FAMILY TRUST ADMINISTRATION
Family Trust Gifting: A Gift For You
Janet Xuccoa
Hello Everyone
Well the New Year has well and truly started for us. In Trust Land we’ve conducted hundreds of Annual Trustee Meetings. Out of those ATM’s we found a common issue arose – Family Trust Gifting. So I thought I’d talk a little about Gifting and hopefully remove all the confusion.
Additionally, for those of you who didn’t know, my GRA Birthday is fast approaching. That special day where it all began for me as your Professional Trustee was 29 March 2005. So to celebrate my GRA birthday, we are going to make a Gift ourselves.
Read more about that at the end of this post.
Family Trusts: How to Gift
You cannot simply transfer your assets to the Family Trust. If you did this, the law would deem that you have made a gift and gift duty would be payable. So to avoid gift duty, you need to sell your assets to the Trust at market value.
When you do this, the Trustees will probably not pay you cash for the assets. Rather, they will give you an IOU, which is often referred to as a Deed of Acknowledgment of Debt. This Deed of Acknowledgment of Debt will record that the Trust owes you a particular sum of money for the asset it has just purchased from you.
The balance owed to you by the Trust under the Deed of Acknowledgment of Debt will be an asset in your hands and a liability to the Trust. To reduce down the credit balance owed to you by the Trust under the Deed of Acknowledgment of Debt, you need to gift.
The Trust Gifting Process
Gifting is a process involving you annually forgiving part of the debt owed to you.
At law, you are able to forgive up to $27,000 per person, per year, without incurring gift duty. If you chose to forgive more than this balance, you will be liable to pay gift duty on the amount of the gift you have made over and above this $27,000 threshold.
The gifting process involves five steps: |
- You as the Donor (the person making the gift) will sign a Deed of Partial Forgiveness of Debt and Gift Statements;
- The Trustees as Donees (the people accepting the gift) also sign the Deed of Partial Forgiveness of Debt and a Trustee Resolution noting on behalf of the Trust their acceptance of the gift;
- A copy of the Deed of Partial Forgiveness of Debt and the original Gift Statements are filed with the Inland Revenue Department;
- The Inland Revenue Department stamps the Gift Statements and returns them to the person who prepared the documents; and
- The stamped Gift Statements should be filed with the Trust’s papers and the Trustee Resolutions accepting the gift should be filed in the Trust’s Resolution Book.
Some people try to shortcut this process and only have the Donor sign the gifting documents. I think this is a dangerous practice as I believe you should be able to show that a gift has been made and accepted.
Why Gift?
Each time you gift you transfer in more wealth to your Family Trust and you transfer wealth away from yourself. Hence if a creditor attacks you personally and all the assets are in the Trust, those assets should be protected.
This means that should anyone bring a successful legal claim against you, they will not be able to satisfy their judgment against your personal assets as you will not own any assets of significance. Rather, it will be the Trust that will hold all the assets and all the wealth.
Of course having said the above, you cannot transfer assets to the Trust to avoid creditors that are already on the horizon. Additionally, the correct transfer process that I have previously discussed must have been undertaken. Most importantly, the administration of the Trust must have been carried out correctly.
Potential Family Trust Gifting Problems
There are two problems I frequently see in practice. The first involves no gifting and the second involves incorrect gifting.
People often believe that once they have completed their first gift they either don’t have to gift anymore, or that their gifting will happen automatically. They are usually wrong on both counts.
If a credit balance is owed to you by the Trust, you need to keep gifting until that balance is eliminated. You also need to ensure that someone actually completes the gifting process. Often this will be a Professional Trustee.
If you do have a Professional Trustee you should ensure they prepare your gifting documents for you. They may for example think one of your other advisors is taking care of this. They may even forget. Accordingly, your gifting may become overlooked. To avoid this, simply diary out your gifting date and call your Professional Trustee or whoever is completing your gifting documents and prompt them.
Incorrect gifting is the second issue that can arise. This can occur when financial statements are not prepared and financial statement reviews are not completed.
Simply put, what happens when this issue arises is the balance recorded in the Deed of Acknowledgment of Debt that the gifting is based on, is not congruent with the balance noted in the financial statements.
