How family trusts work
A legal document called a ‘trust deed’ will formally set up the family trust. It will name the trustees, list the beneficiaries, and state various rules for the administration and management of the trust. The trust deed needs to be very carefully written, preferably by a lawyer.
Then we will need to decide what things we own should be put into the family trust, and what their value is. In many cases this will be the family home, but other things of value like cash, bank deposits, shares, artwork etc can also be included in the trust.
Once the family trust is formed assets can be sold into the trust, at market value. However, although the trust wants to buy, say, our house (and we want to sell it to the trust) the trust has no money to buy it. How then does the family trust pay for the house?
The answer to this is that we lend the family trust the money. Initially this is a ‘paper’ transaction – we sell the house to the trust, and the trust now owes us a house-sized debt.
However, the debt that the trust owes us is still counted as a personal asset. So we will need to get rid of the debt so we can achieve our aim of owning less in our name.
The way we do this is through ‘gifting’.
Most people who form trusts ‘gift’ away the debt that the trust owes them. Before October 2011 there was a limit of $27,000 that anyone could gift in one year without paying a tax called ‘gift duty’ to Inland Revenue. However, gift duty has now been abolished and there is no limit to how much we can gift in one year.
This means that where previously it would have taken 22 years to gift the value of a house worth $600,000 to a family trust without paying gift duty, we can now gift the whole amount of the debt straight away.
If you still owe the money you borrowed to buy the house in your own name then you would not want to gift away the whole debt the trust owes you – because you would have no assets and a large liability. This would leave you insolvent and at risk of being declared bankrupt.
It’s always best to seek legal advice before proceeding with gifting.
Note that gifts are still included in assessment for a Residential Care Subsidy.
For more information visit the Work and Income website.