You may or may not be aware that the Law Commission are currently undergoing a very detailed analysis of various elements of trust law in New Zealand. They are due to release their recommendations in respect to changes to trust law around mid – 2012 and these will be interesting reading. In December 2010 the Commission released a discussion paper looking at the use of family trusts in New Zealand, where there is one for every 18 people.
Some of the comments made in that paper provided an interesting analysis of the use of family trusts in New Zealand. The paper suggests that trusts were seen as something of a status symbol with many people motivated to establish one just because someone they knew had one.
In recent decades some of the reasons for establishing trusts seemed a little more obvious – In the 1950’s trusts were seen as a means to avoid paying estate (death) duty and other high taxes, in the 1970’s as “the obvious vehicle” to avoid matrimonial property having to be equally divided in the event of a divorce, and in 2000, when changes to the tax system increased the top rate of personal income tax to 39% while the tax rate for trusts remained at 33%. In addition, trusts were often used by applicants seeking the residential care subsidy, to reduce their assets in order to satisfy eligibility criteria for the benefit.
So, with the reduction in the personal tax rate, abolition of estate duty and developments in the Relationship Property area of law, why do people use trusts?
I suggest to you that avoiding exposure of ‘personal’ assets to creditors is definitely a common discussion question with clients, as is keeping property out of relationship asset pools. So, do trusts work to protect these assets?
Certainly case law is developing as a pretty powerful tool to suggest that if you are merely operating a trust as an extension of your self, and treating the assets as your own, the trust is likely to be considered by the Courts as a “sham”. Trust “busting” -as it is known- is forging ahead in leaps and bounds in the Courts where relationship property is at stake, with recent decisions providing that assets held in trust do not prevent them from being included in any relationship property division. When dealing with creditor remedies the Courts have plenty of scope to look into trust arrangements to determine whether the assets should be available. The role played by trustees is also increasingly under scrutiny, with case law defining the limits to which trustees can excuse themselves or limit their liability.
So, what to do?
Just in the same way that companies need to be run with resolutions, board meetings and making sure all the necessary paperwork is in place, trusts are no different. Always remember, if you had forgotten, that assets held in a trust are not yours…they belong to the trust fund, which is administered by the trustees of that trust. Trustees have to act in accordance with the Trustee Act 1956 and, of course, the terms of the trust deed that establishes the trust. When trustees deal with assets they need to do so by way of resolution of the trustees and their decisions need to be in accordance with the Act and trust deed.
If you are an independent trustee then you need to make sure you keep copies of trust documents and resolutions. You should require copies of annual accounts and bank statements, and transactional documents. Most independent trustees who are non professional don’t get paid anything to be an independent trustee and yet they take on a huge amount of risk.
All property and obligations are held in the name of the trustees as a trust does not have separate legal personality. What does this mean? Trustees (of a family trust) are personally liable for the debts of the trust. Often, a trust deed will allow the trustees to be indemnified from the assets of the trust. This is helpful to reduce personal liability, but only to the extent that the trust actually has sufficient assets, and I would suggest cash assets – as there is no use in having a fortune in shares in a small business (for example) that can’t be sold.
Shortly (hopefully) we will be able to report back to you with the likely changes in trust law. Until then, make sure if you are a trustee of a family trust that you are aware of what your obligations are to your beneficiaries, what your obligations are under the Act, and your parameters for action under the trust deed.
* this blog reflects the personal views of the writer and does not constitute legal advice, or the opinion of Stace Hammond.
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