This incongruence arises for different reasons, often because the Trust has given back funds to the Settlors. Accordingly, the credit balance owed to the Settlors is less than that shown in the previous year’s gifting documents.
When financial statements are not prepared and the annual financial statement reviews are not completed, the issue never becomes identified and lays dormant. Identification only occurs when an individual or a Trust is questioned or attacked. That’s when the problem is highlighted and comes home to roost.
Of course this can be avoided if you make sure the Professional Trustee does their job and ensures annual financial statements are prepared and carries out that all important annual financial statement review.
Gifting Summary
I hope the above shines some light on Gifting. As you can see, it’s a really important part of gaining asset protection and has to be completed correctly.
Failing to have your Deeds of Acknowledgment of Debt contain the all important Hawkins and Entrenchment clauses can undo all the good work gifting brings about. Not gifting from the correct balances recorded in financial statements just creates havoc with the gifting programme. Taking short cuts with the preparation of the gifting documents themselves doesn’t pay.
So if you are going to set up a Trust and put assets into it to gain asset protection, take care to correctly complete your Gifting.
Our Gift To You
To help celebrate my GRA birthday here is our Gift to you: (This promotion has now finished).
We invite all clients and prospective clients who do not have their annual gifting documents currently prepared by GRA, to take advantage of this gift.
Let us complete your first years gifting for absolutely nothing. Yes that’s right - completely free of charge. If we do this for you, it could mean you save several hundred dollars. (This promotion has now finished).
As with all offers there are a couple of conditions…
First, your Deeds of Acknowledgment of Debt have to be up to date and in a form acceptable to us. Secondly, we must prepare your gifting documents for the 2011 and 2012 years at our standard fees. By the way, those fees are $200 + GST per person per gift.
Lastly, this offer is only available for a limited time. (This promotion has now finished).
So, don’t look a gift horse in the mouth! Contact me now by email or telephone and take us up on our Gift. By the way, with all the money you are going to save through this Gift, remember to send your Professional Trustee a Birthday Card – she’ll really appreciate it (hint!)
All the best.
Janet Xuccoa BCom LLB
Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants
Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955
P.S. Did you like this article? For Help, please contact us for an interview. Please go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth. GRA are accountants who provide expert accountant advice both in NZ and offshore.
Annual Trustee Meetings: Explained
Hello Readers
I hope you’ve enjoyed your Christmas break and are now fully rested, ready to tackle the New Year.
Usually most of us have some spare time at the beginning of a new year and I recommend some of this time being used by Trustees to conduct an Annual Trustee Meeting (”ATM”).
An ATM is our way of of taking care of your Family Trust to protect you, your family and your future.
So what exactly is this and how does it help the Trust?
Well, Trustees have a duty at law to annual review the affairs of the Trust so by holding this Meeting they are satisfying their duty. Additionally, this meeting will go a considerable way to ensuring the successful operation of the Trust and can be instrumental in avoiding a Trust failure.
The Value of an ATM
To demonstrate how an ATM can help a Trust, let’s take the example of Mr and Mrs Boiler. They were the Trustees of the Boiler Family Trust which contained the following assets:
* Family home;
* Shares in Boiler Orchard Limited; and
* $47,000 in cash on term deposit.
When I looked at this Family Trust it initially appeared to be in good health. But it soon became apparent when reviewing the financial statements and talking to the Trustees that the assets of the Trust were under threat. You see the liabilities of the Trust had increased in the last two years. I wanted to know why that was.
The Trustees told me that the Trust’s orchard business had done well over the years but in the preceding two years a large supermarket had come to town. When this occurred, the town’s population purchased all the goods they needed from the supermarket. T
This meant the produce the orchard produced wasn’t selling and what was selling had to be sold at a heavily discounted price. As a result, the Trust had suffered losses in the last two years and had to increase its Bank borrowings just to serve debt.
I was not the Professional Trustee of this Trust but Mr and Mrs Boiler had come to me for advice. I immediately recommended the orchard be sold. It was a case of selling in an orderly fashion or in another year, having the Bank foreclose and sell. The latter option was not attractive. A sale proceeded and financial disaster was avoided.
