeod or the Trust team at Davenports Law by calling 09 883 4400 or visiting www.davenportslaw.co.nz.