Managing Your Family Trust

In New Zealand there are now more than 100,000 family trusts.  We are seeing an increased number of articles in the media warning of the dangers of a poorly managed trust.

Typically a trust is established by an individual or a couple with a view to protecting and preserving the family assets for future generations.  It is usually done in such a way that allows the person or persons who have established the trust (normally the settlors) to be able to benefit from the assets while they are alive.  Examples of this are the continued use of the family home, or access to the capital or income of assets held in the trust.

The legal principles that apply to trusts may also allow the settlors to benefit over time by way of protection of the trust assets from the settlor’s creditors or from a claim by a former spouse or de facto partner.  These benefits can also be enjoyed by the beneficiaries of the trust who are usually members of the settlors family.

With increasing numbers of trusts, there has been a subsequent increase in the number of cases coming before the courts, where an outside party has challenged the establishment of a trust.  Typically, these are creditors, former spouses or de facto partners, or government agencies such as Inland Revenue.  The Courts can have the power to vary or override the terms of a trust.

In order to reduce the risk of the Court deciding to override the terms of a trust, in the event that a challenge is made against the trust assets, it is very important that the trust has been managed properly by the trustees.

Trustees should
• Understand and follow the terms of the trust and the legal responsibilities that the trustees have
• Take ownership and control of the trust assets
• Take an active part in the management or investment of the trust assets
• Keep a written record of all decisions that are made by the trustees affecting the trust assets and any distributions that are made to any of the beneficiaries of the trust
• Maintain a separate bank account to handle any funds belonging to the trust and keep a written record of all financial transactions relating to the trust
• File tax returns and meet any tax liability incurred by the trust
• Be seen to be acting independently of the settlors and give consideration to the interests of all the beneficiaries of the trust

In our experience, the areas where poor management are common include not filing tax returns and gift statements with the IRD.  The two costliest errors of judgement by trustees and settlors have been (a) intermingling of trust and personal monies, and (b) including a de facto partner as a beneficiary.  Both of these cost the settlors dearly when their relationships broke up!