Family Trust Lessons
What’s interesting about this case is if this Trust had a Professional Trustee who had conducted with their co-Trustees an ATM, two things would have been identified.
First, the news that the supermarket was arriving in town would have been aired.
Secondly, the Professional Trustee would have considered this broadcast and discussed the need to sell the orchard business. The Professional Trustee would have given this advice because it would have been clear what was going to happen.
Hopefully, all Trustees would have agreed to sell the business and the need to increase debt would have been avoided. Overall, the Trust would not have suffered the loss it did as the Trustees could have taken action much sooner than what they did.
I hope you can see from the above example the value in holding an ATM.
ATM Checklist
At the Meeting several points should be addressed. These are as follows:
- Trustees should identify and discuss the objectives of the Trust and determine whether those objectives should be carried on in the forthcoming year;
- A schedule of assets and liabilities of the Trust should be completed and analyzed. Trustees should in particular discuss how well the investments are performing and how comfortable they are with the level of debt the Trust is carrying or exposed to.
- Trustees should check the assets of the Trust are well maintained and if maintenance is necessary, should make a list of what is required and who will be instructed to carry out maintenance out.
- All insurance policies for the assets of the Trust should be checked to ensure insurance cover is adequate. Policies must be checked that they are held in the A report by the Professional Trustee and the findings of the Financial Statement Review they have undertaken, should be given to all other Trustees.
The above list of points is not exhaustive but merely suggestive. This is because the matters discussed at each Trust’s ATM may differ depending upon the nature and objectives of the Trust.
Lastly and most importantly, once the ATM has been completed, the Minutes of the ATM should be prepared and signed by all Trustees.
Those Minutes should contain the decision the Trustees have unanimously made regarding whether or not to retain the current assets of the Trust given the nature of those particular assets and taking into account the objectives the Trustees have. In my experience, this task is best carried out by the Professional Trustee.
I hope this information spurs you on to holding an ATM. As always, if you have any queries, would like a review of your Trust or need help, just contact us.
A review of your Trust and structures may end up saving you money and a lot of heart-ache. We work by phone, email or skype for your convenience.
Best wishes for the New Year.
Janet Xuccoa BCom LLB
Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants
Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955
P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth. GRA are accountants who provide expert accountant advice both in NZ and offshore.
A Special Message For Trust Lawyers
Dear Trust Lawyer,
If you’re a Family Trust lawyer, I can assume you are at least curious about how you can reduce risk, improve your service and possibly increase your level of business.
If that’s true, please read this entire message. Even if we don’t end up talking, I’m sure you will get some value or ideas from what’s written below.
Risk Management
When it comes to trust work, we understand the pressures and risk that lawyers can face. Getting small but important trust administrative matters completed on time and correctly every time, is expected. And it’s what we as lawyers get paid to do.
On the other hand, failure to act properly as trustees on behalf of our clients can be devastating. It can cost us, our practice and our partners financially, let alone our reputation…
We’ve heard the stories before. Here are a few that I am personally aware of, that had tragic results:
- Failure by a lawyer to recognise that GST is payable on the sale of a property by the Trust that he was a Trustee of.
- A client (unbeknown to the lawyer acting as their trustee) registering the family trust for GST, claiming GST and then failing to repay the GST on the sale of the property.
- Then there’s the story about the employee of a practice who tried to cover their tracks when it came to gifting. They had ‘forgotten’ to complete gifting documents for a number of clients. To remedy this situation they decide to prepare 3 years worth of gifting for each client, get the clients to execute the documents and then present them all at once to the IRD. As you can imagine, the clients were not happy when the IRD demanded their pound of flesh from gifting duty.
- Or what about that life insurance money that paid out to the trust of one of your clients (with you as trustee) that you’ve held on term deposit for the past 4 years, waiting for the main beneficiary to come of age.
Does any of this sound familiar?
Why Does This Happen?
Failure to act properly as trustees on behalf of our clients can occur for a variety of reasons.
Some of those reasons could include inadvertent omissions as a result of an extreme or heavy workload. Mistakes can happen.
For a variety of reasons we become less vigilant with trust work that we delegate to employees who themselves may fail in their duty.
