Corporate Trustee Coy

[foss]

A question for the lawyers out there ...

I'm looking at setting up a Corporate Trustee coy. Its been recommended that the equivalent of individual trustees (in a normal trust) is achieved by setting them up as shareholders of Corporate Trustee coy, and hubby and wife should be setup as directors. I'm told the independent person does not need to be a director just the third shareholder (equal shares).

That leads me to the question or rather concern I have. Under the above recommendation do I truly still retain the concept of independence, as opposed to a sham? I want to do the right thing here and not create something that is going to be a problem or not work

thanks

[Rosco]

Here is some other information that might help you

1) If you have three trustees, Husband, Wife and third independent person
- Third independent person should be involved in all decisions, which they generally are not
- The Third independent person is liable as trustee. Quite often get banks to agree that only liable up to assets of trust, but if Trust has large IRD debts, the Trustee's will be liable for this
- Sometimes lawyers and accountants use a company to be the third independent person. But, they quite often use this company for a number of clients, so if one goes bad, then have to change all the rest which is not great
- Unless the third independent person (third trustee) is actually involved in the decisions, has full access to bank accounts like other trustees, knows all details about insurance being paid etc, I don't think this structure is great.
- having a third trustee that just signs what they are given, in my opinion doesn't help stopping the Trust being a sham.
- If own lots of properties, all trustees will be on all titles and mortgages. So If change trustee, it will cost a bit to change all titles and mortgages.

2) 1 Corporate trustee with independent director
- so Husband, wife and third independent person are directors
- Same issue as above, director can be personally liable (not many people like being directors, especially if they are not in control), director should have full access to bank accounts, know all information, be fully involved in decisions etc
- Hard part, in my opinion would be finding someone to be a director.

3) 1 Corporate trustee with independent shareholder
- Husband and wife as directors
- as directors make all day to day decisions, control bank accounts and everything else
- Shareholding, over 25% independent person, means they have to approve all major decisions.
- By needing to approve major decisions, this means the Husband and Wife can't make the decisions themselves, so gives independence.
- Advantage like point 2 above, is that it is easy to change shareholding with no major cost or hassle. So If finish with one advisor, easy to move to another.

I think any of these options still need to be done in conjunction with good other Trust practices, but I like point 3.

Ross

[foss]

thanks Ross

Option 3 which you have explained in further detail, is what I was intending on doing and recommended by another accountant

Just wanted to get another opinion before embarking on something that might cause a problem but sounds good thanks

[Ivan McIntosh]

Personally I would like to see the independant person as a director as per option 2 if they are a family friend. Very generally speaking it's no harder for them being a director than a personal trustee. If we're talking a professional independant, then option 3 sounds ok.

Just re a small point that Ross raised: most lawyers are now using separate trustee companies for each trust, specifically because of the risk of a trustee company being wound up. The risk of a professional trustee getting wound up because of problems in another trust shouldn't be a problem for new trusts with a specific purpose corp trustee.

[VincyV]

My lawyer did not consider Option 3 as valid

Ross,

I attempted what you have suggested. My lawyer rejected Option 3 , would only go for Option 2.

On the grounds that , independent trustee being a shareholder only is not good enough, because it is the Directors that have all the power to make decisions.

He would not even entertan discussion on share %ages for option 3. Just rejected the option on the above basis.

[Rosco]

Ross,

I attempted what you have suggested. My lawyer rejected Option 3 , would only go for Option 2.

On the grounds that , independent trustee being a shareholder only is not good enough, because it is the Directors that have all the power to make decisions.

He would not even entertan discussion on share %ages for option 3. Just rejected the option on the above basis.

Interesting! This is the first lawyer I have seen or dealt with that has had a reason not to do it.

The option 3 structure is quite commonly used, as there are a number of companies that form Trusts using it.

In your Corporate Trustee, who do you have has director?
Do they have control, and were they happy to be a director and possibly be personally liable(in limited circumstances)? In my opinion being the director would be similar risk to being a Trustee, and I doubt you would find many professional advisors willing to be Trustee in their own name.

Ross

[Rosco]

Forgot to say,

Technically I could be the sole Trustee in my Trust. If I had great records (minutes etc), then this would be fine. The independent person quite often just helps to seperate, or make obvious that it is a Trust.

So being the sole director, with a requirement to need an independent shareholder to approve major decisions would be better than just sole Trustee! So again technically it would be fine. Even if you were the sole director and shareholder of the corporate trustee, it would still technically be fine. You would want to have great records.

The idea of having an independent person involved, just helps to justify that the Trust is a seperate entity, and that the decisions were made by the Trust, not you as individual. Lots of lawyers argue that just having good trust minutes when you buy and sell property (presuming a simple trust) would be enough to stop it being a sham.

Ross

[CJ]

I have been following this with interest.

My understanding has always been that a corporate trustee was a separate 'person' in law and therefore the need for an independent trustee is not needed.

The same admin needs to be done regardless on whether you have an independent trustee and in fact having an independent trustee who just rubberstamps directions could infact prove that it is a sham rather than help.

I also thought 'sham' had a high burden - ie. lack of paper work is not enough. It is more the acts of the trust (alter ego) verses how you carry it on (paper work) that is the deciding factor. Obviously lack of paperwork makes proving it is not an alter ego harder.

Thoughts or comments?

[spaceman]

Sham trusts

Forgot to say,

Technically I could be the sole Trustee in my Trust. If I had great records (minutes etc), then this would be fine. The independent person quite often just helps to seperate, or make obvious that it is a Trust.

