Family trusts are usually established to protect assets for the future but increasingly, the protection offered by a trust is being questioned as creditors, the courts, disgruntled family and others seek to ‘look through’ a trust structure to gain access to those assets.
Trusts are not a ‘set and forget’ activity. They need to be carefully established for the right reasons then correctly managed if they are to bring the required level of protection. NZ Trustee Services Ltd estimates that over 75% of family trusts could be non-compliant trusts in some shape or form. If a trust is non-compliant then the likelihood of it being over-turned or accessed when it is most needed, increases. The 7 most common reasons for trusts to be non-compliant are:
- There are no minutes, or insufficient minutes recording movement of assets to the trust.
- Decisions are not recorded. Trustees are administering assets on behalf of the beneficiaries so they cannot just make arbitrary decisions without considering all the facts and implications, then documenting what and why a decision was made.
- All trustees are not involved. Too often one or two trustees make the decisions and the independent trustee is totally unaware of that decision. If there are three trustees, then all trustees must make the decision. If it is not practical to have all trustees involved in all decisions then the trust can pass and document a trustee resolution that permits certain decisions (perhaps to a restricted value) to be made by a lesser number of trustees.
- Intermingling of trust and personal monies. This is where trustees use the trust bank account for their own personal needs without correct decision making and documentation being put in place. A family trust is a totally separate legal entity from Mum and Dad who might have owned the assets in the past. They cannot just remove money from the trust when they feel like it. The family trust must have a separate bank account to that of the trustees and settlers. Care needs to be taken with documenting who owns the family home and who has permission to live in it and for what financial consideration.
- Limited understanding of the trust deed. The trust deed is the set of rules that determine how the trust will operate. Too frequently, trustees fail to read or fully understand the trust deed so can end up operating beyond the trust deed.
- No annual meetings. Trusts should be reviewed at least annually by the trustees. Failure to do so could result in decisions not being ratified, insurance policies not being paid, tax returns not being completed and the trust operating in a way that makes it a ‘sham trust.’
- Trustees making assumptions. The Prudent Person rule applies to trustees and prudent people do not make ill-informed assumptions. Instead, they gain all the facts, consult with the appropriate experts and then make decisions. Trustees will be found to be negligent if they assume that something would have been done and they do not attempt to check to see if it has actually been done. Common examples of this are assuming that assets once transferred to the trust are correctly insured; assuming that all the trustees have all the knowledge to make the requisite decisions, and assuming that the trust assets are performing the way you think they should be.
Talk with your Milestone adviser about how you are currently administering your family trust.