Articles by Janet Xuccoa

Money is a jealous mistress

One night last week, in a city away from my home, I found myself at a bit of a loose end.  Not a personality to skulk around, I used the time to see a movie I wanted to enjoy.  ‘Money Never Sleeps’ was my choice.  Not a bad movie as far as movies go.  Quiet realistic in parts although in my view, not as punchy as Michael Douglas’ first movie ‘Wall Street’. 

The following day I mulled over the script.  It struck me the main theme centred around the idea of making money.  The concept of actually protecting the money once the green stuff had been made, wasn’t really explored.  That I found particularly interesting because we all know money is a jealous mistress.  If you don’t pay attention to it, and that surely includes taking time out to look after it, you can wake up in the morning and find it gone.  Michael Douglas certainly knows this as it was one of his lines in the movie.  All this thinking of course has lead me to write this article.

the protection business

Undoubtedly one of the most sensible ways of protecting money and other assets such as your personal home, is to put those assets into a Trust.  Asset protection isn’t the only reason however for someone to use Trust.  Ensuring assets are available for the next generation is also a fairly popular rationale for Trust usage.  Additionally, the existence of government means testing provides a major motivating factor for establishing a Trust.  On this point, it’s my personal belief that means testing is highly likely to be brought into law in the future with respect to New Zealand superannuation.  Hence it wouldn’t surprise me one little bit if Trust usage increases for this reason alone.

means testing in the future

In the last 5 days, I’ve completed 16 presentations on the Budget Changes coming through.  One of those changes involves aligning the top marginal income tax rate with the tax rate Trusts pay.  According to the budgetary commentary that was posted, this alignment is being introduced so that New Zealanders wouldn’t spend time sheltering their income in Trusts.  Great line but I’m not buying it for one single minute.

Put three thoughts in your mind.  First, the Government has known for years that it will have trouble paying out superannuation in the future if no action is taken.  Secondly, when you move assets into a Trust, you are moving them from your personal name and identity into the names and legal possession of the Trustees of a Trust.  Thirdly, means testing is well and truly alive and operating here in the land of the long white cloud.

To assist in filling its coffers, the Government introduced Kiwisaver.  Initially this was optional to join.  Later it became compulsory but Kiwis had the ability to opt out on certain conditions.  In other words, the rules got changed.

Telling New Zealanders not to move their assets, including their income, into Trusts, just gives the Government the ability to means test Kiwis in the future.

Imagine this.  In about 15 years time, Mr Smith rocks up to the powers that be and asks for his fortnightly government superannuation payments.  The Government clerk requests he fill out an asset and liability schedule which establishes that Mr Smith owns his own home, bach, shares, a little cash and his own Kiwisaver fund all with a grand asset total of $1.2m.  Now on the basis that the entitlement to government superannuation is means tested, do you think Mr Smith will get his regular superannuation payments in full?

If you think I am wrong consider this.  Right now to get a rest home subsidy from WINZ you generally can have only $200K worth of assets in your own name and that includes the family home.  More than this and you are told to either sell down your assets and use your own money or a charge is put against your home.  Which means that when you die and/or the home is sold, the Government is paid back what they have been paying out up to certain limits.  Whatever is left over (which could be as little as $200,000 based on today’s figures) is then distributed to your heirs.

Medical science now keeps us alive for longer even if quality of life isn’t what it used to be.  So you can spend years in a rest home.  At an average weekly rate of $900 + GST for rest home care, the bill can really mount up.

I can hear some people out there saying Government superannuation will never be means tested.  Well if they can change the Kiwisaver rules they can certainly change the entitlement to Government superannuation.

If I’m wrong and you’ve put your assets in Trust all you suffer is great asset protection along the way.  If I’m right and your assets are in Trust, when you are means tested you will be able to state you own nothing and then will be entitled to collect your Government superannuation payments.

other reasons why you need asset protection

Its not just means testing we need to worry about.  We can lose our assets through a myriad of other ways such as a business failing or a personal relationship demising.  I’ve already written about these events in my free e-book so I won’t go into any detail here in this blog.  What I will say is that often it is outside your power to control events.  What you can frequently have however, is a large degree of influence over the consequences these type of events bring about. Download a free copy of my e-book to get the low down on this.

fear and control

There are lots of fears about moving assets to a Trust.  Probably the most common one is that people think they will lose control.  Not possible of course if the Trust is created correctly but the fear exists nevertheless.  So let’s put this worry to bed. 

When you create a Trust, you are creating a vessel.  This vessel like all containers will hold something, namely assets such as money, shares, homes, bachs, jewellery, artworks, etc.  Predominately anything that increases in value and that you want protected.

