There has recently been an increase in awareness of potential liability for trustees in New Zealand. The courts are making it clear they expect certain minimum standards for the investment and administration of trust assets and (where applicable) trust liabilities or potential liability.
The commonly accepted trustees’ duties include:
- Efficient management: This includes the requirement to regularly take stock of trust assets and liabilities, setting up structures for the administration and management of the trust and keeping abreast of trust issues.
- Keeping full and unbiased accounts: Trustees must keep appropriate and adequate accounting records and prepare financial statements in respect of proper accounting periods. Trust accounts must be relevant, faithful and accurate.
- Acting personally: Appointment as a trustee is a personal appointment. The trustee must be personally involved in all decisions although they do have the right to take advice from suitably qualified persons.
- Loyalty: Trustees must act in the best interests of all the beneficiaries, present and future. They must act impartially in their decision making and at all times protect the interests of the beneficiaries.
- The duty to consider: The trustees must examine whether or not and in which ways they should exercise their powers and discretions having regard to the terms of the trust in the interests of the beneficiaries.
It is essential that these duties are complied with or else the trust may become ineffective at protection from liability. The critical risk relating to trusts is the possibility that they could be found to be a sham or an “alter-ego” trust.
What is a Sham or “alter-ego” Trust?
A sham trust is a trust which is fraudulently intended to operate in a different way to how it has been presented in trust documentation from the outset. In comparison, an alter-ego trust occurs where the trust property and administration of the trust are operated almost solely by the settlor(s) as an extension of their personal capacity. Without clear involvement of independent trustees, trust documentation, and evidence of trustee meetings there is a risk that your trust could be challenged on these bases. If you have been independently running your trust, this could be relevant to your situation.
Should your trust be challenged as a sham, this could result in an expensive, unnecessary and time-consuming process of proving the trust to be legitimate. The consequences of a sham trust finding are severe, including the invalidation of the trust, exposing its assets to creditors, and depriving your beneficiaries of their rights under the trust.
The nature of trusts in relationship property disputes is also of concern. If the trust is found to operate as the alter-ego of one partner, there is a high risk that the trust will be treated as relationship property in litigation proceedings. This means that the property of the trust may be subject to equal division in the event of a separation, in a similar way to income or other shared relationship property.
In light of this, it is important to have annual meetings with the trustees of the trust to review its affairs and the ongoing administration of the trust. Remember that all decisions involving the trust should be unanimous and well documented.
For more information
The aim is to safeguard the future benefits available to the trust beneficiaries and to ensure that all trustees are fulfilling their legal obligations.
For a complimentary, no obligations meeting regarding trust administration and how best to secure your trust, please contact Jamie Nunns on firstname.lastname@example.org or phone (04) 495 8912 or Andrew Stewart on email@example.com or phone (o4) 495 8921.