Articles by Janet Xuccoa

The Low Down on New Gifting Rules

Christmas Grinch versus Santa Claws

When it comes to giving, they say it’s the thought that counts.  Unfortunately, not many people apply this truism when it comes to gifting to the Family Trust.  I expect lots of New Zealanders will, in the next little while, rush in where angels fear to tread and make gifts to their Trusts.  They will forgive all debt owing to them and will feel happy that the new law permits them to bring their protracted gifting programmes to an end.  Very little thought will be spared on what the implications of this move are or the enormous loss of wealth it could cause.  In a bid to help you, I thought I’d share what I’ve been thinking lately …

a new landscape for trusts

On 1 October 2011 the Government introduced law which abolished Gift Duty.  This legislative move was made after a review had been conducted which showed adequate mechanisms existed to protect creditor rights.  The review also brought to light that little Gift Duty was ever collected thus the tax was ineffective and furthermore, the actual completing and filing of gifting documentation placed significant costs on the Government and the persons making gifts.

The result of the new legislation is that the Gift Duty regime as we have known it is now an historic beast. The practice of selling your assets, at market value to a Trust and getting a Deed of Acknowledgment of Debt (IOU) back from your Trustees and annually forgiving $27,000 of that IOU debt is now a thing of the past.  Individuals are free to make one or more gifts (including debt forgiveness) of any value, without incurring and paying Gift Duty, from 1 October 2011.  Wonderful I hear people say.  Finally, I can wrap up my affairs and conclude this long drawn out affair I’ve had with gifting.  But before you do just that, read on. 

Implications

 1.         potential creditor claims

Many people, especially those in business, borrow funds from an arms length party such as a Bank.  At the time of borrowing they sign loan documents which state they must remain solvent at all times.  Often once an individual has the funds from the Bank, they on lend them to a Trust they have created.  In turn, the Trustees of the Trust give them a Deed of Acknowledgment of Debt evidencing they owe them the money they have just received.  In effect this means the individual remains solvent as the IOU balance noted in the Deed constitutes a personal asset to them.  Accordingly the person’s asset and liability position is balanced.

Forgiving the debt owed by the Trustees of the Trust however may mean the individual becomes technically insolvent.  This is because all assets will be owned by the Trust and the individual will merely owe a liability back to the Bank without having any corresponding asset owed to them. 

Being technically insolvent could amount to a breach of the covenants in the Bank loan documents and that could give rise to the Bank demanding repayment of the debt the individual owes them.

For this reason, an individual should always consider what their personal asset and liability position will be in relation to any covenants they have given to a lender before they complete gifting.  This matter is particularly important if an individual is intending to complete any lump sum gifting.

2.         relationship property issues

When individuals in marriage or de-facto relationships transfer their joint assets to a Trust, they are in effect transferring relationship property.  When they obtain Deeds of Acknowledgment of Debt back from the Trustees of the Trust for the relationship property they have transferred, the debts noted in those Deeds are also relationship property.  The actual assets that have been transferred however become Trust assets.  In other words, the transferred assets change their legal classification.   Ordinarily this is not an issue if the relationship between the individuals continues and if both individuals are Appointors, Trustees and Beneficiaries of the Trust.

Problems can however arise if lump sum gifting has occurred, the relationship breaks and one of the individuals does not hold the positions of Appointor and Trustee.  This happens because if assets have been fully gifted to a Trust there is no debt owed back to the parties.  Therefore there is no relationship property which can be shared.  Additionally if only one party in the demised relationship holds the powerful positions of Appointor and Trustee, the individual not in these power seats may find they have to apply for a Court Order in order to gain access to the Trust’s assets on the basis that the Trust has deprived them of their relationship property rights.  This can be an expensive and stressful experience.

Clearly full consideration of this issue needs to be given and canvassed with Professional Advisors before debt is forgiven in its entirety.

3.         ability to call for funds from the trust

When a person transfers assets to a Trust and obtains a Deed of Acknowledgment of Debt from the Trustees of the Trust, this gives them the ability to demand from the Trustees partial or full repayment of the IOU balance stated in that Deed.  If however the IOU balance has been forgiven in full, it means an individual loses this right of repayment. 

An important consequence of this is that when an individual no longer has an ability to call up repayment of their outstanding loan balance, they become reliant on the Trustees.  One would hope the Trustees would exercise their discretion and provide funds back to the individual.

To avoid the above scenario and retain some control over Trustees, it may be wise to leave a portion of debt owing back by Trustees to an individual.  This point should be given some thought before all debt is forgiven.

4.         inadequate trust attention – sham trusts

The law is quite clear when it comes to Trusts - in return for asset protection that Trusts bestow, Trustees must satisfy their duties and run the Trust properly.  Failure to do this can result in a myriad of unwanted consequences including Sham Trust allegations.

Completing of annual gifting has in the past given Trustees an ability to come together and review how the Trust has been run.  Frequently annual Trustee Reviews and Financial Statement Reviews were completed at the time annual gifting was undertaken. Outstanding Trust administration was consequently identified and caught up on.

Because may people will choose to forgive debt balances owing to them in one lump sum, the opportunity that annual gifting historically afforded to review the affairs of the Trust and catch up with Trust administration work will no longer exist.  Thus there is a real fear that regular and proper Trust administration will no longer occur and opportunities to bring allegations of Sham will arise.

Additionally, now that Gift Duty has been abolished, it’s thought the transferring of assets to Trusts will become even more popular.  Correspondingly so will the scrutiny from creditors and other potential claims such as the Ministry of Social Development.    

