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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Whats Happening with the new zealand economy 

 

 

 

Money – a necessary good (economically and metaphorically speaking) and in some circles, a necessary evil.  The stuff that makes the world go around.  Some people understand this.  Some people can even predict or at least give us a forecast, on how it’s going to behave.  Some people listen.  Some people ignore to their bank balances peril. For what it’s worth, here are my musings on the subject.  They haven’t been checked over by an Economist.  They are simply a collection of thoughts, in no particular order, often wandering off of a point. In many places as I try to piece together what I am thinking and why. 

 

wheres employment going

We all know it’s been high. Last year around 6.8% of our population were unemployed.  This year things have trimmed back somewhat, but the figure still hovers around the 6.6%.  Next year and in the preceding few years however, unemployment is expected to pull back. Yep, our magic crystal ball says there’s going to be a shortage of good people around to employ.  Forecasts show the unemployment rate will hover between 5% and 5.5% for 2012.  What does this mean for those unemployed and those looking for employees? 

 

Well those in particular industries, especially the construction game, shouldn’t find it as difficult as they have found in the past 3 or so years, to get work.  Conversely, employers need to start thinking now about stocking their labour pool before it gets really hard to find good people.  Employers might also start to think about raising labour costs they might incur.  After all, when demand for a good (staff in this case) outweighs supply (available human beings to undertake a role), wages go in one direction.   When this happens, I wonder what will happen to prices of goods and services?

 

 

wheres property going

No dinner party would be complete without a conversation about the property market, or at least that’s the case in Auckland.  Read on and you’ll find out why.

 

Prior to the recession, lots of building was going on.  That said we still had a shortage of supply of houses in relation to those people coming into New Zealand and looking for property.  

 

During the recession, building stopped.  This occurred for a variety of reasons, including the downfall and demise of finance companies, tightening of bank terms and the general unavailability of cash for our developer boys from other secondary sources such as finance companies. These factors served only to worsen the housing shortage as building all but stopped.

 

Coming out of the recession, we’ve seen positive migration from overseas as our wonderful country has attracted migrants.  Additionally, Kiwis in overseas contracts have been made redundant and returned to NZ.  There has also been a shift of population in New Zealand as a relocation of our citizens, attributable to different factors, including the Christchurch earthquakes, has occurred. Relocation in this respect has definitely lead many to the City of Sails.

 

All those living in the Land of the Long White Cloud, need a roof over their head and 4 walls to shelter them from the rain.

 

Remember we didn’t have enough houses before the recession, house weren’t built during the recession and data tells us that building consents whilst on the up aren’t anywhere near where they need to be to cope with the shortage of housing.  It’s been forecasted we need around 25,000 houses to be built a year.  Right now we’re only managing to erect 14,500 of them.  See the problem?

 

That said, building consents are definitely expected to increase from the end of this year and early next year because Christchurch will need to be rebuilt and that will mean in part, building new houses.

 

Which is why I tend to think building costs, such as wages, are going to increase.  Christchurch will clearly need labour to rebuild.  At the same time, Auckland in an effort to cope with the housing shortage it is experiencing will need houses to be built.  That is going to mean building labour will be required in Auckland as well as Christchurch – at the same time.  All in all, there is only so much labour available, which of course means, in economic terms, demand outweighing supply.  This has a consequential effect on pushing labour prices up.  In this respect I’m not talking just about labour costs.  What will happen to the prices of building products and materials?  Will retail get her engines going as a knock on effect occurs because furnishing are snapped up for all the houses that are going to be built?  Interesting thoughts which of course lead me to the existing residential property market.

 

What’s going to happen to prices of existing houses?  Are they going to fall some more, remain static or climb?  Before we look at these questions, let’s think about where we’ve come from.

 

Prior to the recession, credit was plentiful, tax benefits for owning residential investment property was in effect and New Zealanders loved the idea of being property owners and investors.  These factors led to houses being snapped up either by those who wanted to live in a house rather than under the Auckland Grafton Bridge or by those who wanted to be property investors.  This, amongst other factors, lead house prices going through the roof.  A vendors market prevailed.

 

During the recession, things got tight.  Migrants stopped coming to our shores.  People were made redundant.  Banks called in loans and tightened their credit terms.  New Zealanders’ appetite for debt started to decrease.  With all these factors came a fall in house prices.  Yes, prices started to reduce and housing became more affordable.  The market definitely turned and it went from being a vendors market to being a buyers arena as houses were put up for sale.

 

But note it was for a short time only.  An impasse it seemed between vendors and buyers occurred.  Those vendors who didn’t have to take decreased prices hung on and rejected buyers’ offers.  Buyers conversely weren’t prepared, even if they could get it, to take on hefty loans and so refused to meet the prices vendors were demanding. The property market took on a somewhat static effect – but only for a time.

 

Coming out of the recession we saw a new Government take control, a Government who had new objectives.  One particular goal they seemed intent on was to achieve what I call a re-direction of money capital into investments.  There were other things to buy than housing according to those in the power seats.  To achieve this aim, tax advantages such as the claiming of depreciation and the disbanding of the favoured loss attributing qualifying vehicle and the subsequent introduction of the look through company with its limitation of loss rules, have been introduced. This of course has, to a degree, had some effect on the residential property market.  Many people have now sold their residential investment properties.  Don’t be fooled however by thinking residential property investment is dead.  Remember there are always money investment opportunities around.  You just need to know where to look, what to look for and how to assess what you are looking at.

 

All things change of course and this truism applies equally to the property market as it does to other concepts.  The changes that are being felt aren’t the same however the whole of New Zealand over. 

