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25 Oct 2018
You may have a family trust or be told you need one, or even be a trustee of a trust, but do you really understand what a trust is and why it’s needed?
A Trust is a legal relationship in which an interest in property is held by one or more persons (the Trustees) for the benefit of others (the Beneficiaries). There are three categories of people involved in a Trust relationship:
It is important to remember that even though a person may appear in more than one of the categories above, they wear different hats for each. With those hats come different rights and responsibilities. Once a person settles property on a Trust, it is no longer theirs to do with as they wish. It passes to the Trustees who are obliged to deal with it in accordance with the terms of the Trust Deed and comply with the Trustees legal responsibilities to look after it for the Beneficiaries. If the Settlor continues to treat the property as though it is still their own, the Trust may be treated as a “sham” trust and set aside. The Inland Revenue Department, in particular, is alert to the existence of sham trusts.
The Trust is controlled by the Trust Deed. This is a legal document which must be clearly prepared and witnessed to make it valid. The Deed will normally cover the nature and purpose of the Trust, the term (maximum currently 80 years), parties (settlor, trustees, beneficiaries), powers and duties of trustees, and rules regarding distribution of income and capital.
There are a number of reasons for forming a trust and potential benefits include:
Trust Deeds are living documents and it is important to make sure they are regularly reviewed and updated. Changes in circumstances and legislation can impact existing Trust structures. Accountants, with their knowledge of the Settlor’s personal and financial affairs, can assist to review the Trust to ensure it will continue to meet the Settlor’s requirements.
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