What one should take from the above is that at all times the need for regular and correct Trust administration is present.  In point of fact, this need is likely to increase over time.  Simply adopting a ‘gift and forget’ attitude about the Trust will put the Trust and its assets in jeopardy.  Therefore, if debts in their entirety are to be forgiven, Trustees must be mindful to still take the time to annually (at least) satisfy their legal duties and responsibilities.

5.         loss of wealth

Many people will be under the misapprehension that because legislation has repealed Gift Duty, they should immediately transfer all assets into a Trust and complete the forgiveness of all debts owing to them, thereby immediately qualifying for eligibility for the Residential Care subsidy.  This view is however incorrect.

It is the Inland Revenue Department which was charged with the collection of Gift Duty.  So the new legislation abolishing Gift Duty has an effect on this particular Government Department.  It does not however affect the Regulations and policies the Ministry of Social Development applies and which WINZ implement, when an individual applies for a rest home care subsidy.

Before I tell you about the current rules the Ministry has, I should advise you that these Regulations and policies will undoubtedly change in the years to come.

At the time of writing however the process is that once an application for a Residential Care subsidy is received, WINZ conducts an asset assessment on the applicant. 

As at July 2011, an individual is permitted to have $210,000 in personal wealth plus their personal effects plus a $10,000 pre paid funeral expense account in order to be eligible for a rest home subsidy.  This applies where the applicant is single or where the applicant has a spouse/partner that is living in residential full time care.

Alternatively, where an applicant has a partner but that partner/spouse is not in residential care, the applicant is allowed to have the same $210,000 in personal wealth plus their personal effects plus a $10,000 pre paid funeral expense account.

If the applicant does not wish to apply this test, they are able to use another test.  This is often referred to as the Alternative Test.

The Alternative Test will apply where an applicant has a partner but that partner/spouse is not in residential care.  In such a case, the applicant is allowed to have $115,000 in personal wealth, plus a home plus a car.  In other words, the individual applying for the subsidy is able to have cash of up to $115,000 and their home and car is exempt from the asset assessment, irrespective of the value of that home and motor vehicle.  The home and car must however be owned by them and not held in a Trust.

All gifting that is completed by the applicant within a 5 year period immediately before an application for a rest home subsidy is made, will be taken into account when calculating an applicant’s personal wealth.

Additionally, any gift an applicant’s spouse/partner has made within the 5 year period year immediately before the application is made, will be taken into account when assessing how much an applicant has in personal assets.

The news is not all bad.  Under current Regulations and policy regime, WINZ permits an applicant to claim a ‘rebate’ of $6,000 per annum during the 5 year period, providing excess gifting exists.

WINZ also has the ability to go further back than 5 years and as at October 2011 under current policy, can factor in gifts made by the applicant and their spouse/partner by looking back indefinitely and clawing back the gifting that both the applicant and their spouse/partner have completed.

An allowance for any gifting completed by an applicant and his spouse/partner totalling $27,000 in any one year will be given by WINZ when they complete their calculation.

If you think the above rules sound complicated you are not alone.  Trust and Tax experts have all stretched their grey cells considering a variety of potential positions that could befall an applicant. 

In an attempt to make a difficult subject somewhat clear, I am gong to give you the following example of how WINZ might calculate an applicant’s personal wealth.

         example

In 2003 Mr and Mrs Cavell transferred their family home to a Trust.  The market value of the home at the time was $750,000.  They each received from the Trustees of the Trust a Deed of Acknowledgment of Debt for $375,000. In the following years, they progressively forgave $27,000 each of this debt per annum.  Once their annual gifting was completed in August 2010, the Trust owed each of them $159,000.  In 2011, Mr and Mrs Cavell forgave the remaining loan balances owed to them of $159,000 each.

In 2015 Mr Cavell applied for a Residential Care subsidy.  Mrs Cavell would however remain living in the home owed by the Trust.

Under the prevailing legislation at the time, Mr Cavell was permitted to have $250,000 in personal wealth plus personal effects plus a $10,000 pre paid funeral expense account.

Mr Cavell actually had very few personal assets.  He did however have $20,000 in a savings account.

WINZ conducted an assessment and determined Mr Cavell to have $551,000 of personal wealth.  This amount was ascertained as follows:

• Gifting completed by Mr and Mrs Cavell in the 5 years prior to Mr Cavell’s application being made was automatically reversed. 
• Mr Cavell was granted an annual allowance of $6,000 in respect of the gifts he made in the 5 years prior to his application being submitted, totalling $30,000.
• Gifting completed by Mr and Mrs Cavell in the years prior to the 2010 year was added back.  Remember, WINZ has an ability to claw back indefinitely.  In Mr and Cavell’s case, they annually completed gifting of $54,000 in the 2003 year through to the 2009 year, being 7 years worth of gifting.  However in this example, only gifting of more than $27,000 is included in the asset test so $189,000 is in effect added back.
• The funds Mr Cavell held in his personal savings bank account of $20,000 was also taken into consideration.

Because WINZ assessed Mr Cavell’s personal wealth above the $250,000 permitted legislative threshold, his application for the Residential Care subsidy was declined.

Way Forward

You should take from the above example a few points.  First, despite the law change that has now occurred, you should really think through the issues that I’ve mentioned above. Simply divesting yourself of assets to a Trust will not necessarily make you an eligible recipient for a Residential Care subsidy.  Secondly, the forgiving of debt in one lump sum may not serve your best interests nor for that matter will completing annual gifting of $27,000. Possibly a better way is plodding through a gifting programme at an annual combined rate of forgiveness of the usual $27,000 amount. Finally, WINZ rules are complex and likely to change. Because of these points it is vital you obtain advice from your Professional Advisors before transferring assets to a Trust and gifting, whether it be partial forgiveness of debt or gifting balances in their entirety.