 

In some places, there seems to be property to buy and prices have not increased that much at all as we’ve climbed out of the recession.  There isn’t a flood of property on the market and prices are remaining firm but static. 

 

In other parts of the country however, such as Auckland, a different story is being told.  Listings are short, the number of days it takes to sell has decreased, rental prices have increased and sale prices are on the rise.  Turnover of the property that is available is definitely improving.  Banking and legal markets corresponding have improved as more property transactions means more work in these sectors.

 

The sensible question to ask now has to be why is Auckland leading the challenge in the property market stakes against other parts of New Zealand?  Read on.

 

If you are looking for a job, you go to a city where there is employment.  That means people coming into Auckland.  Once you have a job, you have money.  This means you can afford to buy a home or rent a home.  Add to these factors an existing shortage of housing in Auckland and you see increased property prices and increased rental prices occurring.  Of course people who have money in their pockets can afford to pay these prices.  So a marriage of money, supply and demand forms.  Supply is short, demand is high and a population with money and the ability to buy credit exists to meet increased pricing. Capital residential property prices and rental prices are able to increase because all the planets are lining up.

 

In other parts of New Zealand, employment opportunities may not abound.  Accordingly, even if there is a shortage of property, prices simply cannot increase, or at least not increase as much as they otherwise would.  Why?  The population in these areas don’t have the moo la in their pockets to pay for the capital increases in property prices and rental prices which means a constraint on these prices occurs.

 

Looking forward, where are property prices going to go?  With the credit reins loosening, money becoming available, building of property and infrastructure occurring, employment on the rise and pressure for demand for property to own or rent increasing, the answer is clear. Up.  But a caveat comes with this statement.  People have to have the money to pay for those increased property and rental prices, which means they need to be employed and receiving a wage.  So in my view, a city where employment is available is going to be where we see property prices climbing.  Likewise, places where infrastructure is going in will have a subsequent effect on property prices increasing.

 

 

whats happening with Interest rates

Interest rates - another subject the majority of kiwis what to know something about because we borrow money to purchase our homes and subsequently have interest to repay.  If we haven’t borrowed money to purchase the roof over our head, we’ve often borrow money to fund our businesses or indeed our pleasures, such as credit card spending and the buying of nice cars.

 

So where are interest rates heading?

 

Prior to the recession, New Zealanders had a keen hunger to consumer and much consumption was permitted through the incurring of debt.  We had a great enthusiasm for taking out bank loans and accepting credit card companies offers of finance.

 

And spend this money we did.  We bought bigger homes, more investment properties, baches, boats, cars, large tv screens and home theatre systems that you had to have a degree in technology to be able to work.  No wonder I never purchased one of those – I’m hopeless with technology.

 

But with the recession came a redefining of priorities.  Spending was no longer cool.  We worked out we didn’t need all the bells, whistles and gadgets that could perform a thousand functions at the touch of a button.  Redundancies began.  The banking and legal professions in London all but shut down overnight and there was a considerable reduction in work in these industries here in New Zealand.  A reduction in our appetite for spending and debt incurring began. If we didn’t voluntarily decrease existing debt levels or our need to take on more debt, the need to curb our appetite was severely inhibited as bankers tightened their credit terms.

 

All up, we started to understand there was a difference between good and bad debt.  We began the obvious realisation that whilst it was all well and good having capital appreciating assets on our balance sheets, at the end of the day, we had to have cash flow to make those monthly loan payments. 

 

For some souls, this comprehension came too late. They would be severely hurt financially.  For others, especially those who had lived through the latter part of the 1980’s, they’d seen it all before.  The only difference was the product in question.  In the 80’s it was shares. I recall documenting large numbers of script deals in legal offices.  In the 90 and forward roll, the product had changed.  Now people borrowed heavily to invest in property on the basis that it would always go up.

 

For a large number of New Zealanders, a new understanding about money began.  For another group of citizens, the financial knowledge they had gained a couple of decades earlier, simply rose to the forefront of their minds. Overall, we began our journey of off loading assets, repaying debt and decreasing our eagerness to borrow. 

 

At the same time of this increased awareness, some interesting money events were occurring around the world.  I won’t go into them here because this scribble will become a novel if I did but suffice it to say, interest rates start to fall the world over.

 

Thankfully our new founded wisdom and sensibility over money seems to have stuck now that we have come through and out the other side of the recession.

 

Going back to our original question though, where are we heading with interest rates?  To answer this, I think we need to digress just a little further and gain an understanding of where our money comes from in order to assess where interest rates might go.

 

In general terms, our Banks have to get money from two sources (a) us internally and (b) others externally.  Lenders have to utilize both sources because we simply don’t have enough cash available in New Zealanders to satisfy all Borrowers including the Governments, requirements.

 

About 40% of the money that Banks lend to us, comes from people who place their funds on term deposit. The balance of funds, being roughly 60%, is what our Banks borrow from overseas.

 

Banks tend to lend money to borrowers on either floating or fixed terms.

 

The official cash rate is what the Reserve Governor sets.  When Banks lend money to us on floating rates, they take into account the OCR.  But Banks don’t lend at the OCR rate.  Rather, they tend to lend out money at the 90 day bank bill rate, which in part, is influenced by the OCR.

 

The above is in stark contrast to what occurs when Banks lend money to us on fixed rates.  When this occurs, Banks have to source their funds from overseas.  They pay their Lender a particular percentage of interest and then add onto that percentage, a margin.  This combined percentage is the percentage rate that Banks charge us, give`or take,  when we borrow funds on fixed term.

