Many people set up a trust, but then are not advised correctly thereafter. They may think that they can be a passive trustee (a misnomer) or leave it all up to their lawyer. They may even think that because the trust “only” owns the family home that they don’t have to do anything. Or you may have heard it said that you don't have to gift anymore. None of these misconceptions could be further from the truth.
Let's look at each of these one by one:
(1) My lawyer does it all. I'm just a passive trustee
As a trustee, you have a legal fiduciary duty towards the beneficiaries to care for the assets in a proper way, manage the trust, make sound decisions and inform the beneficiaries as required (see this article for details). The beneficiaries have the legal right to be informed and to be considered, and as a trustee you must prove that you have consistently done this. In other words, there is no such thing as a "passive" trustee.
People have tried to tell the courts that... and the courts have taken a rather dim view of it. See this article, for instance. The court ruled:
Equity simply does not recognise the concept of an "active" trustee or a "passive" trustee. All trustees are accountable to the beneficiaries of the trust and must account to them for its proper administration.
So, you can't leave it to your lawyer. You need to be involved. You need to prove that you have acted in accord with the trust deed and are not in breach of trust.
(2) My trust only owns the family home so we don't have to do anything
Irrespective of what assets the trust owns or doesn't own, this does not change your legal obligations as a trust. The trust could own a souvenir coffee mug worth $2, or a house worth $500,000. The legal obligation to use the assets of the trust in a proper way, taking the beneficiaries' interests into account remains unchanged.
(3) You don't have to gift anymore
Ahh, what you may be getting confused with is that Gift Duty was abolished in October 2011. Previously, if you gifted over $27,000 per person per year, the IRD would expect duty or tax on that gifting. They eventually realised that the scheme cost more to run than it made, so they abolished it.
However, this law change doesn't change the need to gift. Why? Well, when the trust is set up (and assuming it is your usual "family" trust*) generally the purpose is for it to take over the assets of the Settlor/s. To do this, the trust buys the home off the Settlor/s. So, a Deed of Acknowledgement of Debt is drawn up. This needs to be gradually forgiven by a gifting process. You can do this yourself, but most people get their lawyer to help them. Annually, Deeds of Forgiveness of Debt are drawn up and signed, and gradually the house is fully gifted to the trust.#
So, if there is no gifting, the trust never really serves any purpose. You have spent thousands of dollars setting it up, but it is of no use to you. Hence, gifting is very much still necessary.
If you'd like more information about all of this, best to talk with your lawyer.
* The most common form of so-called family trust in New Zealand is a Express Written Intra Vivos Discretionary Trust. Express because the Settlor has expressed a wish to create a Trust, Written, not verbal, Intra Vivos in that it exists whilst the person is still alive, and Discretionary in that the trustees have discretion as to what to do with the assets.
# With the abolition of gift duty, some decide to gift their assets all at once. Talk to your lawyer about whether this is right for you or not. See here for the implications of "excessive" gifting.
Credits: Martelli McKegg Lawyers; IRD. EpsomTax.com does not claim any endorsement, representation or relationship by or with the quoted sources.
See our three-video series:
SHAM TRUSTS: COULD YOUR FAMILY TRUST BE A SHAM?
COMMON RENTAL OWNERSHIP STRUCTURES
WHICH OWNERSHIP STRUCTURE SHOULD I USE FOR MY RENTAL PROPERTY?
You might also be interested in:FAMILY TRUSTS: BASIC CONCEPTS
FAMILY TRUST ACCOUNTING - WHAT DO I NEED TO DO?
RESIDENTIAL CARE SUBSIDY AND GIFTING
How and why should you account for your family trust? The first thing to consider is that there are whole teams - firms - of lawyers dedicated to unraveling and breaking apart trusts.
"What?! Who would do such a thing?" you might ask. Lots of people: MSD, IRD, WINZ, creditors etc. They may try to prove that your trust is simply a false front to make you "poor on paper." (a)
How do you prevent this? Simply put, you need to manage it well. (b) How?
Other sources of info
So, what are the news media saying about all of this? See this article at the NZ Herald website. See also this article:
Excerpt: "A key recommendation in the review was that courts would be able to find that a trust had not been established and had no legal standing if the person who established it continued to manage the assets it held "as if they are their own personal property."
and this article:
Excerpt: "The proposed new law would clearly set out the core characteristics of trusts and duties of their trustees. It would also firmly underline that a trust could be found invalid if the trustees were not steering it towards its ultimate purpose, the benefit of its beneficiaries."
I want a second opinion!
Certainly. See The Trouble With Trusts at www.grownups.co.nz.
OK. Now I know. I haven't done any financial statements in the past. Can I just ignore the past and carry on from here?
Honestly, that's risky. Scores of court decisions have shown that the threshold for trustees not breaching their duty is quite high. In our opinion, the best thing is just to bite the bullet and get them done. You'll be grateful later in life that you had the foresight to spend a small amount now to preserve the enormous assets that your Trust owns.
Oh but our Trust only owns the family home so we don't need all that.
With respect to financial statements for the Trust, Janet Xuccoa of the well-known property accountant firm GRA writes on page 117 of her book Family Trusts 101: “It never fails to amaze me the number of Trustees that don’t have annual financial statements prepared for the Trust they are administering. How can a Trustee meet one of their fundamental duties of accounting to a Beneficiary if they do not possess up to date financial knowledge of the Trust’s affairs? Furthermore, a Trustee has a duty to meet the tax obligations of the Trust, and these obligations can’t possibly be identified and satisfied if a Trustee doesn’t know the financial position of the Trust. So in my view, the rule is financial statements should be prepared for Trusts.” She then goes on to list three reasons why your Trust needs annual financial statements even if it doesn’t receive an income.
Hmm, so where to from here?
What should you do now? We recommend that you read Martin Hawes' book. Or if you don't have time for that, at least look at this blog article from LegalBeagle. Get a good accountant who has expertise in trust accounting and can do your annual accounts at reasonable prices (us!). Speak to your lawyer.
When should I start?
I'm overwhelmed by all this. Is there anyone out there who can help me?!
Yes. Us! Contact us today on 099730706!
References: Family Trusts by Martin Hawes. (a) Page 164 (b) Chapter 7 (c) Chapter 9. This blog does not claim any specific endorsement by Martin Hawes, Janet Xuccoa or GRA.
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