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March 2008

The Paperwork is critical

Trusts are a popular choice for people who are concerned about protecting their assets for themselves and for their children. However, the formation of a trust by the execution of a trust deed and transfer of assets to the trust is only the start. A successful trust is one that is regularly monitored by the trustees and where there is a clear paper trail evidencing the ongoing administration of the trust by the trustees.

Why the need for paperwork?

If the trust is not properly administered, there is a risk that it may be seen to have either “lapsed” or that it is simply a “sham”. This usually occurs where the assets which form part of the trust fund are treated by the trustees as if they are their own personal property held for their own benefit rather than assets held by them for the benefit of the beneficiaries of the trust. Given that trustees are frequently both trustees and beneficiaries of the trust, it is all the more important that a clear distinction exists in the minds of the trustees regarding assets which are held by them personally and those which belong to the trust.

Essential paperwork

The administration of a trust will depend very much on the nature of the assets which make up the trust fund. A trust fund that consists of the family home in which the beneficiaries reside will not require the trustees to do a great deal for so long as that situation continues. If there is a debt owing by the trust to the settlors of the trust (i.e. the persons who originally set up the trust and transferred assets to it) then the debt should be gifted by the settlors in annual increments of $27,000.00 (for each settlor) until the entire debt has been forgiven. As house prices continue to rise, the gifting process is taking longer and trustees should be vigilant in ensuring that gifting continues as this will maximise the benefit of the asset for the beneficiaries of the trust.

  • In addition to gifting, trustees should meet at least once a year to review the trust fund and the manner in which the trust fund has been applied for the benefit of the beneficiaries. There may be no need for the trustees to make any decisions but the significance is that:
  • the trustees have turned their minds to their duties and responsibilities; and
  • a trustee resolution records how those duties have been discharged over the previous 12 month period.
    In the case of trusts that hold income producing assets (such as investment properties and shares), the matters which trustees should attend to include:
  • Regularly reviewing the performance of investments.
  • Preparing and filing a tax return.
  • Ensuring that the trustees meet at least annually and possibly more frequently, depending on the nature of the investments which they are monitoring.
  • Ensuring that any new investments and/or transactions that the trust may enter into are properly documented and supported by appropriate resolutions.

Minutes of trustees’ meetings should be kept and particular care taken to record decisions taken concerning investment of trust funds and distributions to the beneficiaries.

Conclusion

In summary, the advantages of keeping the paperwork for your trust up to date cannot be overstated. A trust which is properly administered will provide a much greater degree of protection than one which is effectively dormant because the trustees have not turned their minds to their duties and responsibilities under the terms of the trust deed.