That of course is where we come in.  We are all things money.  We are able to help you evaluate your choices and make your decisions.  With respect to evaluating your gifting choices, we have developed a system helps you decide what’s best for you.   If you need any assistance, just call us.  Remember there’s only one name in the money game.  That’s GRA.

Finally my Christmas wish for you is short spendings and long earnings as the Russian Money Barons say.

 

Ciao.    Janet

Professional Trustee Services
Gilligan Rowe + Associates LP
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.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

© Gilligan Rowe & Associates LP

Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

 

 

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Should I rent or Buy?

 

One of our client recently asked me if they should be renting or striving to buy a home.  They weren’t too sure if buying a house was such a smart way of increasing their wealth given the recent state of the property market and the way property had decreased in areas such as Christchurch.  They also wanted to know what other options of investing they had if they weren’t going down the property route.  Very clever questions I thought and definitely topics that made me use my little grey cells. 

 

Before I tackle this question you need to know I’m not a financial advisor and the following are simply my own comments and feelings on the subject of buying verse renting a home.

 

 

it’s the kiwi dream

 

Owning a home is something that everyone strives for – right?  Not necessarily true.  It all rests on your values and dreams and the assumptions you make about a whole host of things so numerous I’d have to write a book just them off.  In general terms however, the answer to this question depends upon personality, psychology and numerical factors.  So in an effort to light the way, here is a list of pros and cons about climbing on board the property ladder.

pros for owing a home

 

• Rent can and usually does, increase over time.  Mortgage payments on the other hand, tend to stay stable as most people have fixed term mortgages for 2 to 5 years.  This means some degree of money certainty is able to be achieved if you own a home rather than renting one and being at the mercy of the landlord.

 

• Making mortgage repayments is in a way, an enforced savings plan.  This is because over time, the amount of money you owe the bank for your mortgage, decreases.  Conversely, your equity in the home increases.

 

• If the property market moves upwards, you get to increase your equity in the home over and above the mortgage repayments you have made.

 

•  Mortgagerepayments eventually come to an end once the loan is repaid back to the bank.  Rental payments are like Ever Ready Bunnies – they just keep going on and on so long as you are renting the property.

 

• One you have some equity in your home, you can use it as leverage and buy other assets which lead to increasing your wealth such as businesses or houses.

 

• Already having a stake in the property market means you are unlikely to be priced out of the market. 

 

• If certainty is important to you, then owning your home will be a more comfortable concept than renting and being at the mercy of a landlord who may wish to increase rental prices or sell the property and subsequently ask you to leave the property.

 

• Owning a home means you get to play King and Queen of the Castle.  You can do what you like with it, within reason.  If you want to paint the kitchen red and lay green carpet throughout the place, then you’re free to do so without asking anyone else’s permission.

 

• Being able to make improvements to home tends to add capital value to a property, meaning your equity increases.

 

• Owning a home means you have something to leave the children when you depart planet terra firma.

 

• Lastly, when you buy a home, your interests and priorities ands values often change. These you pass onto your children.  You start to buy into society norms such as peace and good model citizen behaviour.  Children tend to copy their parents so if you want to build strong citizenry and consequently, strong communities, homeownership is the way to go.

 

 

cons for owing a home

 

• As our reader pointed out, if the property market falls then your home has decreased in value.  This means your wealth overall has taken a bit of a dive.  But note your wealth on paper may have decreased but that decrease in equity won’t be realised if you don’t sell the property. 

 

• If the property market doesn’t increase, your money won’t see capital gains.  Accordingly, it might be better invested in other things such as shares.

 

• High mortgage repayments may mean you don’t have a lot of surplus income to play with.  Overall, this could mean a lesser lifestyle than what you might have otherwise been able to enjoy if you were paying less rent than what your mortgage repayments are.

 

• It’s hard to argue that annual insurance and rate payments lead to an increase in overall wealth.  Despite this, if you own the home these payments have to be made.

 

 

pros for renting a home

 

• Rental prices can be less than the initial mortgage repayments you make.  This means there’s more money to spend on life’s luxuries such as good vino and holidays.

 

• Money can be saved as you won’t have to worry or pay for rates, insurances and annual maintenance.

 

• Not having a stake in the property market means your balance sheet won’t be subject to any decrease in prices this market experiences.

 

• If you take the money you would have spent on every single mortgage repayment and put that money into something else such as shares or a business, your wealth might increase just as much (maybe even more) as it would have done if invested in real estate.

 

• If you haven’t already purchased a home and you have saved and the property market has dropped, you may be able to afford more house than if you’d purchased earlier on when prices were high.

 

• If you don’t like the new neighbours, you can often move location quicker than if you had a home to sell.

 

 

cons for renting a home

 

• You are always at the landlord’s mercy with respect to rental increases they may want to make.

 

• There is a large degree of uncertainty involved as the landlord may sell and you may be asked to vacate.

 

• Talking of renovations, generally speaking landlords don’t allow you to rip out the kitchen and paint the house any colour you want.

 

• If house prices do increase, you can be priced out of the market because salaries don’t keep up with those property price increases experienced.

 

• Unfortunately most people don’t put aside every single month what they would have paid in mortgage repayments.  Accordingly, their wealth does not increase.

