Reasons for Estate Planning?*

Generally, the reasons for estate planning include:

  • Protecting your assets against future creditors to which you or your family could be exposed;
  • Tax savings on beneficiary income;
  • Enhancing your eligibility for government entitlements;
  • Protecting your assets from the possible reintroduction of estate duty or a capital gains tax;
  • Protecting your assets against relationship property claims, including the interests of your children against claims by their spouses or partners; and
  • Controlling succession of your estate to your children or other beneficiaries.

Creditor Protection

If you are at risk through your business activities as a director or as a professional you may wish to ensure your assets are safe from creditors.

Usually a discretionary family trust is set up and assets are transferred to it through an ongoing gifting programme. Assets owned by a trust do not form part of an individual’s personal estate available to the Official Assignee in bankruptcy. These assets are therefore protected from exposure to your family’s future creditors.

However, this protection is not total. There are circumstances where trusts may not protect your assets against the claims of creditors. For instance, trusts do not afford protection against existing creditors as transfers of assets to trusts can be reversed by the Court where:

  • The person transferring the property is adjudged bankrupt within 2 years after the transfer;
  • You were unable to pay your debts at the time you made the gifts;
  • The transfer has the effect of defeating creditors (whether intentionally or not);
  • The transfer was made with the intention of defeating creditors;
  • The transfer was made in order to defeat the claim or rights of any other person.

In addition, if a disposition is made to a trust without intending to defeat rights but for other reasons (say creditor protection or income protection) the transaction may still be vulnerable.

If you or your family’s assets are exposed to business risk then the sooner those assets you want to protect are transferred to a family trust, the more likely you will be able to shelter those assets if something goes wrong in the future.

Income Tax Planning

A family trust offers the opportunity to distribute income among yourself and members of your family with lower tax rates, which may result in income tax savings.

Maximising Your Entitlement To Government Benefits

Of concern to many New Zealanders is means testing for Government benefits and subsidies. Although means testing in respect of the Residential Care Subsidy is now being progressively decreased from 1 July 2005 for people over 65 and in long term residential care.

If you transfer assets out of your name and into a family trust you will be able to keep a measure of control over your assets, while maximising your entitlement to health, welfare and other government subsidies and benefits. However there are anti-avoidance provisions in the Social Security Act and trusts should not be established solely to avoid means testing.

Political Risk

A trust may assist in minimising the effects of any introduction in the future, of a capital gains tax, inheritance tax, wealth or a similar taxation scheme.

The gifting of assets to a family trust reduces an individual’s personal net wealth and this may assist in minimising liability were such taxes enacted.

Pure Estate Planning

A family trust enables the controlled succession of an individual’s assets to children and grandchildren. It provides an opportunity to take into account the particular circumstances of each beneficiary in respect of any marriage, financial or housing difficulties they may have.
In addition the costs of administration of your estate on you death may be reduced since the bulk of your assets will be held by the trust.

Wills

As part of an overall estate plan, you should ensure that you have a will. There are formal requirements of a will and these are listed in the Wills Act 1837(UK). Failure to comply with these formalities may render the will void. For example, two witnesses must witness and sign the document along with the person making the will.
If you die without making a will,

  • The costs of administering your estate are increased by the need to apply to the High Court for letters of administration in an intestate estate; and
  • You have no control over who will administer your estate and who will ultimately benefit from it.

If you have a will already then you should ensure that it takes into account any changes in respect of your circumstances such as the establishment of a family trust and any transfer of assets to that trust.

It is important also to note that despite having a valid will, both the Family Protection Act 1955, the Law Reform (Testamentary Promises) Act 1949 and the Property (Relationships) Act 1976 have provisions which enable claimants to apply to the court to overturn a will.

Family members can, under the Family Protection Act, make a claim against the estate if the deceased person has failed to make adequate provision for them. If a claim is made a Court can order proper maintenance and support for close family members, including spouses and de facto partners, out of a person’s estate, if that is not provided in the will or on intestacy.

Enduring Powers Of Attorney

Where a person loses mental capacity without having completed an Enduring Power of Attorney, an application needs to be made to the Courts to appoint a manager of their personal affairs and property. This not only involves considerable expense but is also a very time consuming process. The completion of an Enduring Power of Attorney bypasses these difficulties.

If a considerable gifting program lies ahead of a client, it is desirable to craft the Enduring Power of Attorney as to Property to include express authority to continue a gifting program.

Wills and Enduring Powers of Attorney are effective in reducing the difficulties and costs involved in dealing with a person’s affairs if that person were to die or become incapable of managing their own affairs.

* At AIFP we are not Solicitors/Lawyers and above publication is general advice only and to assist our clients to help identify the need for Estate planning.Please take legal advise to meet your personal needs.