How robust is your trust?

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Recent high profile legal cases (for example the case involving the Financial Markets
Authority and Mark Hotchin) and the abolition of gift duty highlight the need for higher
standards of trust management to ensure that the legitimacy of your trust will not be challenged. Further, the New Zealand Law Commission has commenced a full scale review of trust laws with a result that there may be radical changes.

The main purpose of a family trust is to protect your assets for future family use.  In order to ensure that your assets with remain protected; you should regularly review your trust management.

When you take time to review your trust, you should ensure it achieves the necessary legal goals. Some of these goals are as follows.

Ownership
It is important to ensure that a trust relationship is formed and ownership of the trust assets (including control) have passed to the trustees. Is there a clear intention to create a trust and has effective control been passed to the trustees?  From the documentation prepared, does it show that the trustees appointed have the power of dealing with the trust assets in the best interests of the beneficiaries?

The fiduciary relationship
A fiduciary relationship is at the heart of a trust whereby there must exist trustees who look after trust property for people (i.e the beneficiaries) other than the person who created the trust. All trustees must act selflessly and must act in the best interests of the beneficiaries of the trust. It is crucial that the decision making of the trustees must be for the benefit of those other people. In other words the trustees cannot simply act in their own best interests, or in the best interests of the settlor (the person who set up the trust). Proper administration of the trust is also vital, involving annual meetings to review the state of the trust and obviously recording any decisions that the trustees make.

Transfer of Property
In order to protect assets, those assets must be transferred to the trustees to hold on trust for the beneficiaries. It is important however that the transfer of such property has been completed, and has been done properly.

For example, has the family home been transferred to the trustees’ names and is there a gifting programme in place?

Distributions
Distributions are the passing of trust assets to the beneficiaries. To avoid challenge to your trust, the trustees need to be extremely careful when undertaking distributions to beneficiaries to ensure that they are made within the powers of the trustees and that a proper decision making process is followed. Although trustees are not required to give reasons for their decisions, the beneficiaries have the right to hold the trustees to account and to review relevant trust documentation.

Solvency at the time of gifting
Now that gift duty has been abolished, people can transfer property to your trust without undergoing the prolonged gifting program. Regardless of whether you are undertaking an annual gifting programme, or are making a “super gift”, all trustees need to ensure that the person or entity making the gift to the trust is considered to be legally solvent at the time.  Being legally solvent means that the person making the gift should still be able to cover all their debts and liabilities at the time, even after making the gift.

Any gifts made within two years of a person being declared bankrupt will be declared void.  In addition any gifts made within 5 years of a person being declared bankrupt will be open to scrutiny – and it must be proven that the bankrupt person was solvent at the time of making the gifts.  The person making the gift must not being making the gift in order to defraud creditors.

It is a good idea for the person making the gift to sign a declaration of solvency at the time that they make each gift.

In light of the abolition of gift duty and the examination of trusts in respect of relationship property and creditor claims, trusts will come under increasing scrutiny to ensure that they are valid and being administered properly. It is therefore important to review your trust and ensure that it satisfies the above goals and that the trustees are educated to ensure that the trust is indeed managed as a trust for the benefit of the beneficiaries.

If you think your family trust could do with a review to check that it would stand up to a legal challenge, contact trust lawyer, Wade Hansen by phone on 09 836 6885 or email
wade.hansen@smithpartners.co.nz