 

• No house means no asset to leverage off of.  This translates to you being inhibited to a large degree in building your wealth as you have no asset to pledge as security to buy a business or some other form of investment.

 

• No home means no property to pass onto your children.

 

 

wheres the property market now

 

I’ve given a full answer to this question in my blog at www.gra.co.nz so I won’t go into too much detail here.  Suffice it to say that we have a shortage of houses which will ultimately push prices up. But there’s a caveat.  House prices can only increase so much.  In order for them to move up, the population have to have money in their pockets to pay for those increased prices.  To put a person in this position they generally have to have a job.  So only buy a home in an area where there is an undersupply of housing and employment.  Cities clearly fall into this category.  This is why houses in certain parts of Auckland have increased their prices over and above that which they would have fetched in 2007, which was the height of the property market, whilst other houses in New Zealand are still suffering below 2007 prices.

 

what eles is on offer

 

On the basis that you don’t put your moo la into property, how exactly do you grow your wealth?  Good question and if you go to my blog you will see a full answer.  In general however you could try shares, bonds, managed funds or commodities such as coffee, gold, silver  to name but a few of the main categories of investments.  Actually even if you do get into property, I still think you should look at putting your gold coins into these categories because diversification is one very important factor of wealth creation.  Be careful in this area though as there are lots of sharks out there.

 

 

summary

 

No one has all the answers.  We can only make a judgement call and often we either under call or over call our hands.  To assist, we can look at historical data and carry out some forecasting.

 

If I was trying to decide whether to buy or rent, I’d probably buy.  I’d do some solid research on the suburb I was looking at and really get to grips with the market in that suburb, including prices.  But I wouldn’t just buy because of the numbers.  I’d buy because I like certainty and enjoy homeownership.  I like being able to swing half a cat around my Parnell chicken hutch. 

 

I’d also keep in mind they aren't making any more land darlin’ so in the long run (10 years or more), I’d expect to make a capital gain on my home.  But my wealth plan wouldn’t stop there.  Additionally, I’d put some money into Kiwisaver and shares and cash so I’d have most bases covered.  Buying Lotto tickets would also be a regular investment feature as well !

 

The dominate feature I’d put into practice is getting a money plan.  Checking where I am now and where I want to go.  We’re pretty good at that here at Gilligan Rowe & Associates.  Money is our business after all.  If you need help with this, please just let me know.  Happy to help.  Also come along to our fabulous Womens Seminar where I’m going to explain all of the above in much more detail.  Details are on our site. 

In the interim, spend short and invest long as the Russian Money Barons say.

 

Ciao.   

Professional Trustee Services
Gilligan Rowe + Associates LP
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.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

 

 

© Gilligan Rowe & Associates LP

Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should  act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

 

 

 

 

 

 

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Trustee minutes and trustee resolutions

whats the big deal ?

 

As a Professional Trustee, I’m often asked two questions.  First, what’s the difference between Trustee Minutes and Trustee Resolutions and secondly, why are they so important.

 

To answer the first question first, Trustee Minutes are really notes made of a meeting of trustees and the decisions those trustees make at their meeting.  Trustee Resolutions on the other hand, are a record of what the trustees have decided to do but they are made when a physical meeting of trustees has not occurred.  For example, where trustees have discussed matters and made decisions by telephone rather than having a physical meeting.

 

Why are Trustee Minutes and Resolutions so important?  To answer this question, you have to go back to old English law.

 

As I’ve stated in my book Family Trusts 101 Parliament has decreed that assets held in a Trust are held for the Beneficiaries of the particular Trust in question and, all things being equal, are generally protected.  To obtain that protection however, Trustees have to satisfy a few duties. 

 

One duty Trustees have is to document the decisions they make in an appropriate manner.  So what does this entail? 

 

In my book, I’ve explained that I believe it means Trustees have to show they have taken into account all relevant, factual matters before they have actually made their decisions. 

 

duty in action

 

An example of this in action is where a property is going to be acquired by a discretionary Trust. 

 

The Trustees should at the very minimum ask themselves what the assets and the liabilities of the Trust are before the purchase and what they will be after the house purchase has been completed.  Ratios should be compiled.  Trustees will also want to understand how any loans that are going to be picked up will be satisfied. Which of course leads Trustees to reading and considering the loan contracts that are being placed before them.  Finally, a question which I think most important is to ask how is the house purchase going to benefit the Beneficiaries.  After all, the Trust is created for the Beneficiaries so it’s vital their interests are being served by the transaction.

 

Once all the above has been asked and answered, its imperative to demonstrate the Trustees have met their duty and so Trustee Minutes or Trustee Resolutions have to be prepared and signed.  Of coupe, these Minutes and Resolutions should be backed up with appropriate evidence that Trustees have considered all the relevant factual matters that we’ve just discussed.

 

Not all Trusts have the benefit of a Professional Trustee so not all Trustees understand how vital the above is as the Trustees in a fairly recent case found out.  The consequences in that case were dire.  Trustees were found to be in breech of their duties and their decisions were set aside.

 

summary

Moral of the story for all Trustees is satisfy the 3D Rule I discuss in my book Family Trusts 101.  Gather relevant information together before you make your decisions, distribute that information and discuss its contents and implications amongst yourselves as Trustees and then document your decisions in appropriate Trustee Minutes or Trustee Resolutions.  Only this way can you demonstrate that you have met your duties and thus keep the Trust’s assets protected.

