Trust administration related case law.
Estates & trust administration
Elishua v Freeland  NZHC 398
Trust administration related claim by a residuary beneficiary with a “long history of complaints” that the estate had been mismanaged and the beneficiary underpaid.
With proper trust administration and documentation of resolutions in place, significant legal costs and stress could have been avoided.
Trust administration & trustee liability
Scott v Ellison  NZCA 302, (2011) 3 NZTR 21-007, (2011) 12 NZCPR 931
Good case example about trustee liability. Also showing how proper trust administration would have avoided significant legal costs and stress. In this matter the question for the court was trustees were retrospectively liable for acts preceding the trustee’s office. The Court of Appeal ordered that the trustees’ liability did arise from the warranty in the agreement for sale and purchase. That onus was on the trustees to make proper inquires, and if necessary limit their liability.
This case is a great example, of having good legally strategic trust administration assistance during the property development phase. Your team at Vanguard are exceptionally equipped to assist in these needs, from trust administration, planning, consenting process through to construction management.
Trust accounting as part of trust administration.
This is a case about requesting the court to declare that an accountants document to be valid as a will. The court made an order declaring the document valid as the last will of the deceased. Once again, this case also shows how such expensive legal situation could have been avoided with proper trust administration.
More about trust law & trust administration:
> Trustee decision making obligations.
> Compliance process implementation for managing the rules of the Trust.
> Managing “prudent investment” obligations.
> Trust Accounting.
> Trust management of Trust conducting business.
> Trust management of using a house owned by the Trust.
TRUSTEE’S DUTIES ARE GENERALLY MET WITH PROPER TRUST ADMINISTRATION
In law the standard duties of a trustee are to:
- Know the terms of the trust
- Adhere to the terms of the trust
- Treat the beneficiaries in an even-handed manner
- Act in the beneficiaries’ best interests
- Not make any profit from being trustee and to act without being paid (except for refunds of out-of-pocket expenses)
- Invest prudently
- Not delegate any of the trustee’s responsibilities, unless permitted to do so
- Take an active part in trust decisions and the exercise of trustee’s discretions – trustees must not agree in advance to place a limitation or restriction on the future exercise of any discretion
- Act unanimously
- Pay the correct beneficiaries, and
- Keep proper accounts and give information to beneficiaries as required.
Most of these duties can be modified to some extent by the trust deed. For example the deed may allow the trustees to receive trust money as beneficiaries or it may authorise payment to them for their work as trustees. However, the deed cannot override all trustee duties. At the very least, the trustees are obliged to act honestly and in good faith for the benefit of the beneficiaries.
TRUST ADMINISTRATION LOOKS AFTER TRUSTEE LIABILITY
Trustees are personally liable for all debts incurred by the trust, including income tax and GST liabilities. Where loans are arranged from banks or other lenders, it’s customary for the liability of independent trustees to be specifically limited to the net assets of the trust. It’s also quite reasonable for independent trustees to request a settlor to personally indemnify the independent trustees against any losses they incur as a result of their trusteeship.
Personal liability can be avoided by having a company act as trustee. This is advisable if the trust is GST-registered or is a trading or development trust. If your independent trustee is a trust management company, however, a director has further responsibilities and liabilities.
TRUST ADMINISTRATION & TRUSTEE DECISIONS
The law presumes that trustees are to agree unanimously on any decisions they take. However, it is possible for the deed to say that a decision of a majority of the trustees will be binding.
If only a majority decision is required all the trustees are still responsible for the decision; some people may not accept appointment as a trustee on those terms. The trustees may agree that for some activities such as operating a bank account, they will allow one or more trustees to control the account. These arrangements should be recorded in the minutes of a trustees’ meeting. The trustees need not record the reasons for their decisions, only the decision itself.
PRUDENT DECISIONS REQUIRMENT
The trust deed may contain specific rules about how the trustees are expected to invest. If not, then the trustees must invest prudently.
Prudent investment is defined in detail in the law. It’s not just a matter of trustees doing what they consider to be prudent. Prudent investment by trustees requires them to invest in the way that an ordinary prudent person would do when investing money that is held for the benefit of other people.
Section 13E of the Trustee Act 1956 sets out a number of factors which trustees should take into account, where appropriate, when making investment decisions. These include:
- Desirability of diversifying trust investments
- Nature of existing trust investments
- Need to maintain the real value of the trust
- Risk of capital loss or depreciation
- Potential for capital gain or growth
- Likely income return
- How long the proposed investment is for
- How long the trust is likely to last
- Marketability of the proposed investment, ie: can it be cashed in if need be?
- Total value of the trust fund
- Tax issues, and the
- Likely effect of inflation.
Although not all of these matters will necessarily be relevant in all circumstances, they do provide useful guidance for any trustee making investment decisions.
A passive trustee who merely rubber-stamps the decisions of co-trustees could be exposed to claims by beneficiaries for losses incurred by the trust.
TRUST MANAGEMENT & TAX
Each trust is different in terms of its tax liability. Where appropriate, trustees should take specialist accounting advice to ensure the trust complies with its tax obligations.
It should be noted that a trust is a separate tax payer and it must file a tax return if it receives income.
The trustees need to decide, within 12 months following the end of each financial year, how any income earned by the trust will be treated. This needs to be recorded in a signed resolution or minute. The trust income can be:
- Distributed to all or some of the beneficiaries and taxed at their tax rate (there are limitations for distributions to children under 16), or
- Treated as trust income and taxed at the trustee rate (currently 33%), or
- A mixture of these options.