 

So to answer the question where do we think interest rates are going to go in the next year or so, we need to establish if we are discussing floating or fixed rates.

 

With respect to floating rates, it seems unlikely the OCR is going to be raised in the short term by the Reserve Bank.  Hence, floating rates may well remain constant.

 

If you’re looking at fixed rate however, you need to take into account what is happening internally as well as offshore.  If for example, there is a large increase in job growth, a sharp decrease in unemployment, a jump in wages growth and non wage costs, heightened demand for housing and a continuing climbing dollar, this could all lead to a spike in inflation. The RB may then react and tighten monetary policy.  This will force interest rates up of course. 

 

Additionally if our Banks have to pay more for the money they are picking up offshore, they will pass that increased cost onto us.  This of course will mean fixed interest rates will climb.  Why would an overseas Lender put up their interest rates?  Well if that overseas Lender was finding it hard to source cash, it might have to pay more for the money it picks up.  Of course it would then pass that increased cost onto our New Zealand Banks and when our Bankers lend money to us, they in turn would charge us more for the privilege of borrowing those funds from them. Additionally, if it appears our country’s overseas credit rating is heading southward, New Zealand will seem a bit more risky to lend funds to.  Accordingly, the Lenders will charge our New Zealand Banks a higher percentage of interest.  Again, our Banks will pass this cost onto us when we borrow from them.

 

Given the above, where do we think fixed rates are going to?  Only one way. Upwards.  It was forecasted that this would not occur until towards the end of this year but with the earthquake that has just occurred in Christchurch, it may mean economic growth is delayed.  Accordingly, rates may not move until early next year.

 

Things can however turn quickly in the money world.  Hence I’d study the economic climate internally and I’d keep my ears open to mummers such as those coming out about Greece and my eyes on possible future overseas events.

 

 

whats happening with Deposit rates

For those souls who have funds on term deposit, I guess you wouldn’t want to be trapped into holding funds in a bank account at a rate that is lower than what you could otherwise get.  In other words, I’m thinking that if interest rates increase, deposit rates might go the same way. 

 

If deposit rates do rise, you would want some flexibility so perhaps you might consider keeping your funds on term deposit on a short day rate of say 90 to 120 days.  If you do this and the rate moves upwards, you won’t loose too much in earned interest foregone and will be able to move to the higher rate quicker than if you’d locked your hard earned readies up for say 6 months or more.

 

Using a crystal ball and trying to join up the dots, if fixed interest rates increase toward the end of this year or the beginning of next year, you might expect deposit rates to pick up as well so I’d be keeping flexibility around the end of 2011 and 2012 years.

 

 

 

whats happening with Migration

Everyone is interested in this factor because it can have such an effect on our economy. 

 

Prior to recessionary times migration was soaring.  The rate of our dollar was relatively low.  This made us an attractive place to live.  Migrants coming into NZ could buy more for their dollar.  Additionally let’s face it, really is a beautiful country.  You can get good food here, reasonable accommodation and for the most part, NZ is not a country full of violence.  Who wouldn’t want to live here! But I digress – back to economics 101.  When migrants come to NZ we need to remember they have to either buy or rent a house, buy goods to put in those houses, buy or lease vehicles and generally spend cash in our society.  A good thing of course because as people come through the New Zealand door, our population grows which in turn increases demand for goods and services.  Businesses need to produce more to keep up.  This means their demands for labour and other inputs, goes up.  Accordingly businesses start to buy more inputs and hire more people.  Unemployment goes down.  More people in society have more cash to spend (those unemployed are now being paid a wage) and spend they do.  So in effect, the economy starts humming along at a nice pace. 

 

Conversely this supply and demand has a knock on effect.  Prices increase.  New Zealand starts to look like a good place to invest in. Outside interest picks up as people offshore buy up our currency.  All well and good you say but here is the down side.  Our dollar increases and inflation of course occurs.  To gain some degree of control, the Reserve Bank takes action.  They increase the rate   .  Suddenly people don’t want our currency anymore because they have to pay too much for it.  Migrants don’t want to come here because they don’t get so much for the dollars they are bringing in.  Things start to cool down.  And so the whole cycle starts again.

 

The above was what occurred, give or take, during the recession.  Our dollar dropped. Migration dwindled and then ceased.  There was even a period of time when we had more people leaving the country than coming in to reside on our lands.

 

Now that the recession is over, where are we?  Well après recession a new story has begun.  We have been experiencing a mild increase in net migration, excluding March 2011 and forecasts are that this will continue.  Hopefully this will lead once again to an increased demand for our goods and services as our poor retailers really need this shot in the arm.

 

what happening with Manufacturing and RETAILING

As I’ve said previously in these mussing, pre-recession we had a huge appetite for spending.  New Zealanders didn’t just keep up with the Jones.  They set the benchmark and the line to which the Jones had to step up to. We loved spending and retailers clearly enjoyed it as well as they moved their goods literally in the truck loads.

 

On a business front, we consumed as well.  We borrowed to buy capital items and inputs and often a business’ inventories grew fat along with our staffing levels. 

 

Like most things experienced in life however, there is a cycle and our cycle of feeding on debt ceased once the recession hit.

 

Private citizens reined in their belts.  They stopped spending or at least didn’t spend nearly as much as they had done.  Spending also changed.  Discretionary items weren’t purchased so much and if spending did occur, it was usually on those goods that we call economic necessities such as washing machines.

