If you already have a trust, your asset structuring, the trust deed, and the administration of the trust should be checked by an independent trust specialist.
The business environment in New Zealand has become progressively tougher. Changes in legislation governing health and safety in workplaces, more onerous duties and obligations placed on directors of companies have increased the risk of claims by third parties against personal and business assets. For people in business there is also cash flow risk, increased IRD activity in the area of tax compliance and an increase in claims for defective workmanship in the building industry all of which increase the risk faced by business owners today.
How a trust can help
Many business owners are turning to trusts as a way of protecting their personal and business assets from business risk. If business and personal assets are in a trust, it is less likely they can be accessed by a claimant. The level of protection gained will depend on how well the ownership of the assets has been structured, how well the trust deed has been drafted and how well the trust is administered.
The importance of the trust deed and trust administration
Not all trust deeds are created equal. The drafting of a trust deed is not a “fill in the gaps” exercise. Every trust deed should be specifically drafted to provide for:
- the objectives of the person establishing the trust
- an appropriate class of people intended to benefit from the trust assets
- the risks that the person establishing the trust is seeking to protect against
- the type of assets that will be held in the trust.
Many trust deeds leave too much control with the person who established the trust. This makes the trust more vulnerable to third party claims. Care needs to be taken to avoid this. The class of beneficiaries of the trust (the people who can benefit from the trust capital and income) should not be too broad. This reduces the risk of trust claims by beneficiaries and claims by former spouses of family members if the marriage of a family member ends.
The trust deed should give the trustees power to retain assets transferred to the trust that are not authorised trustee investments and release the trustees from their obligation to diversify investments.
Good trust administration is very important. There should be an independent trustee and that trustee should play an active part in decision making. Trustee decisions should be recorded in written resolutions. Meetings should occur regularly to consider the assets in the trust, how the income and capital of the trust should be applied and the circumstances of the beneficiaries.
Poorly drafted trust deeds and poorly administered trusts are giving rise to successful claims against trusts and trustees by relationship property and other claimants.
What to look for in your trust deed
- The trust should have at least one independent trustee.
- The power to appoint and remove trustees should be held by someone independent of the trust.
- The class of beneficiaries of the trust should generally be narrow but the trustees should be able to add more beneficiaries later if required.
- The trust deed should have two classes of beneficiaries, discretionary beneficiaries (who may receive income and capital of the trust during the life of the trust) and final beneficiaries (who receive what is left of the capital of the trust on the date that the trust winds up).
- The beneficiaries should be able to benefit from trust assets in a number of different ways so that income or capital can be applied in a way that is best for that person.
- The trustees should have power to hold assets that fall outside trustee investment duties under the Trustee Act.
- The trustees should have power to vary the provisions of the trust deed.
Importance of specialist advice
Trust law is a complex and rapidly changing area of law. If you are considering establishing a trust, seek advice from a specialist trust lawyer to ensure your asset structuring and any trust you set up gives you the best possible protection. If you already have a trust, your asset structuring, the trust deed, and the administration of the trust should be checked by an independent trust specialist to make sure that the trust assets are not more vulnerable to third party claims than they need to be.