Are you managing your Family Trust correctly?

Written by Nick Aveling

Gone are the days of Mum and Dad running the family Trust as if they still owned the Trust property. With new requirements and regulations the use of Trusts has come under increasing scrutiny. Whilst Trusts continue to provide benefits that make them an essential component of effective asset planning and wealth management, these benefits arise only if the Trust is properly administered. Running the Trust needs to be taken seriously. If Trustees do not treat the Trust as a genuine Trust, there is a very real risk the Trust is not considered a valid entity. At the very least the Trust may not be effective for the reasons it was set up.

We discuss in this article some of the potential issues and the increased compliance burden which must be considered in the current environment.

Trustee Duties

There is a requirement on the Trustees of a Trust to commit to their role and to act in the interests of the beneficiaries, not just at the direction of the person who set up the Trust.

If Trustees do not act in the interest of the beneficiaries and manage the Trust’s assets according to their duties there is potential for the Trustees to be taken to court by the beneficiaries and the Trustees may be held personally accountable for any loss suffered by those beneficiaries.

In running the Trust, all Trustees must genuinely take part in decision-making and record decisions made. Trustees must not just be “rubber stamps” and each Trustee must consider issues independently.

Compliance Issues

Trustees also have an increased compliance burden under the Trusts Act 2019 and certain mandatory duties. Trustees are required to keep core documents (including the Trust Deed, resolutions, accounts, financial advice, where appropriate, and statements) and to carry out certain duties. In general, the main duties of Trustees are:

• To act for the benefit of the beneficiaries.
• To know the terms of the Trust
• To act in accordance with the terms of the Trust
• To act honestly and in good faith
• To exercise the trustee’s power for proper purposes

IRD

The IRD has issued a ruling on ‘sham’ Trusts where the parties to the transaction documents did not intend to create the legal rights and obligations created by those documents.

If a Trust is deemed to be a sham then it can be set aside and the longer the Trust is set up the worse the implications become. The court will give effect to the true legal arrangement between the parties and the parties are taxed accordingly.

Failure to keep appropriate records and procedures may limit the effect of the Trust and all its benefits could be lost should it come under scrutiny. It is important that the Trust keep a clear audit and paper trail of all decision making and the general management of the Trust.

Transferring Assets into Trust

It is important that gifting to your Trust is undertaken appropriately. When assets are transferred to a Trust they are “sold” to the Trust and the amount owed by the Trust either remains outstanding or is “gifted” to the Trust. The law now allows you to gift as much as you want to at any time. In some circumstances, however, giving assets away can have adverse consequences. There are several legal provisions that allow property in a Trust to be clawed back in certain circumstances (and we set out some examples below) often dependent on how you structure the gift.

There are three situations where it is particularly important to get specific advice about how to transfer assets to a Trust. These are:

• If you have a concern about the cost of rest home care at some future time. The rules are complex and the Ministry of Social Development has a stringent regime of assessing whether or not you may have ‘deprived’ yourself of assets, or income from assets. If you attempt to avoid payment of a rest home subsidy by completing a single gift. It may not be effective. This is a specialist area of law and requires specialist advice.
• Where there are potential relationship property claims. The law allows ‘claw-back’ of an asset which was relationship property before it was transferred to the Trust or was transferred to the Trust to defeat the rights of your spouse or partner at the time.
• If you are looking for protection against possible future creditors gifting assets to your Trust may offer some protection, but not if the gift is made with the intention to defeat your creditors and specific timeframes may apply, for example the Insolvency Act 2006 provides that any gifts made within two years of bankruptcy are void.

We have touched on just a few of the issues to be considered in running your Trust.

The management of trusts is complicated and it is important that if you have a Family Trust that this is run correctly, the reasons for the Trust considered, and that the relevant regulations governing trusteeships are followed.

We are happy to provide you with further information and advice. You can reach out to the writer, Nick Aveling, by email on [email protected] or phone on 06 872 8210 to discuss this further.