Similarly, we may experience problems because we just don’t have the staff or the right processes in place to catch problems before they arise - or to stop our clients wandering and causing some disaster which we are implicated in!
Whatever the reason, the thing we ALL have in common, is that we all want to avoid these things from ever happening. Right?
If You Are Acting as Trustee, the Buck Stops with You
Whether you are acting as a trustee in your personal name or in the name of a corporate, we all know that at the end of the day, the buck stops with you.
If we cause a loss to a trust as trustee, a beneficiary has the right to feel aggrieved and may seek to recover against us. Ouch.
Judgements from our Courts have shown that time and time again.
We as trustees, we place ourselves at risk when we fail to act as we should. In fact sometimes, we can attract risk because we may not be clear about exactly what needs to be done.
And when that risk crystallises it can it can bring about some nasty results.
It may cause:
- sleepless nights as we go through the litigation process
- worried hushed conversations with our insurers
- financial loss to the Practice as we spend time fighting the claim or worse, losing the action, negative publicity either before or after the judgment has come down,
- loss of reputation whether warranted or not
- loss of income as other clients hear about the issues and leave the practice.
And if these consequences aren’t enough to send most lawyers running for cover, consider the increased scrutiny and negative attention that can result from colleagues and peers.
So, what’s the Solution?
After consultation and use by several practices already, Cornwall Trustees Ltd (through Gilligan Rowe + Associates Ltd) have developed a complete Trust Administration service designed for use by lawyers involved in trustee work.
It’s the provision of essential trust administration services, that you in turn can recommend to your clients.
For a low fee payable by your client, we take care of the small but critical tasks necessary for any trust to withstand any scrutiny. In effect we remove any risk attached to the ongoing administration by managing:
- Preparation of minutes/resolutions
- Deeds of acknowledgement of debt
- Variable interest loan agreements
- Gifting
And more.
What’s in it for you and your practice?
By briefing out trust administration work to us, you receive a variety of benefits including increasing the time you have available to spend on other matters that increase your income production.
Aligning yourself with New Zealand’s Corporate Trustee of The Year (that’s us), can add value to the relationship with your client and enhance your overall offering.
But the biggest benefit to you of working with us is the tangible risk reduction that you will experience and the peace of mind knowing that the small but necessary details are taken care of.
Non Competition
Of course, we respect that the client is your client. So for that reason, we give you our promise that we would not complete any legal work for your clients.
In fact, we’re prohibited from doing that.
Instead, we (where possible) would refer extra business back to you. How? If appropriate, after the analysis of your clients’ financial statements and other material (which is a normal part of our process), we can report any recommendations requiring your attention back to you and your client.
As an example, this work could include putting in powers of attorney for the client or registering a General Security Agreement.
Low Priced, High Value Service to Your Clients
Our processes, systems and attention to detail are second to none. In fact these attributes helped us secure our national award which is judged on procedure, merit, structure, achievement and client satisfaction.
It’s summed up in the following:
A real strength of Cornwall Trustees is the hands-on commitment from the Directors through to clerical staff where their integrity and personal belief in the structure and process provides the client with a high degree of security. Errol Anderson, Registrar NZ Trustees Association.
We believe that these are all the things that your clients deserve.
Can We Work Together?
We’d like to share more detail about how we could add value to your practice - including our pricing.
The first step is to Request A Call. I’ll speak to you personally, answer any questions and email you an outline of our services and our promise.
If you can’t wait, please call (09) 522 7955 and ask for me, Janet Xuccoa.
Thank you for reading this.
Janet Xuccoa BCom, LLB
Professional Trustee Services
Gilligan Rowe + Associates
P.S. We can work with trust lawyers anywhere in NZ.
Guess Who’s Coming to Dinner? The Beneficiaries!
So you’ve decided the best thing to do to protect your hard earned assets is to put them in a Trust or Family Trust. This way, asset protection will prevail and the assets will be available for you, your children and other Beneficiaries to enjoy.
But what happens when things turn sour and the Beneficiaries want to know what’s in the Trust and what they’re entitled to. Are they entitled to know all about the Trust and its affairs?
