Are you thinking of winding up your family trust?
Before you do so there are several implications that need to be considered, which are as follows:
- Residential care subsidy
- Tax
- Estate claims
- Relationship property
- Bright-line
We will summarise each of these implications below.
Residential care subsidy
If you require full time rest home care in the future in New Zealand, you can apply for the residential care subsidy whereby the government covers the cost of your care.
In order to qualify your assets must not exceed the asset threshold which is currently $256,544.00.
If your family home and other property and assets are in your trust then these are trust assets not yours and as such the value of these assets is not taken into account when determine if you exceed the asset threshold or not. If the assets in your personal names are less than the threshold you may be eligible for the residential care subsidy. However, if you transfer the assets from the trust to your personal names then the value of these assets is taken into account and the total value of the assets in your hands would most likely push you over the asset threshold and make you ineligible for residential care subsidy in the future.
However, eligibility for the residential care subsidy depends on the individual situation and can be effected by how assets were transferred to your trust in the first place and how you have been gifting to your trust over the years. So, you need to discuss your circumstances with your solicitor.
Tax implications
If your Trust owns a rental property and/or has been receiving income over the years, then you need to discuss this with your accountant, especially if there is a rental property as there may be clawback because of transferring the property from your trust to yourself.
Also, if you now live overseas then the trust could be considered a non-complying trust and there may be further tax implications that we are not aware of in relation to the transfer. So before any winding up takes place a discussion needs to be had with your accountant.
Estate Claims
If you pass away your wealth will be in your personal name. Your assets will be sold and distributed to the beneficiaries in your will. Wills can be challenged for a number of reasons, for example excluding (or not providing adequately for) certain family members such as spouses, partners, children and/or stepchildren or where a testamentary promise is made. Trusts cannot be challenged for the same reasons.
Relationship Property
You could be converting trust property to relationship property. This means that if you are in a relationship at any stage, the property could be subject to a claim under the Property (Relationships) Act 1976 if the property is at any stage considered relationship property.
If the property is your main family home and you and your partner have been living together for more than 3 years, then you are definitely converting it to relationship property upon the transfer.
For a rental property, if the property was purchased prior to your relationship and the rental income received from the property is sufficient to cover the mortgage repayments, then under the Act the property will most likely be considered your separate property and not subject to a relationship property claim.
However, if the rental income is insufficient to cover payment of the debts and you are using your personal income to pay the mortgage, then the property could be subject to a relationship property claim in the future. So, by taking the property out of the trust you are putting it at risk of future property relationship claims.
Bright-line
The transfer of ownership from the trust to the beneficiaries is the disposal of land and the Brightline Test applies. If the property is not your main family home and is a rental property, there could be tax implications if:
- The Trust purchased the property between 29 March 2018 and 26 March 2021, and you transfer ownership to yourselves within 5 years of the Trust purchasing; or
- The Trust purchased the property since 26 March 2021, and you transfer ownership to yourselves within 10 years of the Trust purchasing; or
- you sell the property within the next 10 years of transferring it from the trust to yourself.
If you are considering winding up your family trust then before doing so you should discuss this with your accountant and solicitor, so you are aware of the implications. Accordingly, any of the team at Collins and May Law would be happy to discuss winding up your family trust with you.