 

Businesses during this time took stock.  Frequently they were running mother ships and as a friend once told me, it can take several months to bring a mother ship to its right course.  Meanwhile little income is coming in and costs are soaring.  In an effort to turn their ships to the right course, businesses began to empty out their inventories and stopped placing orders for widgets.  This of course affected manufacturing and retailing.  As a knock on effect, manufacturing shut down the world over.

 

Coming out of the recession, the first country to fire its engines was China.  Why that country you say?  Because it was the largest manufacturing country in the world and that is where inventories are made.  Other countries kicked in after that.  Manufacturing to a large degree has picked up and is forecasted to improve as our world economies rise.

 

Retailing on the other hand hasn’t been treated as kindly.  We’ve now had it drummed into us that debt reduction is a good thing and consequently, we haven’t picked up our bad old habits of spend, spend, spend.  Naturally this has affected our retailers.

 

Is retailing going to dramatically increase?  My personal view is no.  Sure the ability to borrow funds might be a bit easier but I think New Zealanders have been listening and they just won’t spend as much or as freely as they previously did. 

 

Accordingly, if I was a retailer, I’d definitely be keeping my eye on controlling the stock I was carrying and trying to create competitive advantages.  Think Harvey Norman. I view this as a smart retailer who from the television ads, appears to read the markets and their expected effects, very, very well.  Actually I wouldn’t mind meeting their marketing guru and having a chat.  I’ve got a feeling that person might also have some economic nouse.  Similarly for individuals, I expect they will continue to shop around for good deals and drive hard bargains.

 

 

The budget

Prior to the budget what was the state of play?  Well one things for sure – we weren’t in a great place.  But let’s take comfort in the fact the whole world wasn’t in such a great shape in the middle of the recession.  Back home however we had high taxes, high unemployment, high migration off-shore and high investment in property to deal with.   Key in an attempt to turn things around introduced some changes via the Budget he saw into play in 2009.  His main objectives under this 2009 Budget was to get Kiwis saving and investing and to keep the engines ticking.

 

One smart move of Keys was to reduce marginal tax rates. The individuals highest tax rate under his hand was reduced down.  Not only was this meant to put more money in peoples pockets but it was meant to make New Zealand more attractive as a place to live and work.  It was hoped this move would stem the persistent drain of our citizens to bbq land - Australia. 

 

To help companies out, Key reduced company tax rates to 28%.  This was undoubtedly a smart move because it was aimed at freeing up money made by companies so they had funds to buy more inputs and capital items and most importantly, hire more labour. If that worked, greater productivity and a drop in the unemployment rate was to be had.   As a bonus, it meant our companies were paying less tax than those in Australia.  Ultimately, helping companies out in this way was meant to induce them to say onshore rather than moving offshore as so many had done before them.

 

Did the changes that Keys introduced in his 2009  help achieve his objectives? A little but not absolutely would be my answer.  When the economy did finally kick start and the world began is slow climb out of recession, New Zealand didn’t get the upturn in economic growth that was expected.  We were left in a place where the economic engine room had fired but not a lot of hiss and roar or output was happening.  We just weren’t experiencing any real growth and we had a deficit that was intent for shooting for the moon.

 

Key of course reacted in an attempt to help matters along.  His thinking was more money was needed for companies for investment purposes and so to free up more capital he decided a change in tax laws was necessary.  Which leads us to around 2010 and 2011.

 

The thinking went that if companies had more accessibility to capital, they would use it in investment in their businesses.  They would buy more capital inputs, they would hire more people, staff would have money in their pockets to spend in the economy – the same argument I’ve already written about. 

 

So a tinkering with the tax system began. A strong effort, backed by legislation, was made to move Kiwis away from their love of property into other areas of investment.  This was brought about in a large part by the removal of the ability to claim depreciation and of course the limiting of losses through the removal of the LAQC vehicle.  Exit LAQC and enter LTC. 

 

Did these changes have their desired effect?  Maybe a bit early to tell but my personal view is they won’t deter Kiwis from investing in real estate.  The property market therefore will not fall in.  Think about it and in particular why we are applying our little grey cells, think about history.  Right now Kiwis have a choice of where to put their money.  New Zealanders have lived through the share-script days of the 80’s, they’ve done the currency-commodity times of the 90’s and they’ve had their fill of the finance companies in the recent decade. So my guess is New Zealanders are pretty smart now they’ve got a bit of history under their belt.  They aren’t going to put their hard earned cash into shares, commodities or for that matter hand, it over to other companies to manage.  Rather they will want to buy something they can touch and see and to a large degree, control. 

 

Where can the average New Zealander then put their cash?  Property of course.  That is and will continue I believe to be the preferred investment vehicle for most Kiwis.  Sure, you may not get so many people chasing the cash flow off of properties and people may well buy (mainly) for capital gains now and there may not be so many people wanting to own a second or third property.  In other words, the investor as a type may have changed but that is where the change stops.  It doesn’t mean more kiwis are going to start up businesses or hand over cash to existing businesses in an investment bid.  At the most, I think all that will occur is those with spare cash who chose not to put it into property, will take the safe route and put it into term deposits.  Ok I guess but not a long term smart money move.  We all know over the long haul cash erodes in value.  So, in summing up, we are left with one choice of investment being property and that is why I do not think Keys latest move in changing the tax laws will make that much of a difference. 

 

Besides from trying to divert the flow of capital, Keys had of course to deal with the deficit heading for the moon.  And deal with it he did, in his recent budget.  They called it a “zero budget” and I think it was aptly named.

 

But before I examine what happened in the Budget, let’s just pause for a moment and think about what a Budget is.

