Importance of Estate Planning and Wills – What, Why and How

For so many New Zealanders, protecting themselves and their assets from unsavoury future events is a very important consideration. The usual tools used in estate planning include Wills and Enduring Powers of Attorney (EPAs). However with the value of assets is increasing and creditors becoming more aggressive in their pursuits, another important element to also consider is establishing a trust.

 

WHAT IS A TRUST?

A trust is a little different to what you might expect as technically, there is no such thing. A trust is actually the relationship between various parties which is then given a name for ease of reference. A trust is comprised of 3 parties – the Settlor (who is the person who forms the trust), the Trustees (who are responsible for holding the assets) and the Beneficiaries (who are there to receive benefits from the trust). You can be any or all of these parties.

 

WHY WOULD I NEED A TRUST?

Everyone’s circumstances are different and so should the reasons for establishing a Trust.

The most common concerns people experience where a trust may be a viable solution include:

 

  • Adding security against relationship property claims
  • Ensuring that your children’s relationship issues do not end up impacting your assets
  • Helping your children make sound financial decisions if you don’t believe they are capable
  • Ensuring your assets are separated and protected from business creditors
  • Protecting your assets from claims made against your Will
  • Allowing for certain assets to be retained in the family like a Bach
  • Confidentiality and privacy of your affairs

 

WHAT HAPPENS WITH THE ASSETS IN THE TRUST?

The assets can be invested or held by the Trustees depending on their nature.

The Trustees are under a duty at law to make sure that they administer those assets in the best interests of the Beneficiaries, which can include you. Typically the Trustees can invest in anything you could in your personal capacity.

 

WHAT ABOUT TAX?

Generally any income earned by the trust will either be taxed to the Trustees at 33% or, if the Trustees decide to declare the income to be beneficiary income, then it will be taxed at that Beneficiary’s personal rate of tax. The Trustee has six months after the financial year end to determine whether the income will be trustee or beneficiary income.

 

CAN I ADD AND REMOVE A TRUSTEE OR A BENEFICIARY?

The trust deed usually provides for someone to appoint and remove trustees and usually that power is given to the Settlor. Similarly, beneficiaries can be added or removed, again depending on the provisions of the trust deed.

 

HOW DO I GET MONEY OUT?

As a beneficiary, you can ask the trustee for a distribution of funds from the Trust. Generally the trustee will have the power to decide what payments should be made and whether any payment should be from capital or income.

 

WHAT ABOUT GIFTING – DO I STILL NEED TO DO IT?

Now that gift duty has been abolished, you are able to gift any property or amount of money to the Trust. However, you can still sell the property to the Trust and take a debt back from the Trustees which you would forgive over time. The right structure very much depends on your circumstances.

 

HOW LONG DOES A TRUST LAST?

Basically a trust can continue for 80 years (although that is about to increase to up to 150 years under the new Trusts Act that is coming into effect sometime this year). The Trust Deed must nominate a date on which the trust will come to an end. This is known as the Vesting Date. The Trust Deed will also provide for what is to happen to the assets of the trust on that date, and who should receive them. Of course it is possible to bring the trust to an end sooner if required.

 

THE IMPORTANCE OF PROPER ADMINISTRATION.

Once your trust has been set up, it is vital that you administer it properly, otherwise the integrity of the trust can be called into question. It is always important to remember that the trust assets are no longer your own and you can’t treat them like a personal bank account. It can have disastrous consequences, as all the protection will be lost.

 

YOUR WILL.

The other aspect to consider is your Will. The importance of having a valid Will in place cannot be underestimated. Should you pass away without a Will in place, then the process to administer your estate becomes long and more expensive, reducing the amount available for your loved ones. In contrast, should you have a Will in place, the process is significantly easier.

 

Your Will sets out who will inherit your estate after you have gone and is a very important tool in ensuring that you get to determine who gets what. You are able to specify gifts to be made, who you wish to appoint to administer your estate, your funeral directions, even details as what you wish to happen to any beloved pets you may leave behind. It gives you peace of mind knowing that your affairs are in order and will be dealt with as you wished.

 

ENDURING POWERS OF ATTORNEY.

Enduring Powers of Attorney or EPAs are typically used in situations where a person no longer has the ability to manage their own affairs.

 

The most important thing you need to know in relation to appointing someone, is that they will step into your shoes and be able to do all the things that you yourself would be able to do. Obviously this is a very wide power you are giving to them so you need to take care as to who you appoint and ensure that you have faith that they will carry out their duties as you would want to if you could have done it yourself.

 

There are two types of EPAs, one appoints a person to make decisions relating to your day to day care such as your living arrangements, healthcare and general well-being. It can only come into effect when you lose your capacity to make decisions for yourself. Then other type of EPA is in relation to your property and appoints one or more persons to administer your financial and property affairs. Unlike your EPA for your personal care and welfare, it can come into effect immediately if you feel that you want someone to help you with your affairs. Both EPAs differ from an ordinary power of attorney in that unlike a power of attorney, they will continue regardless of your mental state.

 

Clients often think that EPAs are only necessary if they are elderly or believe they can wait until perhaps something happens but we find that regardless of your age or mental health, putting in place EPAs now can avoid the complications and expenses that arise should something happen without having them in place.

Related Read: The LMC Midwife and Business Insurance – the last line of defence

 



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