So being the sole director, with a requirement to need an independent shareholder to approve major decisions would be better than just sole Trustee! So again technically it would be fine. Even if you were the sole director and shareholder of the corporate trustee, it would still technically be fine. You would want to have great records.

The idea of having an independent person involved, just helps to justify that the Trust is a seperate entity, and that the decisions were made by the Trust, not you as individual. Lots of lawyers argue that just having good trust minutes when you buy and sell property (presuming a simple trust) would be enough to stop it being a sham.

Ross

As I understand it an independent trustee is supposed to make the trust more "bullet proof"..... but sometimes has the opposite effect if int can be shown that the independent trustee just "rubber stamped" everything.

There is no actual requirement for an independent trustee and I have elected not to have one for my family trust, preferring to rely myself getting it right rather than the possibility of being lulled into a false sense of security by a possible rubber stamper.

cheers
spaceman

[VincyV]

Clarifications

Ross, CJ, Spaceman.

We went through all the options. Including consulting with another lawyer for a second opinion -- who did not even understand what we were trying to achieve after 1 hour of talk. Absolute waste of time for $400

Clarifications--a bit long:

Originally, we had two (settlor) trustees Mum, Dad and one independent (old friend) for over 8 years. Then friend wanted to get out as he was going to travel, and also had a new young partner who suddenly convinced him that being a trustee was very risky.

So we tried to replace the independent (friend) trustee with a Trustee Company. Effectively, we were looking at Mum and Dad as original two trustees, plus trustee company as the third trustee (yes complicated but simpler to do given our trust did did not allow for just one trustee, has "restricted period" clauses et al.

So we wanted a trustee company to be Mum & Dad as shareholders AND directors to do day-to-day work, and we looked for a lawyer (or a law firm trustee company) to act as the third shareholder. We were happy to provide sufficient shareholding/voting rights to provide independence. (BTW we have no hesitation in welcoming a genuine independent as long we respected their judgement--and as long they did not turn out to be like our idiot lawyer as explained further)

We asked our lawyer (of 10 years) to be a shareholder of the trustee company himself or through their company set up by their. And asked him what his advice was about the shareholding %ages. We were quite happy to do whatever was required.

He went along with this discussion, which took place over three months, and in the end said yes via e-mail. But soon after -- within 10 minutes -- sent another message saying "oops spoke to soon" I can't be shareholder because --get this -- "you should know directors have all the power and shareholders do not--so I would be superfluous and not independent". I was glad I was not standing next to him when I received this message.

We are currently in a situation where Mum and Dad are (original) trustees , with the shareholder company currently with same mum and dad as shareholders and directors--pending the finding of a sensible independent shareholder who thinks that the contents of this thread make sense.

We did all this to future proof -- for not having to pay $3000-4000 to change records everytime there was a trustee change.

I regret to say -- we still remain with the lawyer -- but only temporarily until we decide to move -- at a time of our choosing.

The best alternative shareholder we have found is a qualified lawyer and acountant overseas, who also happens to be a close relative. Apparently according to the above lawyer -- that is also not recommended !


Phew -- getting that off my chest felt good !

[CJ]

The best alternative shareholder we have found is a qualified lawyer and acountant overseas, who also happens to be a close relative. Apparently according to the above lawyer -- that is also not recommended !

Why? because they are overseas? Depending on how many decisions are required to be made per year, it may be an administration nightmare.

[Ivan McIntosh]

I'm not sure why they are so anti, as just being a shareholder doesn't attract much liability....if that is all they are and it is made quite clear that they are not in substance a trustee and are not expected to be one...that their retainer is purely and simply to review major transactions when asked to sign a special resolution.

If, however, you expect them to act (or be perceived) as if they were in reality an independent trustee from the position of just a shareholder, then I'm not surprised they are being cautious....because directors can commit the trust and trustee company to all sorts of things that fall short of a major transaction...such as guarantees..without speaking a word to the shareholders.

All in all, I'm less and less certain that option 3 actually provides much benefit in the "not-a-sham" stakes. As another poster pointed out, it is more the record keeping and the ability of trustees to refrain from treating the trust like a day-to-day bank account that make more difference.

Re CJ's comments: An overseas shareholder would probably not be too much trouble, because all they will be signing are shareholder resolutions, and faxed/scanned resolutions will do just fine. An overseas director, however, would be a pain in the proverbial.

Will be adding a short article about sham trusts to my blog this week, when I get the time.

Regards
Ivan

[CJ]

Re CJ's comments: An overseas shareholder would probably not be too much trouble, because all they will be signing are shareholder resolutions, and faxed/scanned resolutions will do just fine.

Increased risk though that they are perceived to be rubber stamping, especially if they fax back a day or two late in relation to an urgent decision which has alredy passed. Very hard to argue the date of signing when the fax has a date stamp and time on it.

[Ivan McIntosh]

Good point CJ. The director resolutions should, if they are competently drafted, make it clear that they are conditional on shareholder approval. Relevant material to enable the shareholders to make an informed decision needs to accompany the resolutions.

If, however, the directors have swanned off and committed the company/trust lock stock and barrel before seeking a rubber-stamping after-thought, then they deserve no sympathy.

[VincyV]

Because they are a relative

Why? because they are overseas? Depending on how many decisions are required to be made per year, it may be an administration nightmare.

Because they are a relative -- and could be seen as rubber stamping.

In my view --- With e-mail, fax and skype it is far more easier to contact people who work six days a week and do not think much wrong with receiving a call after office hours -- than lawyers (and dentists I find) in NZ who take Friday and Monday off -- every week !