 

Just like you and I have to balance our household private budget and cheque book at the end of the month, so does the Government.  If we spend too much personally, we either have to dip into our savings to fund the spending we’ve just done or we have to borrow to cover it.  The Government isn’t much different.  It just has to undertake its balancing of the books on a much grander scale.  To do this of course, just like us private individuals, it either has to live within its means or borrow to fund the deficit that is showing up.

 

Going into this Budget the Government was grappling with a major problem.  The national deficit sat around $16.7 billion and the Government was borrowing around (on average) $300 million a week to fund this eye watering deficit.  This didn’t look so hot for us with respect to overseas Lenders.  Remember what I’ve previously said about borrowing money from overseas.  It was recognised overseas that NZ was one of the most indebted country in the world.  I saw a graph and it even put us in with the PIIGS – frightening. There was some concern that our country’s credit rating would fall. If this occurred, it was thought that the organisations that lent money to New Zealand to enable our deficit to be funded could get nervous.  An effect of these jitters could mean those overseas lenders would increase the interest rate at which they lent money to our Government.  Clearly if that occurred, our Government would end up paying more for the money it borrowed to fund the deficit.  Subsequently, our deficit would grow.  Something had to give.  Enter the recent Budget.

 

Under the Budget just gone, the Governments main objective was to get our deficit down and live within our means. To achieve these objectives, the Government made changes to Student Loan Schemes, Work for Families welfare packages and Kiwisaver.  Additionally, it advised it wanted to privatise some state owned assets and intended that Government departments cut their spending.

 

Spending was off the Budget menu.  This is the reason they called it a ‘Zero Budget’ meaning zero additional spending was intended to occur in new areas and the spending that was going to happen, was going to have to come about by the Government making some cuts in the existing areas it was spending money in such as Kiwisaver.  This of course brings me to make some points about Kiwisaver. 

 

I’m probably not going to be the most popular girl in town for saying this but “has anyone seen the elephant in the middle of the room?”  It just amazes me how many people want to ignore this question.  I speak to thousands of people a year and when I bring this subject up, people get uncomfortable.  You can see the horror on their faces. They don’t want to acknowledge the elephant which is this … WE ARE AN AGING POPULTION, THE GOVERNMENT WON’T BE ABLE TO PAY IN FULL FOR THE KIND OF RETIREMENT WE WANT, IT DOESN’T HAVE THE MONEY, YOU CANT GET BLOOD OUT OF A STONE. 

 

The elephant has been standing in the room for the last few years for sure, which is why Kiwisaver was introduced in the first place.

 

It’s all very well saying I’ve paid my taxes and I’m entitled to my superannuation but if the coffers are dry, where exactly is the money going to come from?  Far better in my view to get real.  Let’s try and do something for ourselves.  Kiwisaver might not be the total answer.  Actually personally I don’t think it is, but it’s a damn good start.

 

Kiwisaver in its basic form is a type of compulsory behaviour – a behaviour we should cultivate – savings on a regular basis.

 

Most New Zealanders do not save each and every week a percentage of their pay packet.  Actually I don’t really understand this behaviour.  Even if it’s $1.00 a week I’d be saving it.  I absolutely refuse to work all week and not pay me first so I’d be first in line to get my $1.00 in payment. 

 

Through regular savings, balances add up.  That’s what Kiwisaver is about – enforced regular savings.  Enforced savings from you of 3% and from your employer of 3% will be introduced.

 

Additionally, it comes with a great bonus.  The Government puts in $1000 as an initial kick start payment and then there are some tax credits you can collect along the way as well.  I know the tax credits aren’t as much as were originally given out but there isn’t any point in our government borrowing money overseas to simply put it into our Kiwisaver accounts.

 

Looking at these incentives, can anyone tell me where you can get someone else (your employer and the government) to put money into your bank account each and every week? 

 

Now at this point I can hear two particular chants.  First people tell me “the Government has already changed the rules of the Kiwisaver game since I started in the fund, they will change those rules again”. To this I say of course the rules have been changed and you should expect them to change in the future.  That is what running a country and a Budget is all about.  It’s a moving target.  This is why the rules have to change.  A change in the rules however doesn’t mean a change occurs in the objective of the game.  The objective of the game is at the end of a long successful life, you have some money available to fund your retirement.  Secondly, people say ‘my money is tied up.  It’s my money and I want to be able to get it when I want it”.  To this I say you can get your money out if you want to buy your first home or you suffer financial hardship.  But if you could just take it out whenever you felt like it, then it wouldn’t be a enforced savings plan would it?  The whole point of Kiwisaver is to keep the fund there until your retirement.  Dipping into it whenever you want would defeat the objective of the scheme.

 

Judging from the above you should get the idea I like Kiwisaver.  But that is only part of the answer.  I think we still need to take action and invest our money in other vehicles.  Property for me of course is my preferred vehicle but it differs from person to person.  I think cash, Kiwisaver and property will see me live at least a reasonable comfort level in my retirement.

 

Back to the Budget.  As I’ve said, we are running at a huge deficit and the recent Budget was in part aimed at controlling and then slashing that deficit.  Additionally the Government knew that in the next coming years it was going to have to deal with two drains on cash – rebuilding Christchurch and coping with population that was ageing that was going to cost heaps.  Keys had these two issues in mind when he designed this Budget.

