Commercial, Property & Trust Lawyers

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Trust Articles

FAMLY TRUSTS
– AN OVERVIEW

A Trust is an obligation binding on one or more persons (the Trustees) to deal with property for the benefit of others (the Beneficiaries). The Trustees legally hold and deal with the property but do so for the benefit of the Trust and not in their individual capacity. The Trust is usually established by Deed.

Who are parties to a Trust Deed?

  • The Settlor
    Someone must set up the Trust. Where a Trust is established by a Will that person is known as the Testator; where a Trust is created by someone who is still alive that person is known as the "Settlor". A "Trust Fund" is established by the Settlor often with an amount as small as $10.00. This may be added to from time to time as the Settlor or anyone else wishes to place more money or assets in the Trust. You can be both a Settlor and a Beneficiary of a Trust and many Trusts are set up in this way.
  • The Trustees
    Trustees have a number of important roles. They decide how the Trust Fund is invested and to whom income and capital are paid. Practical control of Family Trusts is maintained by reserving the power of appointment and removal of Trustees and Beneficiaries to the Principal Beneficiaries.
  • The Beneficiaries
    The Trust Deed says who the Beneficiaries are. The Trustees normally have a discretion to decide which of them will benefit as to capital and income. In most cases Trusts are established for the purpose of benefitting the Principal Beneficiaries, usually a husband and wife (or partners) and their children.

The Trust Fund and Life of the Trust

After the initial settlement on the Trust, the Trust Fund may be built up by gifts, (up to $27,000.00 in each 12 months free of duty), loans repayable upon demand and free of interest or by the Trust Fund purchasing assets. The Trust Fund can be added to. It can own real estate, borrow on mortgage, have bank accounts, generally hold all types of assets and investments and operate according to the powers in the Trust Deed. If gift duty is to be avoided, gifting programmes for substantial asset transfers can take years to complete.

A Trust (apart from a charitable one) cannot carry on forever. Most Trust Deeds provide that the Trust continues for a fixed number of years (not exceeding eighty which is the maximum allowed by law) or for such shorter period that the Trustees decide.

The Number of Trusts

One effect of the establishment of a Family Trust can be to take relationship property outside the application of the Property (Relationships) Act 1976. To preserve for each spouse/partner a measure of control in what was their interest in the assets being transferred we can draft special clauses providing how the Trust assets are to be dealt with on separation. An alternative is to prepare what are known as Mirror Trusts. Where it is intended to transfer business assets to a Trust as well as personal assets (such as the family home) we often recommend that separate Trusts be formed so that there is no intermingling of personal and business assets. This can avoid GST or income tax complications in respect of personal assets.

Uses for Familiy Trusts

  • Retirement Planning and Family Provision
    A Trust can be a convenient vehicle for investments which the Principal Beneficiary wishes to keep distinct from other assets and possible claims.
  • Split Income
    A Trust can be used to split income amongst several members of a family reducing the total tax payable if the beneficiaries are on lower tax rates. The "kiddies tax" does impact here though the ability to income split remains very important.
  • Asset Protection - Creditors
    This is one of the most common reasons for setting up a Family Trust. For many people in business their
    personal and/or business assets are at risk. Members of partnerships and sole traders have unlimited personal liability. In many cases limited liability protection under the Companies Act does not provide full protection. It is a common practice of Banks and major trade creditors to obtain personal guarantees. If assets are transferred to and owned by a Family Trust they are not available for creditors or, in the extreme case of bankruptcy, the Official Assignee. There are, however, qualifications to the foregoing which we discuss with Principal Beneficiaries.
  • Achieving Testamentary Wishes
    From time to time we have clients who are concerned that on their death their estate will not be dealt with in accordance with their wishes. There are a number of Acts of Parliament which confer rights of claim upon persons for whom testamentary provision is not made. For example, children, spouses and partners for whom provision is not made under Wills can bring claims under the Family Protection Act 1955. Spouses and partners may also claim under the Property (Relationships) Act 1976. Such claims are limited to the deceased's estate. If assets are disposed of during the deceased's lifetime to a Family Trust they can be dealt with in accordance with the Trust's provisions and can be put out of reach of the claims of persons disappointed at the testamentary provision made for them.
  • Relationship Property
    We have clients who wish to make financial provision for their children. They have been concerned at the possibility that their children's marriages/relationships may break up with their children's spouses/partners receiving half of the benefit of the financial assistance pursuant to the Property (Relationships) Act 1976. By channelling the assistance through a Family Trust the financial assistance can be protected.
  • Protection from User Pays Charges
    There is an increasing tendency for services to be provided by the State on a user pays basis. Income and asset testing is common. In recent times there has been considerable concern at possible asset attack in relation to rest home subsidy charges. We have clients who are concerned that assets they had intended leaving to their children would become charged to the State to cover accrued rest home charges. By transferring their home and other assets to a Trust they hope to put them beyond reach of the State. The issues arising from this need to be fully understood because avoidance legislation has been in place for many years (Social Security Act 1964).

