The Sunday Star Times recently published an article by Martin Hawes titled “The Trust Relationship“. In the article, Hawes talks about the important process of weighing the advantages of having a trust versus the disadvantages when deciding whether to establish a family trust or keep one going. 

I agree strongly with most of what Hawes writes in this article. But I disagree with the article’s tone and its conclusions.

Have advantages related to trusts reduced considerably?

Hawes explains that the advantages of family trusts have reduced gradually over the years. In particular, he notes that “the tax benefits of trusts have been eroded”, and that trusts have become less beneficial when it comes to maximising government benefits such as Rest Home subsidies. I agree with his assessment.

But does this mean that “The weight of trust advantages has lightened considerably” (emphasis added)?

It’s true that these changes make it more difficult to demonstrate specific benefits to clients. These are benefits that an accountant or financial adviser might be tempted to focus on.

But trusts can provide significant benefits, including in relation to creditor protection, protection against relationship property claims, as a tool for succession planning, and even for providing privacy. 

When I look at trusts from the perspective of wanting to help clients manage the financial risks to which they are exposed, these are incredibly compelling reasons for establishing a trust. 

Think of it this way. If you set up a trust for the purpose of trying to minimising tax, or maximising government benefits, you might stand to gain thousands or maybe tens of thousands of dollars of benefits.

But this is small fry compared to the hundreds of thousands – or millions – of dollars that you’ve accumulated, which you’re protecting more robustly by structuring within a family trust. You only need to see one or two examples of people losing their hard-earned money, when they could (or should) have had it protected, to see how important this is. It can be heart breaking.

At the start of his article, Hawes notes that “We are all different and each can weigh [the relative advantages and disadvantages] heavier or lighter, depending on the personal circumstances”. I agree.

For some people, the potential tax savings and government benefits might be the most important thing. But for many, protecting the assets you’ve worked so hard to accumulate for the benefit of those you love, is not a small thing.

Have the disadvantages related to trusts increased markedly?

Hawes also notes that “while the advantages of trusts have become lighter, the disadvantages of trusts have got heavier”. 

I acknowledge that there’s a strong argument that costs associated with administering trusts have increased in recent years. 

The firm I work for, for example, provides a trust management service, and we charge several hundred dollars per year for each trust we service. (The exact figure varies depending on a number of factors, including whether the trust produces income. But apart from exceptional circumstances, we’re looking at hundreds, not thousands of dollars a year.) 

We haven’t implemented this service to maximise our profits. Personally, I question whether we make our money back from this service. What it does do, however, is ensure that we have a systematic process of reviewing our clients’ trusts to ensure that they are being administered appropriately. Worst case scenario, it adds value to our firm and its clients by minimising the professional risks associated with trust-related advice and administration.

Is such a service more expensive? Yes*. Is it worth it? Yes.

The truth of the matter is, that these management systems were long overdue. They may be prompted by recent court cases, but cases like this were coming.

Hawes states that “Establishing a trust and then managing it badly is crazy – it is likely to negate the purpose of the trust.” And I couldn’t agree more.

What we’re now seeing is that trusts are much more likely to be administered appropriately. Is a client getting as much value from a trust with low ongoing costs that isn’t going to achieve its important purposes, or a trust that costs a few hundred dollars more per year, but will achieve these purposes?

Essentially, what we’re seeing is value for money. I agree with Hawe’s sentiment when he says that he is “happy about this increase in trust management and its cost”. 

Hawes concludes this point by stating that “With weight increasing because of the requirement for better management and with the cost of that management the scales have tilted quite markedly towards the disadvantages of trusts” (emphasis added).

Is a few hundred dollars per year enough to tilt the scale quite markedly?

I guess it depends on your situation. But this is a fraction of what many people pay in personal insurance to protect their loved ones should the worst happen. When thought of in this light, these ongoing costs can be a cheap form of insurance.

*I would also add that with respect to our firm’s trust management system, I believe that it will ultimately save clients money. This is because we can attend to administration in a more efficient and cost-effective manner. Over time, these increased costs will become progressively more modest. 

Conclusion

Hawes states: “Increasingly, I find the right advice for the client is that they do not need a trust as the disadvantages outweigh the advantages”. 

There are a significant number of people for whom a trust is not suitable. And our firm also regularly advises clients to consider winding down their family trusts. On this point, as with most of the other excellent points in this article, I am in violent agreement with Hawes.

But have the advantages of trusts reduced considerably over recent years? And have the disadvantages increased quite markedly? I disagree.

For many people, there is still a compelling case for having, and retaining, a family trust. What might be needed is less of a focus on the things that you can get from having funds held in trust, and more of a focus on the risks that you’re managing by holding assets in a family trust.

Sonnie Bailey

Sonnie is an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).