Financial plan for family trust

[Fred114]

In the midst of writing financial plan for a family trust (as both trustee and beneficiary), it is an important topic. I'm unclear who writes these things, but an essential part of running a trust. As is not uncommon, the plan has to deal with demands on both assets for capital growth (younger beneficiaries) and yield (older beneficiaries), and may provide a bit of a nexus for a strategy. Plan until now has been set for capital growth, basically consolidation. But then debt came along, which is like investing someone else's money twice, once on property and then with interest-only terms, use of the money for investment. Dealing with debt great for capital growth, but poor for yield (needed within ten years). There will be a crossover (somewhere), between max growth for min debt. Accountant said reduce by 50% in five years.

Feeling a bit isolated, so reaching out for comments on dealing with this topic.

[stoploss]

In the midst of writing financial plan for a family trust (as both trustee and beneficiary), it is an important topic. I'm unclear who writes these things, but an essential part of running a trust. As is not uncommon, the plan has to deal with demands on both assets for capital growth (younger beneficiaries) and yield (older beneficiaries), and may provide a bit of a nexus for a strategy. Plan until now has been set for capital growth, basically consolidation. But then debt came along, which is like investing someone else's money twice, once on property and then with interest-only terms, use of the money for investment. Dealing with debt great for capital growth, but poor for yield (needed within ten years). There will be a crossover (somewhere), between max growth for min debt. Accountant said reduce by 50% in five years.

Feeling a bit isolated, so reaching out for comments on dealing with this topic.

Engage a good lawyer to help with the Trust deed.

[fungus pudding]

Engage a good lawyer to help with the Trust deed.

First - find out if there is likely to be any benefit to you in a family trust.
You need to find the right lawyer to help you answer that.
Very ofen they are more trouble than they are worth.
Most people probably don't need one - but whatever you do, have a will and review it periodically.

[Fred114]

Judging from the replies, I might have given the wrong impression. The trust have been in existence for years, basically as a result of buying into an existing business. The query I had is about a financial plan for the trust, and has been a useful exercise in the past to set out a direction and understanding for trustees. The deed would not normally be reviewed in that circumstance, or involve a lawyer.

[FTG]

Judging from the replies, I might have given the wrong impression. The trust have been in existence for years, basically as a result of buying into an existing business. The query I had is about a financial plan for the trust, and has been a useful exercise in the past to set out a direction and understanding for trustees. The deed would not normally be reviewed in that circumstance, or involve a lawyer.

Fred, to have any chance of giving you any meaningful opinion, we first need to understand the situation better. Following are some questions for you.

- Confirming this is a Family Trust (not a Trading Trust)?
- Presumably it currently holds a variety of assets and investments? (not just a family home)?
- When was the Trust originally settled? and who originally attended to that, e.g. Lawyer, Public Trust
- You are a Trustee and a named beneficiary on the Trust Deed?
- Are there other named beneficiaries ?
- Or perhaps this is a "Discretionary Trust", so there are no specifically named Beneficiaries?
- Are there other Trustees, including a "Professional trustee"?
- The Settlor is a family member and related to you?
- How familiar are you with the Trusts Act 2019, and all the various associated rights & responsibilities you have as a Trustee and as a Beneficiary?

[Fred114]

Fred, to have any chance of giving you any meaningful opinion, we first need to understand the situation better. Following are some questions for you.

- Confirming this is a Family Trust (not a Trading Trust)? Correct, and set up to protect liability, should that arise, against a claim of conducting business in the construction sector, a very common reason for setting up a trust.
- Presumably it currently holds a variety of assets and investments? (not just a family home)? Trust holds a variety of assets, business shares, two investment properties mortgaged to ANZ, family home, Cash assets (seven figures).
- When was the Trust originally settled? and who originally attended to that? 2015, Lawyer
- You are a Trustee and a named beneficiary on the Trust Deed? Correct
- Are there other named beneficiaries ? 2x descendant children, wife and I
- Or perhaps this is a "Discretionary Trust", so there are no specifically named Beneficiaries? No
- Are there other Trustees, including a "Professional trustee"? No
- The Settlor is a family member and related to you? Wife and I named as the settlor on the deed.
- How familiar are you with the Trusts Act 2019, and all the various associated rights & responsibilities you have as a Trustee and as a Beneficiary? Trying to get familiar.