 

If you need any assistance with this, please just let this Professional Trustee know.  I’m always happy to help our clients and a quick discussion (free of charge) over the telephone, can frequently save much heartache, time and money down the track.  You can contact me by emailing jx@gra.co.nz or telephoning (09) 522 7955.

 

 

Professional Trustee Services
Gilligan Rowe + Associates LP
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.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

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MONEY MATTERS

Wallis Simpson, Mistress of the King of England, was frequently quoted as saying “must have, can get”.  Of course her way of getting was to ensure others, such as her Husband and the King, got for her. For most of us however, ‘must have, can get’ means we have to get for ourselves.  For many people, their getting involves the use of the plastic fantastic.  In other words, they get using their credit cards.  All well and good you say.  Everyone uses a credit card.  But for many people, that usage can spiral out of control.

 

The use of a credit card is not of itself a bad thing. Many people use their cards sensibly.  They pay their monthly bills such as electricity and telephone with their credit cards.  These individuals however know what they are spending and can tell you what the balance of their credit card will be before the statement lands on their door mat.  When the statement arrives, this group of credit card users have cash in their bank accounts to pay the debt and clear their monthly credit card balances completely.

 

For other world citizens, the credit card can be a dangerous weapon. Dangerous to its owner that is.  Danger usually strikes because the card user simply cannot control their spending.  That said however, you shouldn’t get the idea that all credit card debt is brought about thought a person’s sheer shopping indulgences.  Sometimes people use their credit cards to draw cash and pay necessary bills.  They do this because they simply don’t have the cash to pay their accounts as they fall due.

 

Irrespective of how the debt has arisen, it has to be paid back.  Whilst credit card companies are in the business of making money on the moo la they lend you, they ultimately want the debt and its associated interest, repaid. So how exactly do you go about doing that when the dreaded debt balance has become a bit more than you can chew?

 

 

balance transfer

 

There are many different methods of reducing debt.  Different strokes work for different folk.  One of my favourite methods however is what I call a “Balance Transfer”.  I like this method because it has an immediate effect. It gives a person instant confidence and motivation to keep up the debt repayment plan.

 

Under your existing credit card, you are likely to pay interest at an average rate of say, 19%. Your mission should you chose to accept it, is to get the debt repaid so the less interest you are being the charged, the better off you’ll be.

 

Apply to a new credit card company for an additional credit card.  Transfer the balance of your existing credit card debt to this new card.

 

Before you do this, check the new credit card company will charge you a lower rate of interest.  Many credit card companies charge only a 3% interest rate on balances that are transferred from other credit cards.

 

Once you have done this, you will be paying interest on the credit card debt balance at a much lower rate eg: 3% verses 19%.   That’s a worthwhile saving in my book.

 

Next put yourself on ice.  Fill up a plastic bag with water.  Put your credit cards in that bag and then put the bag in your freezer.  By doing this, you will have to defrost the bag of water to get access to your cards, meaning you won’t be able to indulge in instant shopping gratification.  Clearly a continuation of spending isn’t going to help you in your cause of getting rid of all credit card debt.

 

Finally, undertake a budget exercise.  Determine how much you can pay off the credit card debt each and every month.  Complete the monthly payments. Stick to the debt repayment plan.  Make a determined effort to clear that debt once and for all. 

 

 

summary

 

Regardless of what debt repayment route you take, the fact of the matter is repaying the debt is only part of the solution.

 

The golden key to dealing with credit card debt is being in control of your money rather than money controlling you.  If you continue to think about money and use money as you have previously done, it will be only a matter of time before you find yourself right back in the credit card debt situation you have just clambered out of. 

 

To ensure you get out of debt trap and stay in the black you need to understand where you are now money wise and where you want to go.  You need a money road map – something we can help you with at GRA.  Money is indeed our business and it’s our job to help clients find solutions.  So if you need help, contact me by emailing jx@gra.co.nz or telephoning me on (09) 522 7955.

 

Until next time everyone, spend wisely and save well.  Remember spending is short, and earning is long.

 

Professional Trustee Services
Gilligan Rowe + Associates LP
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.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

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how to avoid fighting over money

 

Recently I had a conversation with one of my friends who told me she was constantly fighting with her nearest and dearest over money.  They just didn’t seem to be able to agree on what they should do financially. She felt they should clean up some of the debt they had got themselves into. He didn’t think there was really an issue at all.  She thought he was financially irresponsible.  He though all she did was worry about tomorrow.  Sound familiar ?  Their arguments got me thinking about the relationship we have with money.

 

If you carried out a survey the world over, I think you’d find the above argument isn’t unusual.  Couples tend to fight over three main topics – children, sex and of course, money.  Which of course has led me to writing this blog. 

 

When we get together with someone, we are very quick to acknowledge we have different ideas, wants and desires.  For the most part, our individual personalities and differences don’t cause too much tension between us.  But when it comes down to money, we seem to lose sight of the fact that diversity in our thinking and doing is more likely than not.  For some unknown reason we assume we’ll be on the same page and reading from the same book when dealing with moo-la.  Assumptions of course makes asses out of all of us. 

 

Frequently our differences mean we end up arguing over money much like my friends have done.  This is not only a waste of energy but ultimately can lead to some serious relationship damage.  So how do we avoid relationship shipwreck?

 

 

We probably all agree that arguing is mostly counter-productive.  For some people this means simply avoiding the subject of money altogether.  This unfortunately can wreck havoc just as much as an out and out hum dinger screaming match.  For others, continual small digs at each other over who is spending what seems to be the norm.  This behavioural response doesn’t produce much better results than outright fighting.  By far the better solution is to be conscious about the subject and to practice what I call the 10 Golden Rules.