This Article is an introduction only to Family Trusts. It is not intended to be comprehensive. Family Trusts are an area where considerable expertise is required in tailoring the Trust Deed, the transfer of assets and a gifting programme to your particular needs.

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TRUSTEES’ DUTIES

The obligations of a trustee are onerous and potentially expensive. Trustees have found themselves subject to
substantial claims from beneficiaries for loss or damage suffered as a result of acts or omissions on their part. If you accept appointment as a trustee it is not a sinecure and should be treated seriously.

What follows applies generally to all trusts but in particular to trusts created by Wills and to Family Trusts. Those seeking to understand their roles and responsibilities under Te Ture Wheua Maori Act 1993 are referred to the Department of Courts publication “Trustees’ Duties A Guide” available at http://www.justice.govt.nz/maorilandcourt/pdf/td.pdf

We normally recommend that more than one trustee be appointed, including one independent trustee.

Duty to ensure that the trust fund is managed in a proper manner.

Trustees must know the terms of the trust. This means reading and fully understanding the Will or trust deed (“the trust document”) in terms of both relevant case law and legislation. They should:

  • Know who the beneficiaries of the trust are and their individual circumstances and if necessary how to
    prioritise between them.
  • Know when the beneficiaries are entitled to receive capital and/or income from the Trust.
  • Know the specific obligations placed on the trustees in the Trust document.
  • Know when the term of the Trust is scheduled to expire.
  • Know what the assets and liabilities of the trust are and be aware of the actions or inactions of former trustees and the state of the trust. This will involve holding copies of documents of title and ensuring the physical protection of trust assets. In addition trustees may need to insure against any risk or liability which a prudent person may insure against.

Other requirements are to:

  • Ensure that any payments by the trust are made to the correct beneficiary.
  • In the case of an existing trust to confirm that trust affairs are in order and if necessary to adopt remedial action and in a new trust to set up structures and adopt procedures to enable proper management and
    administration.
  • Periodically monitor and review the administration and investments of the trust.
  • Seek proper professional advice e.g. from share brokers, real estate valuers.
  • Keep informed of trust issues as they arise to ensure appropriate trust related decisions are made.

Duty to invest appropriately

Since 1988 trustees have had the ability to invest trust funds in any type of property at all, however unless expressly allowed by the trust document, speculation is prohibited. This does not mean that trustees are prohibited from making investments that may carry a degree of risk - it is the taking of unreasonable risk that must be guarded against. Accordingly, trustees must when formulating an investment policy, have regard to the prudent person requirements of the Trustee Act 1956. Under section 13B of that Act trustees have a duty to invest prudently and “to exercise the care, diligence and skills that a prudent person of business would exercise in managing the affairs of others”. Professional trustees have an even higher standard imposed. While modern trust documents normally modify the strict requirements under that Act trustees should desirably follow the requirements of section 13E which provides that the trustees may have regard to the following matters so far as they are appropriate to the circumstances of the trust:

  • The desirability of diversifying trust investments.
  • The nature of existing trust investments and other trust property.
  • The need to maintain the real value of the capital or income of the trust.
  • The risk of capital loss or depreciation.
  • The potential for capital appreciation.
  • The likely income return.
  • The length of the term of the proposed investment.
  • The probable duration of the trust.
  • The marketability of the proposed investment during, and on the determination of, the term of the proposed investment.
  • The aggregate value of the trust estate.
  • The effect of the proposed investment in relation to the tax liability of the trust.
  • The likelihood of inflation affecting the value of the proposed investment or other trust property.

Duty to keep and render accounts

Beneficiaries are entitled to request from the trustees information concerning the trust and its management. In the case of trusts that are not discretionary trusts, if the trustees have not disclosed the accounts to a beneficiary (including a contingent beneficiary), there is a duty to render an account to that beneficiary on request. This may include copies of trust documents such as the document establishing the trust, annual accounts and supporting financial statements and investment strategies. In the case of modern discretionary trusts there may be a wide range of possible beneficiaries. There is no requirement to disclose accounts to those possible beneficiaries. Beneficiaries are not entitled to copies of the trustees’ reasons for exercising or not exercising their various powers and discretions.

