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Article on Trusts in this morning's Sunday Star Times;
News source is http://www.stuff.co.nz/stuff/0,2106,3074448a13,00.html
Regards
Article on Trusts in this morning's Sunday Star Times;
If your trust's gathering dust, check it's not an 'alter ego'
SUNDAY , 24 OCTOBER 2004
Many New Zealanders' trusts won't stand up in court, warn experts. Rob Stock reports.
Legal eagles are warning New Zealanders to get their family trusts reviewed because tens of thousands of them would not stand up in court.
Lawyers Richard Taylor of Taylor Grant Tesiram and trust expert and author John Brown say many family trusts would fall foul of rulings grouped under the new buzz-word in trust-busting - the "alter ego" trust.
There are 231,000 trusts registered with the IRD, touching the lives of an estimated one in five New Zealanders.
They are there to protect assets for their beneficiaries and often to provide for those benefits to be passed on to the next generation.
Often trusts are set up by business people who fear creditors may one day come after their home should their business go belly up.
Sometimes they are set up by people who worry old age care homes will eat up all their assets before the state steps in to help.
Increasingly, encouraged by the likes of trust companies Ross Holmes and Public Trust, they are set up by baby boomers who want to ensure any property left to their kids does not end up in the hands of an unreliable partner who does a runner taking half under the Property Relationships Act.
The setting up of a trust involves the legal transfer of property from the settlor - the person who sets up the trust - to the trust.
But there is increasing evidence that many trusts are simply personal ownership by another name, and the courts in Australia are leading the way in ruling such trusts illegal.
New Zealand courts are beginning to follow suit.
Taylor explains the concept of an alter ego trust as a trust under which the "control of the trust property never really leaves the control of the settlor and the settlor treats the trust as their alter ego".
Typically many trusts are "house trusts" containing little more than a family home.
More complex trusts set up by the rich might include property as well as a business and an investment portfolio.
In many cases there will be no independent trustees and the settlor is a trustee and a beneficiary. Often there may be only two trustees, a husband and wife, who are also primary beneficiaries, with their children as discretionary beneficiaries.
If such trusts are managed to the letter of the law and trustees take their duties seriously, it is more than likely there would be no problem if challenged in court.
But, says Taylor: "Too many trusts are set up and the trust deed put in a bottom drawer to gather dust."
Partly that is an indication that many people who set up trusts do not really need them and so do not take them seriously. Taylor thinks many people have set up trusts without knowing why they were doing it, perhaps because their friends had them, or they heard about them at a dinner party.
But a trust gathering dust provides a strong indication to courts that the settlor and trustees are not taking the trust, and their duties, seriously, and that it could well be an alter ego trust.
Test cases developed in the Australian courts, which are a guide to what is likely to happen here next, indicate:
If the settlor has used their powers to hire and fire trustees or appoint or remove beneficiaries they could be seen to be exerting total control over the trust's assets, invalidating the trust.
If adequate records have not been kept, annual meetings not held, accounts not produced every year, and minutes not kept to show how the trustees' decisions were arrived at, the settlor could be seen as not having given up effective ownership of the assets, and the trust ruled a sham, or alter ego of the settlor.
If the settlors have done anything to indicate they see the trust's property as their own (including its income on their tax returns or attempting to borrow money against the assets), the trust can be seen as an alter ego trust. It could also include using trust property to benefit someone not named among the beneficiaries.
In New Zealand, Taylor says, the recent cases of Glass v Hughey and Prime v Hardie mirror the alter ego decisions by Australian courts and anyone worried they might be not running their trust properly would do well to get their solicitor to look the cases up or do it for themselves.
Of course Kiwis with trusts - many of whom will acknowledge they are walking on thin ice - will not know whether their trust will hold up in court until the day it is tested, perhaps when a creditor turns up to claim on debts or, as is most often the case, a marriage breaks up.
John Brown approves of the metaphor of a trust as a parachute that may not save your life if not kept in good condition. But he has another metaphor for the way many trusts have been set up and run.
Brown travels the country lecturing on trusts, and says on the West Coast of the South Island, he learnt about the treacherous conditions of Greymouth harbour.
Often inexperienced boaties would get dumped in the drink. Inevitably, they would have failed to stow gear carefully. In choppy water the gear comes loose and moves about the boat sometimes leading to boats taking on water and sinking.
Many inadequately-run trusts are just like those boats, Brown says, and there's a storm of litigation coming.
He says it is time to tie down all loose ends or face the possibility of very heavy going.
"There's a pendulum swinging in this country," Taylor says.
