By: Jeff Kenny
Published: 1/09/2009

Asset planning normally involves transferring assets to appropriate vehicles to hold the assets. It often also involves providing for family members under wills, granting powers of attorney to allow others to manage assets if a disability occurs, and obtaining insurance against certain risks.
 

REASONS FOR ASSET PLANNING

There are a number of reasons why you may wish to have an asset plan. These include the following:

  1. Flexibility It is desirable to hold assets in a vehicle that enables them, in future, to be dealt with in different ways in light of changing personal, legal, or tax requirements.

  2. Protecting Assets From Future Claims It is desirable to hold assets in a vehicle that protects them from claims against you, your estate, your family members, and their estates. These claims can come from:

    • third party creditors under contracts;

    • third party creditors if you or your family members commit some other kind of legal wrong against them

    • the Crown if you or your family members commit some kind of offence;

    • your spouse or your childrens’ spouses under the Property (Relationships) Act 1976- this Act applies between married persons but will soon be extended to people in de facto relationships;

    • your family under the Family Proceedings Act 1980 - this Act allows family members to challenge your will and your other family members’ wills in certain circumstances;

    • your family and other persons under the Law Reform (Testamentary Promises) Act 1949 - this Act allows family members and other persons to claim against your estate and your other family members’ estates in certain circumstances.

  3. Tax It is desirable to hold assets in a vehicle that keeps tax liability at the lowest appropriate level.

  4. Managing Assets Sometimes it is desirable to hold assets in a vehicle that allows the asset to be managed by a single person or a small group of persons for the benefit of a larger group.

  5. Transferring Assets Sometimes it is desirable to hold assets in a vehicle that allows the asset to be transferred efficiently to others such as a transfer to children on retirement.

  6. Allow Future Eligibility For Asset Tested Benefits In some circumstances you or your family members may be asset tested to determine eligibility for medical, rest home, and other government subsidies.

 

KEY TOOLS FOR ASSET PLANNING

There are a number of asset planning tools available. These tools include holding assets in partnerships, companies, or trusts (or a combination of them), leases, wills, powers of attorney, and various forms of insurance.

 

PARTNERSHIPS

A partnership arises where two or more people jointly carry on business intending to make a profit. The partners own the partnership assets jointly as a group. Most partnerships in New Zealand are general partnerships. They are not registered under any statute and all that is required to form one is a written, oral, or implied agreement between the partners.

 

COMPANIES

A company is a separate legal entity and must be registered under the Companies Act 1993. Assets are owned by the company and not by the shareholders of the company. The company is mostly controlled by the directors but the shareholders must make certain key decisions from time to time.

 

TRUSTS

A trust arises when a person (called a trustee) holds assets on behalf of a person or a group of people (called beneficiaries). The trustee may be an individual or a company or a number of them. The group of beneficiaries may include the trustee.

The most common form of family trust in New Zealand is a discretionary trust. It is called a discretionary trust because the trustee has the right to decide, from time to time, which of the beneficiaries will receive the income and capital from the trusts assets.

The usual method of transferring assets into a trust is to sell them to the trustee. If the seller is a person related to the trust the sale price will invariably need to be the market value of the asset.

Often, when the seller is a person related to the trust, the trustee will have insufficient cash to pay the sale price. Therefore the seller will usually leave the sale price outstanding and therefore the trustee will owe the seller a debt. The terms on which the debt is payable ought to be recorded in a document between the trustee and the seller.

The debt needs to be extinguished somehow as soon as possible. Therefore it is usual to each year reduce the amount of the debt by way of gift. The maximum duty free gift that can be made is $27,000 for each person making a gift to the trust.

 

LEASES

Leases allow the owner of an asset to grant another vehicle the right to use the asset in return for rent. Any type of physical asset such as land, stock, or plant can be leased. A lease is a useful linking device when a combination of vehicles is used to own and operate assets. A lease can allow one of the vehicles to own the asset whilst another vehicle operates the asset.