 

So with his objectives in mind, Keys looked about and decided he would get his savings from three particular sources.  Decreases in the Government contribution to Kiwisaver ($2.6 billion), lower abatement thresholds and higher abatement rates in the Working for Families Scheme ($448 million) and a savings in running Government departments ($980 million) is where the Government intends to get its money.  Changes are intended to be implemented after the 26 November 2011 election

 

Spending of course under the Budget was at ground zero.  There is no new spending going on in this Budget.  Rather, the Government is going to use the cash it would have spent in Kiwisaver, Working for Families and running it’s Departments towards other things, such as repaying the borrowings we have made overseas to fund our deficit and dealing with rebuilding Christchurch. If all goes to plan, it is forecasted we should be in the black around the 2014.

 

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SUMMARY

Take these comments for what they are worth – merely my musings. As I said, I had nothing to do one Sunday afternoon and wanted to write so thought I’d simply gather my thoughts together and scribble.

 

My musings come with a caveat…if all the forecasts that people have made were true, there would be a lot more millionaires out there.  People when they make forecasts are merely taking the data at their disposal, having conversations with other people, putting things  together and delivering their personal opinions as to future happenings. That’s all I’ve done.

 

That aside, I’ve always found information useful as it helps one play the money game.  You can’t play the game if you don’t know the rules and you’re chances of winning the game are considerable curtailed if you don’t have the necessary information at your finger tips.

 

If you think you want to get your money game back on track, give me a call.  I’m a Partner at Gilligan Rowe & Associates and money is our business.  We know how to help our clients make it and keep it.  We appreciate how the cycle of debt works.  We understand how tax interacts with your personal and business affairs.  Overall, we have the knowledge to get you from where you are now to where you would like to go when it comes down to your money journey.  I guess you could say we know how to play the money game.

 

You can get me by emailing me on jx@gra.co.nz or picking up the phone and calling me on (09) 522 7955.

 

Until next time, spend short and invest long as the Russians Money Barons say. 

 
 

Professional Trustee Services
Gilligan Rowe + Associates LP
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Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

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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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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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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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In the last couple of weeks I’ve been honoured to be able to speak at a couple of events, attended exclusively by women. These events focused on issues relevant to women such as maintaining a “work-life balance”. 

I of course spoke about the issue of women keeping their eyes on the ball and looking after the moo-lah.  No one in their right mind would ever ask me to discuss a subject such as “work-life balance”. 

On occasions I’ve even had to look up the words to check their spelling so you can imagine I’ve got no conception of what the phase actually means.

Although in saying that, I did get a bit of balance in last night when I indulged in some Christmas cheer with a few of my own girlfriends.  We got around to discussing what had occurred at the women events I’d presented at and they suggested that I write a blog setting out my own thoughts about a couple of issues that had come out of these presentations.  This seemed an excellent idea after two glasses of red and by the time morning came around, the idea had stuck.  So here I am putting pen to paper.

Before we start, I want to be sure I’m shot by the Policitially Correct Squad so I’ll make this declaration up front:  the points I am raising in this blog can equally apply to both sexes and the views I am expressing are my own, based upon my own observations gathered from about 2 decades of practice.

So ... on the subject of money, here’s some things I’ve noticed over the years that are pertinent to women:

1.         Relationship With Money

Women often have a strained relationship with money in my view.  I’m not saying they don’t understand money.  What I’m saying is they seem to fall into two distinct camps.  They either really take the trouble to get to grips with the subject of money, where it’s coming from, where it’s going, money goal setting, investing, etc or they simply refuse to get their heads around the subject. In other words, there seems to me to be two mindsets – those that are truly interested in money and think of it as an essential economic good that they need to know about or those that adamantly refuse to deal with the subject at all.

Men on the other hand don’t appear to me to fall into two such distinct groups.  They might or might not be interested in the subject. They might or might not be good at managing money. They seem however not to have such strong feelings about the subject of money as I see women having.  In other words, they are much more laidback and ambivalent about the topic.  Summing it up, money for men doesn’t appear to be an emotional topic for them at all.

Of course the type of relationship women have with money affects how they actually deal with the commodity.

2.         Discussions About Money

This is a really biggie.  It affects not only how women deal with their own money but all sorts of other subjects, such as asking for a raise at work or asking their spouses what is going on in the money affairs department.  Women frequently seem to be backward in raising the subject of money. For some reason they seem shy and uncomfortable about discussing the topic. 

By way of an example, a women I spoke with last week was about to permit her boyfriend of 6 months to move into her home.  He had two ex-wives and 4 children.  She had no idea of what he earned, what assets he owned, what his commitments were to his wives and children and what money he would be contributing to what would become their joint household expenses.  When I asked her if she would be discussing these points with him, she said she ‘didn’t like to’. 

Now I just don’t get this.  She was about to permit someone to get really closely involved in her life and she didn’t have a clue as to what he was about financially.  That is just plain scary in my books.  How can you start to build a lifetime commitment with someone that you can’t discuss the subject of money about? 

Men I’ve noticed don’t seem to have much trouble talking about the green stuff with either their prospective partners or their employers.  As a result, they frequently get to grips with the views that their spouses and employers have on the subject and they then make decisions about their own behaviour accordingly. 

Of course not being able to raise and engage in a discussion about money leads women to either taking or advocating control of the coin which can have some really startling consequences.

3.        Working With Money

I guess it goes without saying that if a person isn’t interested in the subject of money and doesn’t feel comfortable discussing money then they aren’t likely to really work with money.  What I mean by this is that they will not feel comfortable asking questions and challenging another person’s viewpoint about what should be occurring with the moo-la.  Unfortunately, women often fall into this category. 

To illustrate my point I want to discuss the case that recently came across my desk, involving Jillian.  Her husband was running a bookshop which actually did pretty well financially. They always managed to pay their mortgages and they enjoyed a reasonable standard of living.  Jillian had always left the running of the business and their money to her husband saying he had everything under control.