There are two very important people involved in a Trust.  These are Appointors and Trustees. The Appointor hires and fires the Trustees so they have ultimate control over the Trustees.  The Trustees’ job is to decide a variety of things including what assets the Trust will hold, buy and sell and who they will allow to use the Trust’s assets.  Clearly, if you are an Appointor and a Trustee you have great control over the actions of the Trustees and the assets of the Trust.

managing the trust

Not all Trusts are created equal and not all Trust documents ensure you get the benefits a Trust can bestow.  To demonstrate, let me tell you about Mr Smith.  He sets up a trust and puts his home into it.  At the time of transferring the home to the Trust, the Trustees give Mr Smith an IOU for the value of the home.  A couple of years later, Mr Smith incurs a large business debt and through no fault of his own, is unable to pay the money he owes his creditor.  The creditor subsequently sues Mr Smith and forces Mr Smith to call up the IOU.  This in turn, forces the Trust to sell the house.  The sale proceeds go to the creditor.  So, at the very time Mr Smith needed the Trust to protect his assets, it failed.  This sorry ending could have been avoided if the IOU had contained appropriate asset protection clauses.

The moral of this story is simply ... setting up a Trust and moving an asset into it, is not enough to ensure asset protection.  Documentation must be correct.  In particular, vital asset protection clauses need to be in the documents at the time the IOU is given.  Your GRA Professional Trustee can assist you with this.

Of course not only does a Trust’s documentation need to be in tip top shape but the Trust actually has to be managed.  This bit needlessly trips up a lot of people.  The golden rule is contained in what I have called the ‘Trust Commandments’ and it’s called the ‘3D Rule’.  Succinctly put, ensure you discuss, decide and document all the affairs of the Trust with all of the Trustees.  The discussing and deciding exercise is usually the easy part to complying with the 3D Rule.  It’s the documentation part that causes big problems.  Documenting what the Trustees have decided, why they have made their decisions and the basis of their decisions is vital and it’s crucial to get the wording of documents correct.  Failure to adhere to the 3D Rule can mean the Trust can be challenged as a Sham and all the benefits that the Trust bestows, such as asset protection, can be lost.  That’s not where the bad news stops however if a Sham Trust is found to exist.  Next comes along ugly tax consequences.  Big headaches in other words that no one needs.

smart people lead to smart solutions

An easy way to avoid all of the problems associated with managing a Trust is to put a smart independent professional trustee on your ‘A Team’.  These creatures are usually pedantic in nature.  They lie awake at night and worry about the little details in life that cause migraines if they aren’t attended to. 

Professional trustees need to have accounting and law degrees, skills, education and experience in pertinent areas to do their job well.  They need to understand a myriad of issues including business, insurance, finance, tax, accounting, equity and contract law to name but a few topics.  Chose your professional trustee well as the Trust and its affairs will be run only as well as your professional trustee’s capabilities expand to.  Another client war story will show you the point I’m making.

Mr and Mrs P landed around 500 pages of correspondence on my desk one Friday morning telling me they wanted to purchase a property that afternoon.  According to them, I had no need to read any of the correspondence or documents because their solicitor had already looked over the papers and was happy with everything.  Now my job as an independent professional trustee is to keep the assets of a Trust safe and in ship shape condition so there was no way I was going to sign a legal document without reading it first. 

Once I’d read the 500 pages I explained to Mr and Mrs P that I could not sign the legal papers.  I explained why as well but they were absolutely determined to proceed.  So quite simply, I dragged the chain.  I did all I could to delay matters. 

Sometimes you have to have big shoulders as a professional trustee. You have to stand behind, next to and if necessary, right in front of your clients.  That’s your job – protecting all assets.  It’s not always an easy role either, especially if your clients are giving you a difficult time.

I offered to resign as their professional trustee but told them that this would take about a week to sort out.  You see we needed a week to get the story to the media.  We knew once this happened, Mr and Mrs P would have cooled down and would not want to do this deal.

This story has a happy ending.  The newspapers picked up the story the following day.  One week later, I received an email from Mr and Mrs P.  It simply said “Thank You”.  We had just saved these clients around $500,000 and the transaction I’m talking about was buying a Blue Chip apartment.

It is true professional trustees do render fees.  We do.  Our fee is $250 a year.  I think you’ll agree however that’s a small price to pay in light of the financial disaster Mr and Mrs P were about to create with their Trust.  So you do need to be aware of fees but don’t ever be someone who knows the cost of everything and understands the value of nothing. 

summary

Michael Douglas was right – money doesn’t ever sleep.  Whilst it is awake and working however, it needs protecting.  There are 24 hours in a day, 7 days in a week and 365 days in most years.  That means protecting money is well and truly a full time job, one that a Trust is best equipped to deal with in my book.  Talking of books, if you have any questions about Trusts, let me know.  I’d be happy to help answer them.  You might also consider purchasing my book.  It’s called ‘Family Trusts 101’.  To be sure I’m not Dan Brown and I haven’t written the Da Vinci Code but ‘Family Trusts 101’ is on the way to being a best seller.  It was only released in July of this year and we’ve sold thousands of copies so far.  It’s a small investment in your money future considering its’ cost is only $30.  You can obtain a copy clicking HERE.  If I’m not out and about presenting, you’re find me having fun with the team at Gilligan Rowe & Associates, Newmarket, Auckland.  My email address there is jx@gra.co.nz and my telephone number is (09) 522 7955.  Until I hear from you, happy travelling everyone with building your financial future and protecting what you grow.  Ciao.