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JUNE 2012

Family Trusts

The Good, the Bad and the Unexpected

Discretionary Family Trusts (“Trusts”) have become a common feature on our legal landscape. Recent statistics indicate that there is in excess of 400,000 Trusts in New Zealand. This equates to one Trust for every 10 people in New Zealand compared with one Trust for every 34 people in Australia and only one Trust for every 294 people in the United Kingdom. New Zealanders have clearly shown a liking for them.

The structure of a Trust is well known but the devil is in the detail. As a result there is a continuing increase in litgation surrounding such Trusts.

Our approach

There are three fundamental certainties required for there to be a Trust. Our approach, when considering whether a Trust is the best structure for your family’s circumstances, is to:

  • Identify the intended reasons for creating a Trust;
  • Satisfy ourselves that the Trustees intend to perform the Trust honestly and in good faith according to the terms of the Trust Deed – to avoid an allegation of it being either a “sham trust” or an “illusory trust” (certainty of intention);
  • Identify the proposed beneficiaries (certainty of object); and
  • Identify the initial assets to be owned by the Trust (certainty of subject).

Intended reasons

There are good reasons and bad reasons for having a Trust. Amongst the good reasons are:

  • Being in business and wishing to protect family assets from business creditors;
  • Entering into a new domestic relationship where you wish to protect your existing assets from a future claim by your new domestic partner;
  • Protecting your assets from a claim against your Estate on your death (retaining assets in your own name and leaving them by Will can result in a family member contesting the Will); and
  • Undertaking Estate Planning to ensure that you appropriately provide for future generations of your family.

Certainty of Intention

You need to appreciate that once you have decided to create a Trust it becomes a separate legal entity (even though you may be a Trustee and may even have the power of appointment of new Trustees). You have a clear legal responsibility to act in terms of the Trust Deed and the provisions of the Trustee Act. You can not treat the Trust as if it were you and its assets as if they were your assets. You must make all decisions with the other Trustee or Trustees, you must keep written records of all decisions made and you must ensure that all decisions made are for the benefit of one or more of the beneficiaries.

Certainty of Object

The Trust Deed must stipulate who the intended beneficiaries are (both final and discretionary). They must be family (in a broad sense of that term). We strongly urge clients to keep the class narrow as beneficiaries do have some limited rights of claim against Trustees. We consider that having too larger class of beneficiaries merely opens the door for more to have potential rights of claim.

Certainty of Subject

Without assets there can be no Trust. The Trust Deed does not create or constitute a Trust. The Trust Deed merely sets out the terms of the Trust. It is the actual transfer of assets which creates the Trust. For that reason, Trust Deeds generally state, in the recitals, that the sum of $10 (or whatever other amount is inserted) has been paid to the Trustees. It is critical though that the transfer of funds actually occurs. Without the transfer, the Trust does not come into existence.

Independent Trustees

Trust Deeds will normally provide for a minimum of two Trustees. We strongly advocate that, at least, one Trustee should be independent (ie not a beneficiary). Our reasoning for the inclusion of an independent Trustee is:

  • It demonstrates, from the outset, that there has been a clear change in ownership of the assets transferred to the Trust;
  • It may avoid the “sham trust” arguments, although it is accepted that the inclusion of an independent Trustee does not of itself mean that it may not be held by a Court to be a “sham trust”;
  • It helps to maintain a clear distinction between personal and trust matters and further helps to avoid an intermingling of assets;
  • It introduces an objective perspective to the Trust’s affairs that will generally not be readily available if the Settlors of the Trust were the only Trustees.

The importance of an independent Trustee may not become apparent until there is a claim made against the Trustees of the Trust.

Claims against Trusts

In recent times there has been a noticeable increase in the number of claims made against Trusts by creditors, by spouses (pursuant to the Property (Relationships) Act 1976), and by Government Authorities. The best protection is to ensure that:

  • The Trust is properly created;
  • The three “certainities” apply;
  • All decisions of the Trustees are documented; and
  • The Trustees do not treat the Trust assets as if they belong to themselves personally.

Conclusions

Family Trust Law is a broad topic with this article focussing solely on the bare bones of the structure. We are enthusiastic regarding a Trust being an ideal arrangement for some but not for everyone. We encourage you, if you want more information, to contact us for an appointment. We want to work through the range of issues with you, at the initial stage, to make sure that a Trust is the right structure for you.