Her husband wanted to get ahead as he put it and so he wanted to buy another bookshop.  Trouble was it would involve them getting a very big loan.  But Jillian didn’t want to appear unsupportive so she didn’t question him about things and just signed the loan papers that were put before her. 

She did feel a little uncomfortable about them borrowing such a large sum of money to buy the 2nd bookshop and she wasn’t that happy at the time at having to put their home up as security but she nevertheless went along with things.  She even gave a personal guarantee for the borrowings herself. 

They went ahead and purchased the 2nd bookshop but despite her husband’s best efforts, the business still wasn’t making money after 7 months of trading.   As luck would have it however, a distant relative died around this time and left Jillian $80,000.  Her husband suggested that Jillian put in the inheritance she had just received to help the business along and Jillian, again not wanting to appear unsupportive, agreed. 

Things just got worse.  Month by month the business lost more money.  The loans were unable to be repaid.  Jillian’s husband took action and did sell the 2nd bookshop but the sale proceeds they got were not enough to pay back the loans.  So he then sold the 1st bookshop they owned.  But still there was a debt left owing to the Bank.  So they then sold their home.  Of course being in a downward market, the house didn’t realise as much as they hoped and there was a debt left over that had to be paid back to the Bank. 

As you can imagine all these events put enormous pressure on their marriage and Jillian and her husband separated.

As if this wasn’t bad enough, letters from the Bank started to arrive demanding repayment of the money that was still owing.  Jillian went to the Bank and explained the situation. The Bank whilst being sympathetic told her that she would have to pay them and that if she didn’t, they would sue her under the personal guarantee that she had given.

Of course Jillian had no money and no assets and so that is exactly what happened.  The Bank sued and then bankrupted her. 

Jillian through not wanting to deal with the issue of money had lost her home, her ½ share in the 1st profitable bookshop and her inheritance.

4.         Responses To Money Troubles

In my previous lifetime I use to head up a team at a Bank.  One of the functions of that team was to deal with customers who were defaulting on their loans.  And this is where it gets really interesting.  When the loan was in a joint name, it was usually the women who picked up the telephone and called to find out what was happening and how the problem could be worked through. 

From the couple of years work that I did in this capacity I had to draw the conclusion that when money troubles were on the horizon, women were more inclined to take the bull by the horns and move into ‘clean up mode’ as I though of it. 

I never really did come to understand why it was the fairer of the sexes that tried to sort things out when they’d gone bad especially given the fact that these very same women weren’t at all involved in the decision of where the money went in the first place.  Perhaps this is just one of the mysteries of life I’m going to have to live with. 

The point that I’m making however is women are good at cleaning up money issues but frequently woeful at dealing with the set up of the monetary situation.  If they were more involved and better at the inception of the money decisions, the money troubles may never come home to roost.

5.         Solution

Millions of books have been written about it and loads of money has been made from the subject over the years.  It’s called “Communication”.  That’s the only solution to dealing with money.  Quite simply, you have to sit down with yourself and explore how and why you feel a particular way about the subject.  Then, assuming your financial future is tied up with a nearest and dearest, you have to get down to the nitty gritty, take a deep breath and talk to your spouse about the subject.  You can do it in a non-threatening way. You don’t have to argue about the subject.  You can even agree to disagree.  But you do have to talk.

Once you’ve explored your reaction to the subject and your spouses reaction, you have in my opinion, a really good base from which to grow.  You see a little acorn of knowledge can lead to the growth of a whole tree.  And whilst you’re busy planting, you will start getting comfortable about the subject.  Which in turn will lead you to asking questions and finding out more about the fruits of the tree, including how to look after what the tree is producing.  Which leads me to my last point.

For all those women either in business themselves, or those who have their financial future tied up with their spouse who is involved in business, ensure you get good advice.  You don’t have to put all your assets at risk.  Nor do you have to lose all your assets, including your inheritances, if the business goes bust.

An ounce of prevention is worth a pound of cure.  Get advice.  Get protection.  Get the right structure.  Look at what amount of money is being borrowed and by what entity.  Think about and decide who should be directors and shareholders.  Review who is going to give personal guarantees.  Seriously consider putting in place general security agreements in favour of yourself.  In all circumstances, understand what is going on and feel comfortable about what you are legally agreeing to.

Your goal in life is to minimize your exposure and to protect what you have built up.  Don’t let your own feelings of being uncomfortable about the subject of money be your downfall.  Get advisors around you who help you feel relaxed about the subject.  And if someone is trying to make you feel inferior or unsupportive or just plain incompetent about the subject of moo-la, then take a step back – that’s their issue not yours.

The only dumb question in life is the question you don’t ask.  So as always, get the right people on the bus, sitting in the right seats to help you. And of course it goes without saying, I’m one of those people who are happy to help you.  I

I’d much sooner be pro-active and help you plan your financial future than be the ambulance at the bottom of the cliff, cleaning up the damage.  So if in doubt, please request an interview or contact me.

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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Dear Clients & Friends,

Recessions bring about all sorts of changes. For example, in the legal world  people stop purchasing houses, so lawyers often run out of conveyancing work.

Conversely, money starts to get tight so people start to sue each other. This of course means extra litigation work for the lawyers.

Recessions can also bring about some pretty dramatic personal life changes. For instances, people can be made redundant which in turn, creates financial pressure. Often sadly, this pressure spills over into their personal relationships.

Sometimes, facing financial pressure can bring a couple closer as they bury down in the trenches together. But often, the strain can lead to a couples’ relationship breaking down. When this occurs, people separate. We know this because in ordinary times about 42% of Kiwis do just that – separate.