 

Rule 1:  Gaining an awareness of yourself and your partner as individual money personalities is vital.  Acknowledge that you will have different ideas about the importance of money in your lives.  This will affect how you think you should save and spend money and what money goals you have as individuals and as a couple.  Once you make this acknowledgment to yourselves and your partner, you will be more tolerant towards each other. Have a look at my previous blog on money personalities.

 

Rule 2:  Put some time aside for a discussion on the subject of money.  Choose an appropriate time to have this discussion with your partner.  When you are tired and pressured is not an ideal time to raise this topic. 

 

Rule 3:  When you have your money discussion, try to establish why you hold the views you do about money.  Discuss with your partner how your parents dealt with money in their household and what they taught you about the subject.  Talk about your own childhood, teenage and early adult experiences.  How did you think about and deal with money?  Remember the relationship we have with moo la is shaped by our upbringing and our own life experiences. 

 

Rule 4:  Remember in your discussions you don’t have to win every battle to win a war.  Pick your words carefully and be generous to your partner.  If you find your discussion veering veer off course and you are beginning to disagree over unrelated subjects, end your talk.  If one of you is trying to control, intimidate or manipulate the other person, communication and agreement will be severely inhibited.  This is a short run game with very large nasty long run consequences.

 

Rule 5:  Try to reach an agreement as to how you want to approach your own money and how you want to approach it as a couple.  Determine what money system you want to implement.  Will you have one joint cheque and savings account where you pool your incomes and pay all your joint and individual bills or do you want to have one joint account where you pay joint expenses and have your own individual savings accounts?  Will you contribute equally to your joint account or will you contribute on a percentage basis based on how much each of you earn? If you want a hand devising a money system, talk to us.

Rule 6:  At all times you need to bear in mind that you are a couple.  What affects one person can affect the other.  For this reason, recall you are a unit, facing the world together and nothing brings a unit closer than having some shared financial goals and strategies to achieve those goals.  So create some joint objectives.  It might be paying down some debt, saving for a holiday or buying a home.  Whatever it is, plan what you want to do and how you intend to do it together.  It’s an investment in the future of your relationship.

 

Rule 7:  I’ve mentioned debt above.  In today’s times, it’s not unusual for one or both partners to a relationship to have some debt hanging around.  I’m not an advocate for cleaning up other peoples money problems but if you are in a relationship and if you do intend to have a future together, it’s best to be aware of the debt that sitting on the shelf and put into place a plan to pay it down.  Ultimately, if one of you has debt, it will affect your long run relationship and the goals you want to achieve.

 

Rule 8:  Become involved jointly with making your financial lives work.  Each person should participate in balancing the relationship cheque book.   If there is a joint appreciation of what bills have to be paid and when those payments are due, it will create closeness between the partners and neither partner will feel they have to carry the responsibility of making the money scales balance all alone.

 

Rule 9:  Put in place what I call the Disaster Recovery Account.  This is an account where you keep a certain amount of money for a rainy day.  You never know when a redundancy or a large bill is going to strike.  Be armed.  A few dollars in this bank account can ensure financial disaster is averted if a negative monetary event occurs in either or both of your lives.

 

Rule 10:  Call in the artillery.  Get some quality professional advice and help from advisors who are experienced at dealing with money.  It’s a commodity to be grown and respected and put to work.  Frequently having a chat with an independent party can give a couple clarity and direction on what financial objectives and plan will work for them.

 

Summary

There’s no right or wrong when it comes down to how we handle money individually or as a couple.  But there are some sensible things you can do with your money.  There are some smart choices you can make. 

 

Like many things in life, it can sometimes be difficult to see the woods from the trees which is where we can help.  Over the years, we’ve seen all sorts of clients with all sorts of different money issues. Some people have debt they need to deal with.  Other people wonder how on earth they are going to get ahead.  Some families worry about teaching their children about money.  Others want to help their kids get on the property or business ladder. 

 

Whatever the issue is you think you need to deal with, a good hard look with an external professional like us can often be the difference between success and failure. We can help set goals and strategies to ensure you achieve what you set out to. Working with a profession like this not only increases your chances of succeeding financially but also has the added bonus of bringing you together as a couple.  So if you want to work on your financial future with your nearest and dearest, give us a call and let us help you.

 

Professional Trustee Services
Gilligan Rowe + Associates LP
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.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

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Hello Everyone

 

I’m feeling pretty pleased that the Media is picking up the idea that having a Family Trust isn’t just a nice “extra’ in life but is going to become an “essential”.  Have a look at this link and you will see the interview I recently gave. 

Here is the link: http://www.stuff.co.nz/business/money/4613958/How-to-set-up-a-family-trust.

Remember the motto, if you don’t own something it can’t be taken from you.  In other words, if you don’t own the house, it can’t be taken into account for means testing purposes which I think is very likely when looking at future superannuation payouts.  The latest Budget and the tax changes being implements all lead me to this view.  The solution of course is to get smart and come to our next GRA seminar on 23 February (click here) where I’ll canvass some of the views I have.  Looking forward to seeing you there.

 

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955P.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.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

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SHOW ME THE MONEY HONEY

 

women and money

I reckon all women are in the protection business.  Just look around.  They are born Protectors.  They look out for their friends and family and are constantly trying to protect those they love.  They even look out for friends of friends.  Experience has shown me that women are frequently much better than their counterparts in dealing with wealth building and protection issues.  Let me give you a couple of examples.

