Family Trusts - Trustee Companies
Consequences of the Newmarket Trustees case
The recent decision of the Court of Appeal in the Newmarket Trustees case has highlighted the twin trust issues of:
- Trustee personal liability; and
- The difficulties with a professional trustee company that is trustee for more than one Trust.
Trustee Personal Liability
Trustees have personal liability for debts of the Trust unless specific exclusions apply (such as a Bank limitation on the liability of Independent Trustees*). In the case of Trust income tax and GST liability, there is no ability for Trustees to contract out of their personal liability.
In the Newmarket Trustees case, the Court of Appeal determined that it was appropriate to liquidate the trustee company for non-payment of tax even though it was accepted that the company had no assets to pay the outstanding debt.
Professional Trustee Companies
Over the years, lawyers and accountants have created their own trustee companies. The trustee company would be utilised as the Independent Trustee, when the settlor clients could not identify any other person to fulfil that Independent Trustee role of the proposed Family Trust. Inder Lynch Trustee Company Limited has been an example of this arrangement, being a Trustee for over 250 of our clients’ Trusts.
The decision in the Newmarket Trustees case has now raised the appropriateness of such a continued arrangement. In that case, the company submitted that although the tax debt was acknowledged, the company was a bare trustee company with no assets of its own and therefore unable to pay this debt. The submission continued emphasising that liquidation of the company would have significant adverse consequences on all of the other Trusts that it was Trustee for. The Court of Appeal did not accept that submission. It determined that the major consequences for the law firm and the Trustees of the other Trusts should not be the basis for preventing a liquidation of the trustee company.
Accordingly, flowing from the Court of Appeal decision we have notified those clients of ours who have Inder Lynch Trustee Company Limited as the Independent Trustee of their Family Trust that our company should no longer continue as a Trustee. We are not aware of any difficulties with any of the Trusts our company is the Independent trustee for but do not want to put our clients’ Trusts at risk should events similar to the Newmarket Trustee case occur in the future.
Family Trusts are a useful vehicle to control assets and provide protection from claimants. However, with the significant number of Family Trusts now in existence in New Zealand (reported to be in excess of 400,000) it has become inevitable that problems will arise from time to time with some of those Trust problems reaching the Courts for determination.
We will continue to keep abreast of changes in this area of the law and provide you with the best advice as Trust Law further develops.