by Wendy Dews, Associate at Greg Kelly Law Ltd, Wellington
When you discover you are going to inherit grandpa’s spectacular beachfront property on which your parents have built a beautiful holiday house, you need to think carefully about how you can protect this asset for future generations.
There are a number of potential risks which could result in this property not being available to grandchildren and great-grandchildren for their future enjoyment. You should establish a structure that would help protect this idyllic property from:
1. Business risk.
2. A second/future marriage/relationship situation and/or relationship breakdown.
3. Claims against your estate by family and others.
4. Having to sell the property; and
5. Any possible future capital gains or similar taxes.
Being aware of the above risks will help allow the beachfront property to pass to the next generation without exposing inheritances to relationship property or other claims.
A number of people in this situation of inheriting significant assets will already have established trusts for the protection of those assets from the above risks. Those trusts hold what would normally be regarded as relationship property.
Relationship property is likely to include the family home, family chattels, investments, savings, rental properties purchased and the majority of the shares in the business you may have established during your marriage, civil union or de facto relationship. There is a risk that the inherited beach property could be mixed in with relationship property and so be subject to a claim by a former spouse or partner. Using a separate trust for that inherited property allows you to ring fence it from other assets. Showing that the property has never been mixed in with the relationship assets helps avoid the risk of a claim against that property.
Steps To Follow
The mechanism most recommended is as follows:
The thinking behind such a trust structure is to use the strengths of Section 10 of the Property (Relationships) Act 1976 (“PRA”), which states that “any gift and anything you inherit or receive as a trust beneficiary is not relationship property”. If you do allow your inheritance (or gift) to be mixed with relationship property it’s likely to be treated as relationship property.
You may also want to consider establishing the new trust prior to your parents’ passing and have your parents leave any inheritances directly to this trust so the assets do not pass through your hands. This is referred to as a “legacy trust” or it’s sometimes called an “inheritance trust”.
Note that this structure will not be effective where it involves the family home and family chattels due to the application of Section 10(4) of the PRA, or Section 12 of the PRA in respect of homesteads. In these circumstances, a Contracting Out Agreement under Section 21 of the PRA will still be required for the long term protection of any inherited family home or homestead.
Clearly doing nothing is not a sensible option. Doing so could leave the holiday home open to claims from family and others and, due to the use of such an asset by family members, it may result in it being deemed to be relationship property. Protecting assets for future generations is not simple, but it’s essential if you want to retain assets.