 

protecting the family by putting a roof over their heads

For those old enough to remember, you will recall the time when you could capitalise the family benefit the government handed out.  At that time in history I was involved in completing the legal work for a  property building and selling company.  Couples would cash up 5 years worth of family benefits, save a weekly deposit themselves and purchase a home.  Many a kiwi family got their foot on the property home ownership ladder in this manner.  The main driving force behind most of these home purchases was a women.  In fact the salesmen use to say that if the female in the equation wasn’t interested, the sale wasn’t going to go through.  I guess there must be some truth in this sentiment because Real Estate Agents tell me that this is still the position today – if the women doesn’t like the home there isn’t going to be a sale no matter how much her husband likes the place.

 

keeping the roof over the family’s heads

When I worked for a firm of solicitors that acted for a Bank, I found out that women are very good at stepping up to the plate when trouble is on the horizon.  In this role, my job was to ensure the Bank’s legal documentation was in order so the Bank could sell up a Borrower’s home when they defaulted on their mortgage payments. It was a pretty sole destroying role but I learnt a lot about the law and about human behaviour.  When the money problems came about, they often occurred in those days due to a business failure. Nine times out of ten, it was the husband’s business that had failed and ninety-nine percent of the time, it was the wife that called me to discuss the issue.  The husband could frequently be found engaging in one of two activities; playing ostrich and ignoring all attempts by the Bank to deal with the matter or playing chicken and taking flight, leaving the wife to deal with the mess

 

tell me why

Because women are generally pretty good at getting and protecting wealth it surprises me that a perception exists that the female sex have trouble looking after and protecting their own affairs.

 

From what I have seen, it does appear that sometimes women don’t want to get too involved in the topic of money, or at least aren’t as interested in the green stuff as men are. That doesn’t mean however that women aren’t good with money.

 

This week I was giving a presentation about ‘all things money’ and I noticed that one women was having real trouble with the subject.  I wondered why that was.  Perhaps historically the subject had caused conflict within her own marriage.  Perhaps she found the language of money too confusing.  Perhaps she saw knowing about all things money as unfeminine. Perhaps it was even an historical family thing where money wasn’t openly discussed with her parents.  I’m unsure of the reasons and there are probably plenty.  What I do know however is that not knowing about money definitely puts women on the back foot and unnecessarily so in my view.

 

The way I look at it is if you are in a relationship and you understand about the green stuff, including what is going on in your Partner’s financial life, then as a couple you will be stronger. Alternatively, if you are on your own, then the buck stops with you so you may as well make each one count and get some understanding how moola is made, lost and protected.

 

Here’s a really interesting thing to consider.  Women, when they do get an understanding of money, make it, handle it and protect it in far better ways and to much greater degrees than men.  Women have uncanny capabilities and instincts when it comes to money.  Ask any Money Trader.  A women on a ‘Spot Team’ will often write far better deals, with greater consistency then her male team mates.

 

solution

In my view, if we are going to have to deal with the issue of protecting the family jewels we may as well get armed.   A little knowledge goes a long way and the right person on your Money Team can make an incredible difference.  Find a person who you feel comfortable with who has the education, skills and experience to help you.

 

Check out a couple of books as well.  Start with the basics.  Budgeting, insurance, risk, diversification, shares, superannuation and property.  Get a working Money Language of terms and definitions behind you.  Then move to understanding how to grow money. 

 

Finally, have a bit of a look at how you go about protecting money and those assets you purchase with the gold you’ve made.  My book ‘Family Trusts 101’ can help you on this score. 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 by emailing or calling me. 

 

If along the way you have any questions about money or Trusts, let me know.  I’d be happy to help answer them.  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. 

 

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.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

 

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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. 

 

 

Happy reading everyone.

 

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

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As the Trustee Services Partner at Gilligan Rowe & Associates, I’m often asked by Trustees what we think is going to happen in the economy, the property market and with interest rates. We answer questions like this all the time as helping people make and protect their money is our business.

Matthew Gilligan is particular strong on these topics and there are many clients out there who thanks to his advice, did pretty well on the last lot of interest rates ups and downs.

The one million dollar question on the table at present is does a Trust fix its interest rates on its existing loans right now or not?

The last thing Trustees want to do is fix a Trust loan at a rate of say 7.25% pa and then rates move downwards the following month. Likewise, a Trustee will not be happy when they choose not to lock in their loans and find rates move upwards and against them and the Trust.

A couple of months back the answer to this one million dollar question would have been fairly clear. Now however, it really is a game of snakes and lizards and everyone is wondering which way they should roll the dice. Below are some tips that might just help you decide what to do with Trust loans.

The Reserve Bank and the OCR

In simplistic terms, the Reserve Bank’s main job is to establish and implement monetary policy. It does this by setting the Official Cash Rate (“OCR”) with an aim of controlling economic activity and inflation. How does this affect Trustees and Trust loans?

Well, again in very loose terms, Banks borrow money which they then lend on to us. Banks borrow money from several sources such as from overseas lenders, term deposit holders and of course, the Reserve Bank.

When a Bank borrows funds from the Reserve Bank, it usually does so at a rate around the OCR. When a Bank then lends funds on to us, it does so by putting a bit of a margin on those funds. So if a Bank borrows funds from the Reserve Bank at say 5% and if it adds a mark up of say 2%, we can expect that Bank to lend those funds to us at 7% or thereabouts.

Accordingly, when the OCR moves, it affects the wholesale rates Banks borrow funds at which in turn, affects the interest rates the Banks are prepared to lend money to us at.