If a resolution isn’t passed within the 12-month timeframe, the income will be treated as trustees’ income and taxed at the 33% tax rate. As a result, any potential tax savings will be lost.
MANAGING TRUST INCOME
Under most modern trust deeds, distribution of trust income is totally at the discretion of the trustees. They may do any of the following:
- Accumulate and retain within the trust all or any part of the trust’s income
- Make distributions of income to any one or more of the beneficiaries in any proportion, and/or
- Credit income to the current account of any beneficiary within the trust. The income will then be taxed as beneficiaries’ income and will be payable to the beneficiary on demand.
MANAGING TRUST CAPITAL
During the term of the trust distributions of capital are usually made at the discretion of the trustees. Some trusts don’t allow capital distribution or they may limit the percentage of the capital that can be distributed. Capital can usually be paid to any one or more of the discretionary beneficiaries.
If you are a beneficiary of the trust you can receive distributions of capital if the deed permits and if the trustees decide to make such a payment. Alternatively, if you are owed money by the trust, you may be able to access the trust capital by demanding repayment of all or part of the outstanding loan (subject to the terms of the loan agreement).
TRUST MANAGEMENT WHEN TRUST IS CONDUCTING BUSINESS
Modern trusts usually give the trustees an unrestricted power to act as if the trust were a real person with no limitation on what the trustees can or cannot do. Trusts can therefore conduct a business in the same way as a real person. However, some care needs to be taken where a trust is conducting a business as legal, taxation and risk management issues can arise.
As a risk management tool when carrying on a business, more than one trust is usually recommended in order to divide the ownership of the family home and passive investments from business ownership.
WHEN FAMILY HOME IS OWNED BY A TRUST
If your family trust owns the family home, the trust can make the house available to you and your family to live in, provided that you are beneficiaries of the trust. The trust may allow you to live in the house on the basis that you pay the rates, insurance premiums and other day-to-day outgoings in lieu of rent. This decision of the trustees should be recorded in writing and should be reviewed regularly as part of the trustees’ review of the trust’s investment policy. There are usually no income tax implications for beneficiaries living in a property owned by the trust.
Trustees should ensure that the insurance policies for the family home, as well as rates demands, are in the name of the trust or trustees. Contents policies should be in the personal name of the settlor, unless there are items which have been transferred to trust ownership, when two contents policies may be necessary.
TRUST ADMINISTRATION & TRUST LIFE TIME
According to Trust law trusts can only operate for periods specified by the trust deed. Generally the maximum period is 80 years, but a shorter period can be stated in the trust deed. Usually, the trust deed will allow the trustees to distribute the trust assets before the 80 years is up. This greater flexibility allows the trustees to decide the best time to distribute, taking into account family members’ needs and abilities, as well as tax considerations and investment opportunities.
3 Ward v Ward  NZSC 125;  2 NZLR 31
TRUST ADMINISTRATION & RELATIONSHIP PROPERTY
If you are currently living in a marriage, civil union or de facto relationship of more than three years’ duration, then it’s likely that all or a significant part of your assets will be relationship property. If you and your partner separate at any point after the three year threshold, that relationship property must, except in certain limited circumstances, be divided equally between both of you. There are some circumstances in which the three year period is reduced significantly, including having a child living with you.
Assets fully transferred to a trust before the start of any relationship will be trust assets, not your own property. So they should not be subject to relationship property claims, although there are claw-back rules in the Act. Any debt not gifted to the trust may be relationship property if it has not been protected as separate property. An agreement to contract out of the Property (Relationships) Act maybe recommended by your lawyer to avoid these complications.
Transferring family assets to a family trust therefore has a significant impact on your relationship property rights.
It’s particularly important for you to understand the effects of the relationship property legislation on your family trust arrangements as:
- In some cases, transferring assets to a trust will mean you no longer have relationship property rights which you would have had otherwise
- If relationship property is transferred to a family trust, the court has the power to compensate an aggrieved spouse or partner who has been disadvantaged by the trust arrangement, and
- Under section 182 of the Family Proceedings Act, if a married couple divorce, the court can rewrite a trust they had set up before or during their marriage – this applies also to civil union couples but not to de facto couples.
Ward v Ward (section 182, Family Proceedings Act)3 This 2009 Supreme Court decision illustrates how section 182 can work. Mr Ward was part owner of a family farm. He bought out the other owners shortly after he married Mrs Ward. Some years later the Wards set up a trust and transferred the farm to it. The beneficiaries were Mr & Mrs Ward and their children. Three years later the Wards separated and the relationship between them deteriorated so that they and their independent trustee could not reach unanimous decisions as required by law.
The Family Court resolved the impasse by dividing the property between two trusts; one for Mrs Ward and the children, and one for Mr Ward and the children. Mr Ward appealed but both the Court of Appeal and the Supreme Court agreed with the division into two trusts.
When relationships terminate and a trust owns the assets, the trustees will generally ensure a fair resolution is reached. In most circumstances the trustees would resolve to transfer half the value of a jointly established trust to each of the partners or to a new trust established by each of them. Alternatively one partner could continue with the existing trust and the other partner could establish a new trust and have half the value of the joint trust transferred to it. Your trust deed can include a clause to say what is to happen to the trust assets if your separate. You should tell your lawyer if you have views about what your envisage in the event of separation.
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