When a couple separate they usually divide up their assets. If their assets have been placed in a Trust the inevitable question arises: What happens to the assets in the Trust? This question is of great importance because when a relationship breaks down, there can be a lot of fighting happening and frequently the only thing left standing is “The Trust”.

An Ounce of Prevention is Worth a Pound of Cure

First, before assets are placed in a Trust, all individuals should obtain good legal advice. This is absolutely essential in my view because when assets are moved from an individual to a Trust, an individual’s property rights are affected.

Secondly, the legal advice obtained by the parties will usually include a very strong recommendation for the parties to enter into a legal Property Relationship Agreement. Again, in my view, this is essential because it will set out the basis for future reference. Should a relationship breakdown after the assets have been transferred through to the Trust, this Agreement will become invaluable.

The individuals will be saved a huge legal bill as they will not have to go to Court to argue over the assets. Additionally, and most importantly, those same individuals will not have to suffer the enormous emotional burden going to Court places on a person.

Thirdly, an actual Agreement should be entered into between the parties. This seems almost a moot point considering we have just discussed the absolute need for the Agreement but you would be surprised how many people talk about getting an Agreement but never actually do it.

The Agreement, if prepared and executed, is likely to set out a variety of matters including an acknowledgment of what assets belong to each of the parties before those assets are transferred to a Trust. It may also set out what will happen to those assets when they are transferred through to a Trust should the parties ever separate.

Lastly, if an Agreement has been entered into by the parties and assets have subsequently been transferred to the Trust then the issue is pretty easy. This is of course providing the Agreement stated what was to occur should the parties ever separate. The Agreement is just placed before the Lawyers and hopefully everyone can agree to implement what the Agreement says.

In the normal course of events what this means is the assets of the Trust are sold, loans are repaid and the balance of the sale proceeds are put into the Trust’s bank account, ready for division between the parties.

Often at this point in time the existing Trust is made into one of the individuals own Trust and another Trust is set up for the other remaining party. So in effect, each of the parties ends up with their own Trust.

Then half the sale proceeds are sent to the new Trust and the other half of the sale proceeds simply remains in the existing Trust (which was previously turned into one of the individuals Trust).

Two is Better Than One

It’s no secret that many smart people have two trusts. One each. Each Trust will hold its own assets and frequently a half share in the family home. Why have two Trusts rather than one? Again the answer is simple. If you have two Trusts you have the ability to deal with property that was solely your own before it went to the Trust. This could include family heirlooms.

Also, your own Trust can be the recipient of any inheritances you might receive, such as money from your own Parents. Overall, having your own Trust means you can deal with the assets in the Trust as you and your Trustees wish. You can do this without the consent of your spouse (assuming they are not your Co-Trustee).

Lastly, a very large advantage of having your own Trust is you then have the ability to leave particular assets to specific beneficiaries such as children you had prior to your relationship.

As mentioned above, another great benefit of having two Trusts is that both Trusts can own a half share in the family home. When two Trusts are involved they are also very likely to have entered into a legal Agreement which would have set out the steps to be taken if the parties ever separated.

So overall, a two Trust structure is frequently far superior to one. You do have to be aware that you will have double the set up and running costs of course, but this disadvantage can be far outweighed by the benefits a two Trust structure can confer.

When You Dont Prepare...

Here’s where all the trouble begins. The parties don’t ever enter into a legal Agreement and cannot agree on what is to happen with the assets that are in the Trust.

When this occurs only the lawyers win as the battle royale begins and legal fees start to mount. When I see this happening I call both clients. I try to give them a bit of a reality dose. This includes reference to the movie “War of the Roses”. If anyone has ever seen this movie we all know who the winners are and that is the Lawyers. A couple can spend literally thousands of dollars in legal fees as they fight over the assets of the Trust. Let’s face it ... a house worth say $500,000 isn’t worth a couple spending $100,000 on legal fees fighting over.

Often, when you look at what is really going on, the individuals aren’t fighting over the house at all. They are fighting because they are hurt. The trouble is, that fight costs lots and lots of money if it goes on for a long period of time. It is also emotionally draining.

I’m not advocating that an individual shouldn’t engage lawyers when and where they are needed. All I’m saying is a little common sense needs to prevail in these situations. As a Professional Trustee I try hard to calm the parties and seek some form of agreement that I can send through to their Lawyers.

But if you can’t get an agreement, then what happens? Well the matter just has to go to Court. Which means the Courts look at how the Trust was established, how the Trust has been run over the years, who has control of the Trust, what assets have been transferred to the Trust and what loans the Trust owes back to the individuals.

Other matters can also come under scrutiny but in the main, these are the points the Courts will look at. Once the Courts review the matter they may make a variety of Orders. These can include putting an independent person in to run the Trust (act as a Trustee) as well making a monetary award.

I guess there are 3 main points to take from this article.

1. Get great Trust advice when setting up a Trust from a professional who really understands asset protection, estate planning, tax minimization and financial accounting. Get the very best advice you possibly can.

2. Seriously consider a two Trust structure and if you do decide to go down this route, make sure both Trusts have a legally binding Agreement as discussed above.

3. Get good solid legal advice and enter into a legal property relationship agreement.

Remember, if you want your assets to be protected, use a Trust. But do the right thing ... get the right advice, from the right people and chose the right Trust structure to ensure that asset is truly protected.

If you would like advice about setting up or reviewing a family trust, please contact us for a free interview.  The best time to put structures in place is now.

Thank you for reading this,

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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