Published: Wed, Oct 3rd, 2018 by John Stirling
1. What is a trust?
A trust is a name given to a legal relationship which is set up by a person (called the “Settlor”) where the legal ownership of assets is held by people (or companies) (called “Trustees”) for the benefit of certain individuals (or a class of individuals) (called “the beneficiaries”). A trust is not a separate entity in the way that a company is. A trust cannot be sued but the trustees can be. Trusts are commonly given a name, for example the “Blue Sky Trust” but the trust assets are held in the names of the Trustees. It is possible for the Settlor, the Trustee and the Beneficiary to be the same person.
2. What are the reasons for establishing a trust?
A trust is not for everyone – there are costs involved both in setting up and administering a trust. Careful consideration must be had as to whether you would actually benefit from having a trust. The main reasons that people have for establishing a trust are:
- Creditor protection - if you operate a business it is likely that the business will have financial obligations to third parties such as suppliers and landlords. Due to the fact that a company has limited liability, the third parties are likely to require the directors and/or shareholders to provide them with personal guarantees. If a claim is made under a personal guarantee and you are unable to satisfy it then any assets you are holding in your personal name will be vulnerable to being sold to satisfy the amounts you owe. This could mean your family home and other personal assets are at risk. If you establish a trust and these assets are transferred to the trust, which is administered properly, this will help ensure that your personal assets are protected as much as possible.
- Protection from fines and penalties under legislation - there are various laws which can create personal liabilities for directors and other individuals involved in the management and control of a company in certain situations. This legislation includes the Health and Safety at Work Act 2015, the Companies Act 1993, the Resource Management Act 1991, the Income Tax Act 2007, the Tax Administration Act 1994, the Goods and Services Tax Act 1985 and the Fair Trading Act 1986.
- Retention of Family Assets – trusts can help ensure that upon your death, the assets you have accumulated during your life time are not under threat as a result of assets being squandered by children or a relationship property claim. They can also be used to provide for dependants who have special needs - for example those with intellectual or physical disabilities. Another use is to ensure that a certain asset (such as a holiday home or boat) remain in the family for use by future generations.
- To protect assets from a relationship property claim – however this is not fail proof and it is dependent on the circumstances when the trust was formed and current law. Expert advice is particularly crucial if you are contemplating establishing a trust for this reason.
3. How do I set up a trust?
It is vital that a trust is set up in the right way. If it is not there is a strong risk that if a trust is challenged in court that it will not provide the protections it was meant too. It is essential that a trust expert is used to establish the trust. They will complete an analysis of your needs to establish whether or not you need a trust. If the answer is yes, your trust expert will help you decide what property should be transferred into the trust, who should be the trustees and the beneficiaries and give you advice on how your trust needs to be managed. They will make sure that the trust deed suits your needs and reflects your intentions in relation to who can appoint and retire trustees, who will be the beneficiaries and how trustee decisions are to be made.
If you have existing property which needs to be transferred to the trust this property will be transferred at its market value and this amount will then be owed by the trust to the original owners of the property. Alternatively, the property can be gifted directly to the trust. Your accountant’s advice will be crucial in deciding the best method to transfer the property to the trust.
If the bank has a mortgage over the property, your trust expert will need to write to the bank to find out the requirements to transfer the property from your ownership into the names of your trustees. This will usually involve the trustees having to sign new bank documentation such as loan agreements and personal guarantees.
There are a number of documents which need to be carefully created when establishing a trust. These include not only the trust deed, but a memorandum of guidance which sets out the thoughts of the settlor(s) as to who they would like to benefit from the trust when they pass away. In addition, there will be trust resolutions which are needed to record the decision made by the trustees.
4. Do I need a trust lawyer to set up a trust?
Our answer to this is absolutely! An experienced trust lawyer will help you determine whether or not you should have a trust, they will ensure that it is set up properly and assist you to make sure that your trust is administered properly. They will also keep you up to date with changes in the law and legislation and keep you advised on anything which will affect you. The importance of setting up and administering a trust properly cannot be over stated. A failure to do so could mean that your trust, if challenged in court will be over turned and will not provide any of the protections or benefits that it was intended too.
5. Do I need an independent trustee?
The trustees of a trust have legal ownership of the trust assets and they are responsible for making sure that the trust assets are dealt with in accordance with the provisions of the Trust Deed. All trustees of a trust have legal obligations to comply with the terms of the Trust Deed and to act in the best interests of the beneficiaries. They have a general duty to exercise the care, diligence and skill that a prudent person of business would exercise when managing the affairs of others. They also have other duties to keep and render accounts for beneficiaries.
Being a trustee of a trust in not something be taken lightly. It is a serious responsibility and trustees can incur personal liability if they are negligent. Having an experienced independent person or company (which is operated by experienced individuals) as your independent trustee will provide peace of mind that your trust will be operated in accordance with the law. Having an independent trustee can also help provide legitimacy to the trust.
At Turner Hopkins we take our role as trustee very seriously. When assisting clients to establish a trust we set up a company which is dedicated to this purpose. The directors and shareholders of this company are partners of Turner Hopkins who are experts in administering trusts.
6. What is involved in administering a Trust? Can I do it myself?
As indicated above it is essential that a trust is administered properly to avoid it being challenged. Administering a trust properly involves ensuring that annual accounts for the trust are prepared each year and signed off by the trustees, that decisions regarding the trust assets and any distributions to beneficiaries are made in accordance with the trust and recorded properly. It is possible to do this yourself, but many find that using a professional to administer the trust takes this headache away with them and also ensures the administration of the trust complies with current law.
Matters which trustees should consider on an ongoing annual basis include:
- The trust’s annual accounts;
- Any transactions which the trust has completed;
- Whether the gifting programme has been completed and if not whether further gifting is required.
Ideally, an annual meeting of trustees should be held, and this can be done either in person or an annual resolution can be prepared to record the trustees’ decisions
At Turner Hopkins our trust experts will also consider:
- Whether any existing Memorandum of Guidance needs to be updated;
- Whether any amendments are required to your will;
- Whether Enduring Powers of Attorney are required or need to be replaced;
- Any change in the relationship of the settlors and the beneficiaries including whether or not a relationship property agreement should be entered into.
7. When should I establish a Trust?
The sooner the better! Timing is crucial in the establishment of a trust. If you are a company and you leave it until you have creditors knocking down your door - the chances of your trust providing you with any protection are very very slim. The best time to form a trust is before you have any issues.
8. Do I need to change my will?
The short answer is yes. The reason for this is that you will no longer personally own the assets which have been transferred to the trust. You will also want to appoint a person to take over your power to appoint and remove trustees of your trust. If you don’t do this, when you die the executor/s of your Will will have the power (jointly) with the surviving trustee/s to appoint and remove trustees of your Trust.
IMPORTANT: This information is not a substitute for professional advice. If you are contemplating establishing a trust you are strongly recommended to use someone who is experience in Trust Law. Contact our trust expert John Stirling, Partner.