I've answered these questions for context, but don't quite see their importance for an opinion for a financial plan. There are future (within ten years) competing demands on the trust broadly, that younger beneficiaries would want a lump sum to purchase a house, and older beneficiaries would prefer yield-producing assets, as a source of income. The treatment of debt by the trust will have a bearing on the provision of each demand, described in the first post of the thread.

Hope that helps.

[FTG]

Fred, to have any chance of giving you any meaningful opinion, we first need to understand the situation better. Following are some questions for you.

- Confirming this is a Family Trust (not a Trading Trust)? Correct, and set up to protect liability, should that arise, against a claim of conducting business in the construction sector, a very common reason for setting up a trust.
- Presumably it currently holds a variety of assets and investments? (not just a family home)? Trust holds a variety of assets, business shares, two investment properties mortgaged to ANZ, family home, Cash assets (seven figures).
- When was the Trust originally settled? and who originally attended to that? 2015, Lawyer
- You are a Trustee and a named beneficiary on the Trust Deed? Correct
- Are there other named beneficiaries ? 2x descendant children, wife and I
- Or perhaps this is a "Discretionary Trust", so there are no specifically named Beneficiaries? No
- Are there other Trustees, including a "Professional trustee"? No
- The Settlor is a family member and related to you? Wife and I named as the settlor on the deed.
- How familiar are you with the Trusts Act 2019, and all the various associated rights & responsibilities you have as a Trustee and as a Beneficiary? Trying to get familiar.

I've answered these questions for context, but don't quite see their importance for an opinion for a financial plan. There are future (within ten years) competing demands on the trust broadly, that younger beneficiaries would want a lump sum to purchase a house, and older beneficiaries would prefer yield-producing assets, as a source of income. The treatment of debt by the trust will have a bearing on the provision of each demand, described in the first post of the thread.

Hope that helps.

Thanks Fred,

Quite helpful in getting some sense of where your Trust sits on the continuum of "Trust sophistication & needs".

As you know, the foundational purpose of having a Trust is that the Settlor(s) wish to protect the assets belonging to the Trust.

Relative to other countries, NZ has a high number of Trusts (circa 400,000). As an aside, one of the reasons for that is that back in a day people were primarily using Trusts as a tool to navigate 'tax planning issues' (e.g. Estate Taxes, Gift Duties). In more recent years a more significant motivation for the formation of Trusts has been navigating the PRA (Property Relationships Act). Basically attempting to protect the assets of the Trust from current or future partners of the Settlor and/or Beneficiaries.

Considering the breadth & depth of assets held in your Trust, I think it is great that you are putting together a financial plan! In fact, I would go as far as suggesting, as a Trustee it is imperative that you do so. Many of those 400,000 NZ Trusts (of which many just hold the family home) are currently being rather "loosely" governed & administered. Under the provisions called for in the Trusts Act 2019, at some point many are going to be caught wanting. If a Trust is not structurally correct or is governed poorly then the chances of a Trust being deemed as a sham and hence exposing the assets are much higher. For many people (specifically the Settlors) the new compliance requirements & associated ongoing costs should raise the question to whether having a Trust is still the best approach going forward.

Sorry, I have digressed a little. You wanted comment on how best to put together the financial plan for the Trust. Following are some quickfire points of comment for you to consider. I apologise for any brevity. Getting into specifics on this forum is not appropriate, but feel free to PM me if you wish.

- I would suggest that you do seek some legal advice. Ideally from a Lawyer who specialises in Trust Law. This advice would include reviewing the current Trust Deed and current structure of the Trust. Is it "fit for purpose", especially in the context of the 2019 Act now in play? Once those affairs are in order any financial plan will be more nuanced & aligned to ideal long term objectives.

- As you have business & income producing assets in the Trust, it's best to continue getting Accounting & Tax advice from your good(?) Accountant. Ideally that Accountant will have full visibility of the entire historical & current financial affairs of the Trust, you & your wife, and the associated business interests. A good Accountant will also have sufficiently up-skilled on matters relating to the Trusts Act 2019.

- But, keep in mind that the Accountant isn't a Lawyer!

- And... the Lawyer probably isn't a financial whiz!

- Hence, sometimes the legal, financial & tax planning "best practice" strategies & tactics will appear to be in conflict.

- Having a truly independent financial advisor/planner on your team can be beneficial. (Disclosure: I'm not an Authorised Financial Advisor)

- The Trust holds Family assets (e.g. House), Business Assets AND financial Assets. This in itself isn't necessarily a problem, but ......
- This intermingling of various assets does increase the risk profile for the Trust.
- For example, if things go awry in the construction industry business and the Trust is successfully challenged by a Creditor & "cracked open".
- Another example, and assuming the Home & rental properties are cross-securitised, is if something goes awry with the property market, mortgage serviceability etc, then ALL the assets of the Trust can become vulnerable.