"There's an increasing risk that if the only trustees are husband and wife, (the trust) could be found to be an alter ego trust."
SUNDAY , 24 OCTOBER 2004
Many New Zealanders' trusts won't stand up in court, warn experts. Rob Stock reports.
Legal eagles are warning New Zealanders to get their family trusts reviewed because tens of thousands of them would not stand up in court.
Lawyers Richard Taylor of Taylor Grant Tesiram and trust expert and author John Brown say many family trusts would fall foul of rulings grouped under the new buzz-word in trust-busting - the "alter ego" trust.
There are 231,000 trusts registered with the IRD, touching the lives of an estimated one in five New Zealanders.
They are there to protect assets for their beneficiaries and often to provide for those benefits to be passed on to the next generation.
Often trusts are set up by business people who fear creditors may one day come after their home should their business go belly up.
Sometimes they are set up by people who worry old age care homes will eat up all their assets before the state steps in to help.
Increasingly, encouraged by the likes of trust companies Ross Holmes and Public Trust, they are set up by baby boomers who want to ensure any property left to their kids does not end up in the hands of an unreliable partner who does a runner taking half under the Property Relationships Act.
The setting up of a trust involves the legal transfer of property from the settlor - the person who sets up the trust - to the trust.
But there is increasing evidence that many trusts are simply personal ownership by another name, and the courts in Australia are leading the way in ruling such trusts illegal.
New Zealand courts are beginning to follow suit.
Taylor explains the concept of an alter ego trust as a trust under which the "control of the trust property never really leaves the control of the settlor and the settlor treats the trust as their alter ego".
Typically many trusts are "house trusts" containing little more than a family home.
More complex trusts set up by the rich might include property as well as a business and an investment portfolio.
In many cases there will be no independent trustees and the settlor is a trustee and a beneficiary. Often there may be only two trustees, a husband and wife, who are also primary beneficiaries, with their children as discretionary beneficiaries.
If such trusts are managed to the letter of the law and trustees take their duties seriously, it is more than likely there would be no problem if challenged in court.
But, says Taylor: "Too many trusts are set up and the trust deed put in a bottom drawer to gather dust."
Partly that is an indication that many people who set up trusts do not really need them and so do not take them seriously. Taylor thinks many people have set up trusts without knowing why they were doing it, perhaps because their friends had them, or they heard about them at a dinner party.
But a trust gathering dust provides a strong indication to courts that the settlor and trustees are not taking the trust, and their duties, seriously, and that it could well be an alter ego trust.
Test cases developed in the Australian courts, which are a guide to what is likely to happen here next, indicate:
If the settlor has used their powers to hire and fire trustees or appoint or remove beneficiaries they could be seen to be exerting total control over the trust's assets, invalidating the trust.
If adequate records have not been kept, annual meetings not held, accounts not produced every year, and minutes not kept to show how the trustees' decisions were arrived at, the settlor could be seen as not having given up effective ownership of the assets, and the trust ruled a sham, or alter ego of the settlor.
If the settlors have done anything to indicate they see the trust's property as their own (including its income on their tax returns or attempting to borrow money against the assets), the trust can be seen as an alter ego trust. It could also include using trust property to benefit someone not named among the beneficiaries.
In New Zealand, Taylor says, the recent cases of Glass v Hughey and Prime v Hardie mirror the alter ego decisions by Australian courts and anyone worried they might be not running their trust properly would do well to get their solicitor to look the cases up or do it for themselves.
Of course Kiwis with trusts - many of whom will acknowledge they are walking on thin ice - will not know whether their trust will hold up in court until the day it is tested, perhaps when a creditor turns up to claim on debts or, as is most often the case, a marriage breaks up.
John Brown approves of the metaphor of a trust as a parachute that may not save your life if not kept in good condition. But he has another metaphor for the way many trusts have been set up and run.
Brown travels the country lecturing on trusts, and says on the West Coast of the South Island, he learnt about the treacherous conditions of Greymouth harbour.
Often inexperienced boaties would get dumped in the drink. Inevitably, they would have failed to stow gear carefully. In choppy water the gear comes loose and moves about the boat sometimes leading to boats taking on water and sinking.
Many inadequately-run trusts are just like those boats, Brown says, and there's a storm of litigation coming.
He says it is time to tie down all loose ends or face the possibility of very heavy going.
"There's a pendulum swinging in this country," Taylor says.
"There's an increasing risk that if the only trustees are husband and wife, (the trust) could be found to be an alter ego trust."
Regards
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