A Family Trust is a common vehicle for the ownership of property in New Zealand. There are many benefits of having a trust, but also a general lack of knowledge surrounding the duties and responsibilities of a trustee.
Acting as a trustee in a trust in a very onerous responsibility. It is surprising however how few trustees understand what is required of them. The following guidelines give a brief overview of some of the main considerations:
1.Understand your duties andresponsibilities as a Trustee
As a trustee in the trust you have a fiduciary responsibility to the beneficiaries meaning that you are entrusted to act in the best interests of the beneficiaries. People commonly refer to “trusts” as if they are separate legal entities, like companies, however they are not. A trust is simply a set of obligations imposed on the trustees to deal with the trust property for the benefit of the beneficiaries or for the advancement of certain purposes frequently charitable.
The main duties of a trustee include:
· Being familiar with the trust deed, who the beneficiaries are and what assets are owned by the trust
· to act personally rather than delegating decisions to others
· to act impartially taking into account the interests of all beneficiaries and acting without favour
· not to use knowledge or influence gained as a result of being a trustee to advance the trustee’s own position
· to act personally rather than delegating decisions to others (except if the trust document explicitly permits delegation)
· to act honestly and with the level of skill and care that would be expected of the reasonable businessperson in administering the affairs of others
If a trustee fails to comply with these duties, the trust’s beneficiaries could bring legal action against the trustee for breach of trust. It is important that all Trustees meet, discuss and agree on issues and that independent trustees are not treated as “rubber stamps” in the decision making process. Each Trustee must consider issues independently and not be under the influence of other Trustees.
2. Keep your trusts matters clearly separate from your personal matters
It is essential to keep the trust matters separate from personal matters. Don’t treat Trust property as if it’s your own personal property. IRD and other parties can challenge your trust if they believe it is a “sham”, which would probably be the case if you were using the trust assets as if they were your personal assets. It is a common pitfall for the individual or couple who establish the trust to continue to treat the trust property as if they are still the owner(s) of the trust property. Having a professional trustee can assist in establishing the validity of a trust as it can increase the separation of trust affairs from personal ones.
Another common mistake is not keeping clear and separate records and accounts for the trust rather having these intermingled with personal and business matters. A simple way of separating trusts affairs is to have a separate trust bank account that is not used for personal or other expenses (the trust can make distributions to beneficiaries but these should be correctly documented).
3. Documentation and Record Keeping
The importance of proper administration and record keeping cannot be stressed enough. We recommend that each trustee keep a file of all trust affairs, copies of the deed establishing the trust as well as:
All trustee decisions should be recorded by way of resolutions in a minute book. The minutes should be maintained for the lifetime of the trust and include records of all meetings, trustee decisions and accounts of all assets bought and sold, distributions made to beneficiaries and income earned.
Wills and Memorandum of Wishes
It is important for everyone to have current wills in place particularly if you have a trust. Trust wills differ from standard wills as they include provisions for:
– Forgiving any balance of debt that has not been forgiven by your gifting programme
– Appointing a replacement trustee and person with power to nominate trustees.
You should also prepare a Memorandum of Wishes for your trustees covering how you would like them to manage the trust and care for beneficiaries after your death.
Trustees should keep a list of the trusts assets and liabilities. We recommend that you get advice from an accountant regarding distributions, tax issues, and the necessity of registering your Trust with IRD. Annual tax returns may not be necessary for non income earning trusts, however if the trusts assets are earning an income (just as if they were your own) a tax return would have to be filed recording what income was earned and what, if any, was distributed to the beneficiaries.
The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual situations. If you would like advice regarding your particular situation then please make an appointment to meet with one of our Lawyers.
Contact our Auckland Lawyers today to book a trust review.