To meet their obligations trustees need to have in place systems to enable the safe custody of trust documents, the accessing of required information, the preparation of financial accounts, the meeting of taxation obligations, the recording of resolutions and the steps taken in carrying out actions required pursuant to such resolutions.

While actual requirements will vary depending on the degree of professional and accounting assistance available to the trustees the trustees should keep a “minute book”. This will incorporate:

  • A copy of the Will (as admitted to Probate) or Trust Deed (including any related deeds such as Deeds of Variation, Deeds of Retirement and Appointment of new Trustees).
  • A copy of any important documents including Agreements for Sale and Purchase, Transfers, Deeds of Acknowledgment of Debt, Deeds of Partial Forgiveness of Debt.
  • A copy of any Memorandum of Wishes executed by the Testator or Settlor.
  • Resolutions (to record all decisions reached).
  • Details of beneficiaries (addresses, dates of birth, dates of marriage etc. all as relevant to the particular trust with copies of any supporting certificates as obtained).
  • Annual financial statements and a schedule of Assets and Liabilities.
  • Copies of important trust correspondence (including copies of any formal accounting, investment advisor or legal advice obtained).
  • Banking details (cash book or cheque book and bank statements)
  • Tax records (as relevant).

Duty to act in the best interest of all of the beneficiaries

Trustees need to consider what is in the best interest of all beneficiaries both present and future. Subject to any
express authorisation in the trust document, by statute or with the consent of all beneficiaries this means:

  • They must act impartially and balance the interests of persons presently entitled to receive income with
    those ultimately entitled to receive capital.
  • They must not profit from their position as trustees.
  • They must not sell property to the trust or purchase property from the trust.
  • They must avoid situations where their own personal interests come into conflict with the interests of the trust.

Duty to meet Tax Obligations

The trust is a separate legal entity for tax purposes and accordingly may need to register with the IRD and obtain an IRD number and if appropriate G.S.T. registration. If the trust earns income the tax treatment can involve accrual accounting and accounting advice needs to be taken prior to filing initial returns.

Trustee’s can be personally liable for tax owing by a trust and in the event that the trust is unable to meet its tax obligations then the trustee will be obliged to cover them. For this reason if a trustee retires the notice should immediately be given to the Inland Revenue Department.

Taxation obligations vary depending on individual circumstances. Because of the possibility of trustees becoming personally liable for the trust’s tax obligations, specialist accounting advice needs to be sought as required.

The trustees need to resolve how any income earned by the trust will be treated. Options (depending on the terms of the trust) are:

  • To distribute income to the beneficiaries or to any one or more of them. In this case recipients are taxed at their individual tax rate; or
  • To treat the income as trust income in which case it is currently taxed at 33%; or
  • Any combination of these options.

If a decision is not made then by default the income will be treated as trust income and taxed at the trust income tax rate. This could result in the loss of potential tax savings.

Duty to act in person

Trustees must be personally involved in, and make decisions about the trust. They should meet in person as
required but at the absolute minimum should meet on a formal basis at least annually taking the opportunity to
discuss the current status of the trust’s assets and reviewing its investment plan. All trustees must consider issues independently and not be under the influence of their co-trustees. Where necessary the trustees should obtain professional advice from valuers, investment or financial advisers, accountants and lawyers. We consider that after due deliberation it is preferable for trustees’ decisions to be unanimous (though some trust deeds allow for majority decisions) as the trustees become jointly and severally liable for their decisions. In the case of professional trustees liability to banks and lending institutions is usually limited to the trust assets. The duty to act personally means that trustees:

  • Cannot (except as expressly authorised by the trust document) delegate their responsibilities to others.
  • Can employ agents to give effect to decisions taken e.g a real estate agent to sell a trust property once a
    decision to put a property on the market has been taken. Even then the agent must be selected, properly instructed and supervised by the trustees.
  • Must take decisions for themselves. They may have regard to the wishes of the Testator or Settlor and to interests of beneficiaries but in the absence of a binding direction in the trust document they cannot be
    dictated to. An exception arises in the case of a will when all beneficiaries are adult (20 years of age or more), of sound mind and have vested interests. In this case all of them can join together to achieve their combined wish.

This Article is an introduction only to Trustees Duties. It is not intended to be comprehensive.

If you would like to discuss making a Will or the setting up of a Family Trust or if you have any general enquiries concerning your obligations as a Trustee contact:

Lesley Grant on 04 570 4180 or lagrant@gywlaw.co.nz
or Jeremy Hucker on 04 570 4185 or jihucker@gywlaw.co.nz

 

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