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Structuring your affairs to protect your personal assets - Is a Family Trust for you?

Ivan Vodanovich - Associate
Ivan Vodanovich - Associate

ARTICLE by Ivan Vodanovich

October 2012

Businesses can fail for many reasons. Often failure arises from factors outside your control. These factors can include global economic crises, a large debtor going into liquidation or receivership and failing to pay you, a product you are selling becoming obsolete or even a change in your financier’s lending criteria.

The question arises: Should you lose all of your personal assets which you have worked hard for over the years due to your business failing as a result of factors beyond your control. If the answer is yes then you should consider a Family Trust.

Family Trusts have been a hot topic among business people in New Zealand now for a number of years. Family Trusts have become a common structure in New Zealand and every man and his dog seems to have one but many don’t understand how a trust works.

The basic concept of a trust is very simple. The giving of money or property to another person with instructions to use that property or money for the benefit of a third party or a specific object creates a “Trust”.

The very term “Trust” means that you trust someone else to carry out your wishes. 

Family Trusts in New Zealand have developed to an extent where they are very flexible structures which results in the Settlors (the people setting the Trust up) not only protecting their assets but maintaining a comforting level of control over those assets.

A Trust essentially is a separate legal entity which is able to own property of all kinds. The Trust is made up of the Settlors which as mentioned above are the people that initially create the Trust, the Trustees - who hold the Trust property (often made up of the Settlors and one independent person) and the Beneficiaries (usually the Settlors – the Settlors Children and remoter issue). The Trustees hold the property for the benefit of the Beneficiaries.

Most modern Family Trusts are Discretionary Trusts which means that the Trustees have complete discretion as to who of the beneficiaries will receive benefits from the Trust from time to time. For example the Trustees of the Trust may decide to benefit the husband and wife who initially set up the Trust by exercising their discretion in favour of them while providing little or no benefits to the children. This could change in later years when the Trustees decide to exercise discretion in favour of the children, for example, to pay for schooling/education or accommodation.

The Trust assets and income earned from them can be distributed to Beneficiaries, loaned to them or held in trust.

In a nutshell the objective of a Trust is the protection of family assets built up from the efforts of the Settlors for themselves and their family.

If family assets are held by a Trust then if a business you own fails and you are pursued personally for the debts of the business your personal assets will be safe because it is owned by the Family Trust and not by you.

For a Family Trust to work effectively and protect you as a business person from attack by business creditors it needs to be set up properly and the earlier it is set up the better.

If you believe that the creation of a Family Trust will benefit you please contact Ivan Vodanovich for further in depth advice.

You can read Ivan's previous article in respect of Asset Protection for Business Owners here.   Or can contact him directly using any of the details located on his profile page.