- You & your wife AND your children are beneficiaries. As you have already indicated, the "wants & needs" of the beneficiaries aren't necessarily going to be perfectly aligned in the future. Formulating a comprehensive yet flexible financial plan that meets the needs of all beneficiaries equally is not easy.

With you saying that you may want to assist your children inside 10 years, I'm assuming that they are 18 or over, or will be reasonably soon. The new Act requires that certain information is disclosed by the Trustees to all adult beneficiaries.

- The new Act is yet to be properly "pressure tested" in court with some test cases, but it doesn't take much imagination to see a situation where a beneficiary of a Trust challenge the decisions made by the Trustees.
- I would go further to say that legal challenges could also be made based on their perception to whether the financial plan is A) Well considered & coherent B) Executed as per the plan.

You can probably sense where I'm going with this, but in summary; formulating a financial plan is excellent (as per the quote: "If you fail to plan, then you are planning to fail"), but I suggest there are a couple of other things you may be best to do first.

[SBQ]

I've found sooner or later I may have to form a family trust in NZ. How they say, "A necessary evil" if we look to move back to Canada.

FTG questions are very important. Over the past year i've witness a family feud based around the formation of a Family Trust. Some background info, before my uncle died he placed their home into a trust only because the lawyers at the time said they required it when the large parcel of land was to be sub-divided in 4 ways. He went by the advice of the lawyers despite his wife objecting. The lawyers did not give an alternative as they would not leave each member of the party at risk by not having separate trusts formed. Anyways he passed away 2 years later and boy did their trust cause some major issues. One of the beneficiaries wanted to dissolve the trust but the lawyer that set it up said there was no unanimous decision. The 1 other beneficiary refused to sign the document. Then the lawyer struck the trust as non-standing or in layman terms, a massive rift in the party had formed. He advised each beneficiary must find a new trustee to represent them in the trust. When 2 attempts from different people in each side of the party had failed, the lawyer was forced to hand the trust over to Public Trust. Now under a different administration, the public trust has to obliged with the will and 'memorandum of wishes' set out when the trust was formed. By the way, the 1 beneficiary that tried to dissolve the trust incurred legal fees in excess of $16K, all at the end having the trust end up in the hands of Public Trust administration. As we speak, they are trying to sell the house and they realise the funds have to go back into the trust account. From there I don't know what will happen after if all parties will agree to dissolve the trust.

Just saying that there are major problems when operating a trust, if all parties are not on the same page. This is the biggest thing that scares me the most and the lawyers make a lot of $ out of this stuff. Don't ask the advice of an accountant. Seek someone trustworthy, a close friend or family that can recommend a good lawyer. Even then, it's been mentioned before that the family trust today serves little for the average family. It no longer offers the same protection as it use to (hence repeated changes of the Trust Act = 2019).

[peat]

so its actually got little to do with the Trust because usually the fine points of those are in the Deed or The Memorandum

So if you were to go professional it would be a Financial Planner.
However you're presumably going to do it yourself.
In which case work through some asset allocation percentages using standard FP principles (adjusted as you consider) If you dont know what the ranges here would be I could provide something to work off.

Then work through the expected returns on those and compare those to the 'requirements'.

But , Perhaps you dont need to consider the return on the assets themselves just their appropriate percentage in the risk based allocation and then pay the income required out of the cash as it seems there is a good pool
The trust will grow as per its own income and capital gains ,or shrink if the income paid to the beneficiaries is too great but would I be right in suggesting thats unlikely.

[Fred114]

so its actually got little to do with the Trust because usually the fine points of those are in the Deed or The Memorandum

So if you were to go professional it would be a Financial Planner.
However you're presumably going to do it yourself.
In which case work through some asset allocation percentages using standard FP principles (adjusted as you consider) If you dont know what the ranges here would be I could provide something to work off.

Then work through the expected returns on those and compare those to the 'requirements'.

But , Perhaps you dont need to consider the return on the assets themselves just their appropriate percentage in the risk based allocation and then pay the income required out of the cash as it seems there is a good pool
The trust will grow as per its own income and capital gains ,or shrink if the income paid to the beneficiaries is too great but would I be right in suggesting thats unlikely.

asset allocation, yes I’d overlooked that, partly because I don’t normally apply.

yes, if you could provide something to work off that would be good.