When setting the OCR, the Reserve Bank looks about 2 years out. In other words, the Reserve Bank doesn’t just deal with what is going on right now in our economy when it sets the OCR. Rather, it looks about 24 months ahead and sets the OCR on what it expects is going to happen in the future.

In the last OCR review, which happened on 29 July 2010, the Reserve Bank set the OCR to 3%. The Reserve Bank said the economy might not grow as quickly as previously thought and inflation might not reach the heights it was previously expected to reach in 2012. What does this mean for interest rates?

If all was going according to the Reserve Banks prior expectations, the OCR would have risen to around the 6% mark by the end of 2012. That meant we could expected interest rates to be around the 9% mark by the end of 2012. But now that the Reserve Bank has brought back its expectations, it thinks the OCR will only reach 5% by the end of 2012. This of course means interest rates could come back a bit, to around the 8% mark.

So given the above information, does a Trustee fix or continue to float the Trust’s existing loans?

Floating Rates

If a Trust’s existing loans are on floating rates right now, you might as a Trustee, choose to continue along this path if you think New Zealand’s economy will be long and slow in growing. Of course if you hold this view, you’re be expecting interest rates to stay low and the OCR not to rise as quickly or as high as was previously envisaged. You will recall the Reserve Bank has recently indicated this.

As a Trustee you might also continue to float if you think the global situation (especially in Europe) will deteriorate. Why would you do this? Well a deteriorating global situation could lead to a decrease in the rates our Banks pay to pick money up off shore. If Banks have to pay less to get the moolah that they on-lend to us, then perhaps they won’t charge us so much for the pleasure of borrowing it off of them eg: fixed rates will come down.

If a Trust is in funds, perhaps it receives rental income for example, you may as a Trustee be intending to pay off some of the money the Trust owes the Bank on its existing loans. If this is the case as a Trustee you would probably also choose to float because if you fix the Trust’s loans, penalties may be incurred for making early repayments.

Fixed Rates

If you are thinking you might fix the Trust’s interest rates on its existing loans, you are probably of the mind that the International Monetary Fund growth forecasts will come true. Likewise, I expect you will believe the New Zealand economy is going to experience fairly rapid growth and inflation in the near future. You might be basing your Trustee opinion on the fact that the vehicle sales, dairy, forestry, education, exports and manufacturing sectors in our economy have grown and will continue to grow at a relatively quick pace.

Of course if you hold these beliefs, you will be expecting fixed interest rates to increase. As a Trustee wanting to do the best for the Trust’s Beneficiaries, you will be hoping to get in early so the Trust doesn’t have to suffer the rate increase later on. Hence, you are likely to fix the Trust’s interest rates now.

The Trust might also be in a financial position of being able to pay the additional monthly increase in payments it is going to experience if the rate is fixed now. I say this because if the loan is currently on a floating rate, the Trust is probably paying around the 6% pa mark. But if as a Trustee you choose to lock in the interest rates right now, you are most likely going to do so around the 7.0% to 7.3% pa mark. Consequently, the loan repayments will increase in size.

Of course the extra the Trust pays in loan repayments on a fixed rate might well be worth the peace of mind that is gained. Which is another reason why a Trustee might choose to fix their interest rates.

Look Left & Right Before You Jump

This heading says it all. Whatever you decide to do, get some information before you implement your decision. Do the numbers. Work out the figures. Check to see which alternative will be to the Trust’s financial advantage. Get help from someone independent. By the way, your Bank is not independent.

If you need help doing this financial check, then talk to us. Over the years we have helped thousands of clients with their Trust affairs. Of course a large part of our role is working out what is advantageous to clients from a financial perspective. This includes Trust clients and businesses and individuals.

So give us a call on (09) 522 7955 for a free chat. We’re here to help you.

 

 

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.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

 

 

 

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I’M TELLING ALL !

After plenty of anxious moments and sleepless nights, I’ve done it. Yes, I have written a Book. “Family Trusts 101” has finally been born.

Trusts are never easy creatures to understand but I think this Book should help all New Zealanders comprehend the creation and administration of Family Trusts. In a way, it’s a ‘go to’ Book.

If you’ve ever been confused or frustrated about how a Trust is supposed to operate or if you’ve ever wanted to know the in’s and out’s of a Trust, then this book is a must read for you.

I’ve spent many days and months using my little grey cells to bring you a Book written in plain English. It’s an easy read, packed with great examples which will demonstrate the points I’m making.

You won’t need any previous knowledge to understand this Book as I’ve made a massive effort to ensure it won’t bamboozle you with legal jargon. So a word of warning should be given. If you are looking for a concise legal text on equitable structures, coupled with judicial dictum and ratio decidendi, then this Book is not for you!

If however you want a guide on Trusts, which covers the following points, then you should seriously consider buying this Book:

• How Trusts came to exist;
• What a Trust can do for you;
• Steps to take to place your assets into a Trust;
• What a gifting programme is;
• How Trustees should act;
• What a Professional Trustee can and should do for a Trust;
• Whether you need a Bank account;
• If financial statements should be prepared for the Trust;

And so much more.

I really hope you love reading this Book as much as I loved writing it.

Of course, this is the first of many Books so any feedback you wish to give me would be much appreciated.

The cost of this Book is $29.95 + GST + postage. To order your Book NOW please CLICK HERE.

To else see me talk more about my book on TV One's Breakfast Show Click Here

Happy reading everyone.

 

Professional Trustee Services
Gilligan Rowe + Associates LP
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.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

 

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