This issue comes up more than most people realize. It especially raises its head when Beneficiaries are fearful and suspicious which can occur if there is limited communication between Trustees and Beneficiaries. The order of the day is thus good dialogue between everyone which tends to foster good will and trust.
In the event however that the Beneficiaries do want to know about the Trust, what information are the entitled to see?
Legal Basis of Beneficiaries’ Rights
Historically, it has been thought that a Beneficiary’s right to information stemmed from whether they were a Fixed or a Discretionary Beneficiary.
Fixed Beneficiaries had an entitlement to Trust assets pursuant to the Trust Deed provisions. Therefore, it was posited, Fixed Beneficiaries had an entitlement to view Trust documents and to receive disclosure of Trust information.
Discretionary beneficiaries on the other hand had no entitled to Trust assets. All they possessed was a right to be considered by the Trustees when the Trustees exercised their discretion with respect to the paying out of capital, income and /or the allocation of assets. Accordingly, it was supposed Discretionary Beneficiaries had no power to demand to see Trust information or to view Trust documents.
Recent case law has now clarified the basis on which a Discretionary Beneficiary may seek disclosure of Trust documents and this has nothing whatsoever to do with whether they are a Fixed or a Discretionary Beneficiary. Rather, the approach has been to apply to the Court’s on the basis that the Court has an inherent jurisdiction to administer Trusts.
Using this approach, the Courts have said that they possess inherent jurisdiction to supervise and if necessary, to administer Trusts. Beneficiaries of both classes have a right to approach the Courts to seek discourse of a Trust’s documents and it will be for the Courts to determine whether they will exercise their inherent jurisdiction or not. This of course means that the right of a Beneficiary to view Trust documents is at the discretion of the Courts.
The Courts have said that when they are considering exercising their discretion they will be mindful that they are engaging in a balancing exercise, balancing the competing interests of different parties (eg: trustees and beneficiaries and third parties) and will take into account various issues including personal and commercial confidentiality, parties privacy, consequences of disclosure, etc.
The Courts have also noted that they will be mindful that Trustees are not obliged to disclose to Beneficiaries their reasons for exercising their discretionary powers. This is important as it could have an impact on what documentation is released to a Beneficiary to view.
In some circumstances the Courts have pronounced, disclosure may be limited and safeguards may have to be put into place.
What Information are Beneficiaries Entitled to View?
Types of information that Courts have approved for disclosure include:
- Deeds of Trust;
- Deeds of Variation of Trust Deed provisions;
- Deeds of Changing of Trustees;
- Deeds of Resettlement;
- Legal opinions relating to the interpretation of a Trust Deed’s provisions;
- Legal opinions with respect to a Beneficiary’s rights;
- Valuations of assets of the Trust;
- Financial accounts of the Trust.
Some information Beneficiaries are not entitled to see. For example, the Courts have ruled beneficiaries are not entitled to view letters and notes from Settlors, Memorandum of Wishes, Trustees reasons for decisions made and motives of Trustees.
Beneficiaries Rights to Demand & Receive Payments
Because the Trust’s financial statements may be viewed by a Beneficiary under a Court Order, it is important to deal with allocation of income each and every year. Any income that has been allocated to a Beneficiary and shown as such in the financial statements, may be called by that Beneficiary to be paid to them upon them becoming adults.
Accordingly, only income that is to be spent on them should indeed be allocated to them in the financial accounts. Failure to allocate income in this manner may result in a Beneficiary requiring a Trustee to pay them the surplus income that appears as a credit in their Beneficiary account shown in the financial accounts of the Trust.
Summary
I believe that one of the best ways of avoiding any type of disagreement is communication. If full communication is made with a Beneficiary, whether they are a Fixed or a Discretionary Beneficiary, then there will be no mystery or reason for distrust to arise.
Whilst Trustees are not legally required to show Beneficiaries all Trust documents, it is in my view, sensible to be clear and honest with Beneficiaries when they ask about a Trust’s affairs. Failure to do so will simply create suspicion and exacerbate tension.
Janet Xuccoa
Janet Xuccoa BCom LLB
Professional Trustee Services
FamilyTrusts.co.nz
Gilligan Rowe + Associates Ltd
Learn more about Janet
_________________________________________________
More Information?
