Trusts - massive change ahead

Nobody knows how many trusts there are in New Zealand. What I do know is this:

Almost every time I act for someone buying or selling a property or a business, the question comes up: "Should we use the trust for this?" Or, if they don't already have one: "Should we form a trust for this?"



Sometimes people ask that question and they don't actually know what a trust is. And thats okay because the driver for setting up a trust is different for every client. It depends on their own circumstances. For some people, protecting their assets from business risk is important. Or protecting them in case they enter into a relationship that turns sour. For others it might be minimising tax. Or looking after their wealth for their children and their children's children.

Trusts can be quite elaborate, but in simple terms a trust is a legal structure whereby someone (called the settlor) transfers assets to the trustees of the trust, whose job it is to look after them for the beneficiaries of the trust. The Trust Deed set out the duties and powers of the Trustees, and also who the beneficiaries are. The Trustee Act since 1956 has provided the overall framework, including how to deal with situations where the Trust is not working the way it was intended.

This is all about to undergo some fairly major change.

The Law Commission has issued a report called "Review of the Law of Trust". The report says that a new Trusts Act is essential. They want to keep the good things about trusts but fix the bad things.

So what are some of the things they want to fix?

Firstly they want the new Act to set out clearly what is a trust and what is not. There have been plenty of instances where someone has supposedly set up a trust but then just carried on dealing with the assets of the trust as if they are still their own assets.

This is easy for people to do if they are not careful. Ask yourself these questions for a start:
Is there a separate bank account for the trust?
Did all the trustees sign the agreement or did they forget to get the accountant trustee to do it in case he might say "no"?
Did they record what the trust funds were spent on?
Were they spent on something for the beneficiaries or were they paid to a friend who is not actually a beneficiary of the trust?
Where did the trust funds come from in the first place - is that recorded and did a transaction actually take place?
When you transferred those assets to the trust were you actually solvent? Or were you being sued at the time? Are you sure the reason for transferring them to the trust was not simply to deny that person what you owed them?
Were you in a relationship when you transferred the property to the trust? It doesn't have to be marriage. De facto will do. When did that start - when you first slept together, when you moved in together, when you first set up a joint account? What if you split up for six months and then got back together again?

So? You tell me?

You may have heard of "sham" or "alter ego" trusts. I'll tell you what will happen next. That trust you think you have - the person suing you, or IRD, or your ex-partner, or whoever - they will try to prove that there is no trust, that its still all yours. They will try to break it down and prove that its a sham. And if they do, you lose.

The Law Commission wants to fix this so its very clear to everyone if a trust actually exists.

They also want to make it very clear to trustees what they can and can't do. There will be six mandatory duties that are essential to the existence of a trust. If they are not there, no trust.

They also want to make it clear when a trustee is liable. Often trust deeds contain clauses limiting the trustee's liability to the assets of the trust. But if a trustee has been negligent or dishonest why should he be able to get away with that? The Law Commission want to fix this.

There are other things as well. For example, what sort of information must the trustees provide to the beneficiaries? How can beneficiaries get decisions of trustees reviewed? How will disputes be resolved? How can a trustee be replaced? When can beneficiaries legally require the trust to be revoked so they can get their share?

These are sweeping changes that are proposed and they will affect just about every transaction and every client we deal with, including you.

There are some flashpoints:
If you are buying or selling a business or shares in a company, or any sort of property; if you are in a relationship or about to enter one, or if your relationship is ending. If you have been in a relationship before and maybe have children from that relationship. If your business carries any sort of risk. These are the obvious ones. You need advice.

Please contact me on rem@prlaw.co.nz or phone 03-4500000.