Trusts - Do You Need an Independent Trustee?
There is no legal requirement for a trust in New Zealand to have an independent trustee. An independent trustee is a person or corporate entity (company) who derives no benefit from the trust assets. It is quite legitimate for say, a husband and wife who are setting up a trust to be the settlors, trustees and beneficiaries. However, in our opinion, a trust set up upon this basis is more likely to be open to attack as a sham or invalid trust.
Our recommendation is that when a trust is being established, the settlor or settlors (the person or persons setting up the trust) appoint an independent trustee. We believe that appointing an independent trustee assists in establishing a trust as valid and not a sham.
A trust is more open to attack if it can be shown that the trustees are still dealing with the trust fund (assets) as if they were their own. This is more likely to occur where there is no independent trustee and the settlors are holding and dealing with the trust assets for their benefit and at their direction rather than for the benefit of the beneficiaries. If, in a Court hearing, a trust is found to be a sham the Court is able to look past the terms of the trust and order access to the trust assets as if they were still owned by the settlor personally. This would then allow claimants such as creditors of the settlor, the Inland Revenue Department or the Official Assignee to access the settlors’ property, to settle any claim they might have for money owed to them.
The appointment of an independent trustee would also assist in the better management and administration of the trust. The appointment encourages the co-trustees to discuss the merits of a proposed transaction and ensure the decisions are documented by a resolution or minute. The appointment helps to separate the personal affairs of the settlors from those of the trust.
An important function of the trustee is to ensure they are thinking of the beneficiaries of the trust when dealing with the trust assets and not just the interests of the settlors. Having an independent trustee does help with this focus. If the settlors have only appointed themselves as trustees and then transferred, for example, the family home into the trust, there is a risk that in the absence of an independent trustee, the trustees will deal with the trust property as if they are still the owners. With the inclusion of an independent trustee there is an ability to add objectivity to how the trustees deal with the trust assets.
There has been a recent case before the Courts, Official Assignee v. Wilson which demonstrated the importance of having an independent trustee. A property developer, Mr Reynolds, was bankrupted in July 2001. He had no assets in his name. However, the Official Assignee claimed that a Queenstown home owned by a family trust was, in fact, the property of Mr Reynolds. The trust which owned the particular home had two independent trustees, one of which was a solicitor, Mr Wilson. Mr Reynolds was not a trustee of the trust but he was heavily involved in how the trust dealt with his assets including the buying and selling of houses.
At one stage, the trust sold a property to Mr Reynolds because, according to Mr Reynolds, the trustees did not wish to carry out certain renovations. The Official Assignee argued this was not the real reason and the transfer was, in fact, to allow Mr Reynolds to use this particular house as security for his business affairs. They argued that the trustees were managing the trust fund as directed by Mr Reynolds. The Official Assignee argued the trust was a sham because Mr Reynolds intended for the trustees to hold assets for his benefit rather than for the beneficiaries. Mr Reynolds was not a beneficiary of the trust.
The decision of the Court of Appeal was the trust was not a sham and this was partly due to the trustees being independent and one of the trustees being described as a professional trustee (the solicitor Mr Wilson) who knew what he was doing. Even though there was a lack of documentation for the trust, the Court found there was no basis to the suggestion that the trustees including the professional trustee, Mr Wilson, were not actively involved in dealing with the trust assets. An implication of this case is that if there had not been an independent trustee, the trust may have been treated as a sham and the Official Assignee would have had access to the home.
Turner Hopkins is an advocate for ensuring every trust has an independent trustee. We provide this service to our clients in the form of North Harbour Trustee Company Limited, a professional trustee company. The directors of this company are the partners of Turner Hopkins.
“John is very easy to talk to, he never makes you feel dumb, and never makes you feel like you are wasting his time for asking questions. He explains everything very clearly, every time. John's support staff are also very efficient and so easy to deal with. No detail is missed when dealing with them. My husband and I are fans of them all :)”
“I have struggled with different legal firms over the years, but over the past few years I have engaged with Turner Hopkins with various requirements from personal relating to wills, family trust, property settlements and contracts through to commercial engagements including employment advice, commercial lease agreements and general legal advice. I have engaged with a number of the people in the firm and always found them professional, punctual in their responses and very sound in the advice provided.”
“To Michael Robinson – I wanted to thank you and your colleagues for many years of excellent service to the Bank. You have an outstanding business that has proved to be one of the most reliable and ethical businesses that Collections have dealt with in the almost 9 years I was with the Bank.”
“Joy, we cannot thank you enough for your help with our purchase! You have been wonderful to deal with and so proactive (and patient with my numerous emails). We will be visiting NZ in April so will make sure we drop in to thank you in person.”
“I have used Turner Hopkins for my legal services for over eight years. I have always found their level of service excellent and their work to a very high standard. I have used various lawyers at their firm for various businesses I have been involved with and have always had very positive experiences. I would highly recommend them.”