If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview. Otherwise just call Janet Xuccoa . Janet can be contacted by emailing janet@familytrusts.co.nz or telephoning (09) 522 7955.
Financial Statements & Family Trusts
Here’s a question from Mr Warren H. from Christchurch:
“Am I required to have financial statements completed for all
Trusts or just for Business Trusts”?Thanks Warren T.
Janet Xuccoa
ANSWER: Warren, the Inland Revenue Department places a duty on Trustees to prepare financial statements and file tax returns if the Family Trust or other Trust earns income. Trustees may also have to prepare and file GST returns.
Trustees need to remember that they are personally liable for the affairs of the Trust and this includes paying any taxes that are due to the Inland Revenue Department.
Good record keeping, including having bank statements evidencing transactions the Trust has engaged in, is crucial to preparing accurate financial statements from which the Trust’s tax returns can be compiled and the Trustees can be made aware of their taxation responsibilities.
Even if a Trust does not produce any income and simply holds passive assets such as a family home, I still recommend financial statements be prepared for the Trust. These type of financial statement will note advances made by the Settlors to the Trust, loans the Trust may have made to other entities, the gifting position, the assets the Trust holds and the liabilities the Trust has incurred. Again, such financial statements help the Trustees satisfy their duty when accounting to the Beneficiaries of the Trust. Reduced accounting fees may well apply for the preparation of these types of financial statements.
Properly prepared financial statements are a great tool that Professional Trustees use to ensure the Trust is being administered correctly and that all Trust documentation is up to date and in place. Without financial statements, this task is severely hampered. Correspondingly, poorly prepared financial statements will be a hindrance to Trustees and in some situations can be very dangerous. For these reasons, it is important to choose a qualified accountant who is familiar with accounting for Trusts, such as GRA.
For readers of this blog, GRA offer free accounting services for the first year for Trusts and Companies. There are however a couple of conditions which will be disclosed to Readers on enquiry.
All the best,
Janet Xuccoa BCom LLB
Professional Trustee Services
FamilyTrusts.co.nz
Gilligan Rowe + Associates Ltd
Learn more about Janet
_________________________________________________
More Information?
If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview. Otherwise just call Janet Xuccoa. Janet can be contacted by emailing janet@familytrusts.co.nz or telephoning (09) 522 7955.
Why Family Trusts Need Their Own Bank Account
Family Trusts and Bank Accounts
Frequently, Trustees have to consider whether they should open a bank account for the Trust. This consideration usually arises when a Family Trust either receives funds or the Trust has to make a payment.
My view is that a bank account should be opened when the need exists for such an account. So, if the Trust is going to receive funds or pay out funds, then a bank account is necessary. Hence, if a Trust hold shares and will be receiving dividends, then those dividends will belong to the Trust and hence should be banked into the Trust’s bank account. Correspondingly, if a Trust is going to incur expenses, such as having to pay for a new roof of the home that it owns, these expenses should be paid out of the Trust’s bank account.
- The reason why I hold this view is that Trustees have two particular duties. The first duty is to ensure monies belonging to the Trust do not get mixed up with Trustees’ funds. Clearly, having a bank account for the Trust where funds are paid in and paid out assists in meeting this duty.
- The second duty is that Trustees must be able to account to Beneficiaries for the administration of the Trust.
Having a separate bank account and keeping copies of all the Trust’s bank statements showing all the transactions undertaken by the Trustees is of enormous help in satisfying this duty. Remember however, those transactions will need to be recorded in Minutes and financial accounts based on the information contained in the Bank statements will need to be completed.
Janet Xuccoa
All the best,
Janet Xuccoa BCom LLB
Trust Director
FamilyTrusts.co.nz
Gilligan Rowe + Associates Ltd
Learn more about Janet
_________________________________________________
More Information?
If you have any questions or queries relating to asset protection or trusts you can Request-A-Call for a no-risk chat or to set up an interview. Otherwise just call Janet Xuccoa, Trust Director and Partner of Gilligan Rowe & Associates Limited. Janet can be contacted by emailing janet@familytrusts.co.nz or telephoning (09) 522 7955 .