 

WILLS AND POWERS OF ATTORNEY

A will is a document specifying what is to happen to a person’s assets upon their death. A will has special requirements and should therefore be prepared by an experienced lawyer. If a person dies without leaving a valid will their assets pass by default to various relatives. In broad terms this means that the deceased’s spouse will receive the deceased’s chattels, the sum of $155,000, and one third of the balance deceased’s estate. The deceased’s children will receive the rest equally. This will often be unsuitable for the surviving spouse and therefore it is usually important to have a will.

A power of attorney is a document authorising another person to deal with your assets or make decisions about your welfare on your behalf. In New Zealand special kinds of powers of attorney called enduring powers of attorney can be granted. These allow the attorney to manage your assets and your welfare even if you become incapable of doing this yourself.

 

FARMER’S SPECIAL ASSET PLANNING ISSUES

Farmers have special asset planning needs. The farm will usually be their single large capital asset. This asset will usually be expected to provide sufficient income for the farmer, his or her spouse, their children, and possibly future generations. The farm ownership structure must:

  • allow the farm business to trade properly;

  • allow the farm business to be financed;

  • be tax efficient;

  • allow the farm business to be operated or otherwise dealt with if the farmer becomes ill or dies;

  • allow the farm business to be passed on, usually over a period of time, to future generations.

 

PASSING ON THE FAMILY FARM

One of the most difficult issues for farmers is how to pass on the family farm upon retirement. Many farmers have gained ownership of their farms from their parents. Other farmers have bought farms with the assistance of family money generated from farming. However few farmers are now financially able to both pass the farm on to their children and keep sufficient money for a comfortable retirement.

In most of these situations the farm is sold to one or more of the children at its full market value. Some of the purchase price is paid immediately and the balance of it is paid over a period of time to the retiring parents who use this money in their retirement. In this kind of transaction the retiring parents will want to obtain sufficient money to enable them to live comfortably. On the other hand the children will wish to ensure they do not pay too much money because the volatility in farming income means a high level of third party debt is undesirable. This conflict creates a difficult issue. Proper long term asset planning can often alleviate this difficulty. This will usually involve direct family discussions and experienced advisers.A number of options are available. A common solution is to form a family trust to own the farm. There will then be a number of options to ease the children into the farm:

  • the trustee may distribute assets owned by the trust to the children; or

  • children may run the farm through the trust whilst the trust continues to own it; or

  • the trust may sell the farm to the children.

Often in these situations a combination of partnerships, companies, trusts, and leases will be used to allow the farm to be passed to children, allow the business to be efficiently operated, and for it to be protected from claims.

 

MATRIMONIAL AND DE FACTO PROPERTY LEGISLATION AND FUTURE GENERATIONS

An important aspect to consider when passing on the family farm to a son or daughter is the risk of their spouse claiming a proportion of the farm. It is possible for the claim to be up to 50% of the farm value. In those circumstances the family farm may need to be sold. A carefully designed asset plan can substantially reduce this risk and allow the farm to remain in the family if one of your children or grandchildren separates from his or her spouse.

 

WHAT STEPS YOU NEED TO TAKE

An experienced lawyer should always carry out asset planning. The lawyer will obtain information about your assets, your family, and your requirements, prepare a proposal for discussion, and implement it. Initially you will need to take the following steps:

  • prepare a list of your assets and liabilities;

  • prepare an outline of your financing requirements;

  • calculate your future income and expenditure;

  • prepare an outline of your future business activities;

  • prepare an outline of your family circumstances;

  • calculate your future income and asset requirements;

  • decide what future threats may arise to your asset and your income earning ability;

  • decide what future asset transactions you may wish to carry out (in particular, on retirement).

Once this is done you should consult an experienced asset planning lawyer and supply this information to him or her in writing. The lawyer will then prepare a proposal for discussion and agreement. Once agreed on, the plan can be implemented. For many people the steps required to implement a plan are straightforward and cost effective.
 
 

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