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To trust or not to trust

Trusts are an integral part of the farming industry.

Here are some examples and issues that you need to think about.
  • Bill sold out to his son, delighted that the farm would remain in the family for another generation. He and Glenda stayed on in the family home on the farm, and the son and his wife built a new house. Unfortunately, the new marriage split up after five years, the farm had to be sold, and Bill and Glenda had to move into town.
  • Bob and Jean always intended that their farming daughter would inherit the farm, and were thinking about how they would arrange it when Bob died suddenly. By the time everything had been paid there wasn't as much equity left as had been expected. The daughter had to take out a much larger mortgage so that she could buy her mother a home in town.
The names here are fictitious, but the predicaments are very real. I often see clients heading for situations that could cause them grief when they could so easily avoid problems by forming a Trust.

A Trust is like a living will.

For farmers, trusts are a means of keeping property in the family and managing its transfer from one generation to the next. They are a great way to help your family to take over your assets, without having to borrow heavily from the bank.

It's not hard to do. Firstly, you form the trust and sell your assets to it. Initially you lend the trust all the money to buy the assets, and every year you gift back the maximum amount you can without having to pay gift duty. Eventually, the trust owns the whole property.
The deal might look something like this:
  • Farm value including shares 100,000kg/ms @ say $3,500,000
  • Debt bank say $1,500,000
  • Overdraft $100,000
  • Total debt $1,600,000
  • Sell to the Family Trust $3,500,000
  • Existing debt $1,600,000
  • Loan from the new Family Trust back to the Vendors $1,900,000
Now you can gift at some $27,000 per annum each to the family trust without attracting Gift Duty. Now you as the property owner are the Settlor. You need two Trustees and you may wish to nominate a professional Trustee like Guardian Trust. It is an encumbrance on the trustees to manage the assets for the beneficiaries. You of course can be one of the Trustees but on your death you need to have nominated your replacement.

The property is held in Trust say for your son, who has taken over the property, his new partner is unlikely to be able to make a claim on the asset should she leave.

The Trust can also hold money, shares and so on for the beneficiaries. There are also some taxation advantages for beneficiaries once they reach a certain age.
Get it Right: The Trust must be set up properly with expert legal and accounting advice. I am unhappy to admit that I had two back-to-back Trusts set up some ten years ago which are now unworkable and obsolete. It has cost me some $10,000 to re-settle them into one new modern Trust. There is also some taxation on depreciation recovered that I will have to pay. Notwithstanding, I now know I have it all done correctly.

Trusts are also a cost effective way to prevent predators from attacking your assets. Trusts must be run as a separate entity and have their own bank account and balance sheet. Minutes need to be kept. You cannot be the Settlor, Trustee and Beneficiary of your own Trust. This is a sham Trust and can be attacked by IRD.

When you retire, and sell the farm, the purchase of a house in town must go into a Trust. Why? If you need full hospital or palliative care, the government will put a caveat on your non-trust property to recover the cost of your care. Scary isn't it?

IN SUMMARY

Trusts are a simple cost effective way of protecting and transferring property into the next generation.
These are just some of the issues you need to consider. They need to be set up and administered properly. You must get top legal and accounting advice, and if you need someone to explain it in a language you can understand phone Don at Fraser Farm Finance on 0800 777 675.


 

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