Articles by The Professional Trustee Team
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 instance, 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 couple's 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 separates 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 individual's 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 individual's 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 three 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 minimisation 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,
I really enjoyed the property school. Its amazing and I am glad that I learned a few strategies in property investment. Thanks and regards - Kushil
Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
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