Trust times are a changing
A wake up call is coming for mum and dad trustees with an overhaul of trust regulation likely to create a compliance regime similar to that for governing companies.
Next month, a paper to be issued by the Law Commission could review options to significantly tighten compliance procedures for trusts including: creating a register of trusts, appointing a trusts ombudsman paid for by an annual levy on trusts, detailing in a dedicated statute the duties of trustees and making it easier for beneficiaries to remove non-performing trustees.
In line with the Companies Act which sets out company directors’ duties, the trust statute could include both civil and criminal penalties for trustees (often mum and dad) who fail in their duties and could give more power to trust beneficiaries. There may be as many as 500,000 trusts in New Zealand resulting in a growing worry that a large number may be mismanaged or, in some cases, not managed at all.
The Concerns
Poor trust administration may lead to serious problems for both trustees and beneficiaries evidenced by the following examples:
| 1. | Annual gifting of Settlors’ loans not completed.
If loans resulting from assets transferred to the trust are not forgiven, trust assets will not be fully protected, defeating the primary purpose of the trust.
|
| 2. | Trust minutes not completed.
Trustees should authorise by a signed minute adoption of the annual financial statements and tax returns, distributions to beneficiaries, borrowing of funds, the purchase and sale of assets, investment strategy and other important transactions. Failure to do so may lead to disputes between trustees and beneficiaries, causing expensive legal litigation.
|
| 3. | Lease documentation not on file and current.
Trustees may own property that is leased to a trading company. If up to date lease documentation is not on file the leasing arrangement could be challenged by Inland Revenue or a disgruntled beneficiary.
|
| 4. | Registers regarding Trustees, Beneficiaries, significant events and gifting programmes not properly maintained.
If these registers are not accurately maintained, problems may arise in establishing the true position of the trust, especially when attempting to wind it up and distribute assets to beneficiaries.
|
| 5. | No Settlors’ Memorandum of Wishes.
This document provides trustees with a blueprint for governance of the trust to fulfill the intent of the settlors who established the trust. Without this memorandum in place, trustees
|
The Way Forward
There is a clear need for family trusts to be comprehensively reviewed.
Our firm has developed a trust risk review process which we strongly recommend we action for all client trusts. The review will address all of the above concerns and provide a ‘warrant of fitness’ of trust documentation and administration. We recognise the need to put in place a formal structure to ensure your trust cannot be challenged by any other party.
See also our article on Successfully Managing a Trust