Trust Law In For A Shake-Up?

[Xav]

There is no legal requirement for trustees to have an annual meeting, although it wouldn't surprise me if some of these trustee companies put such a requirement to do so in their Trust Deeds so they have something extra to charge for.

[Bluekiwi]

One of my trusts is just for a bach, so there isnt a lot going on anyway from year to year, my dad is a retired chartered accountant so he just sends in accounts once a year.

[fpl]

May this be the key message:

"The cost of professionally administering a trust is around $250-$500 a year, Cron said, but many are not willing to pay. But, without professional administration, the errors people make can fatally undermine their trust. "

[Xav]

It would be more accurate to say that errors may undermine the point of having the trust. Unless there has been recent case law I am unaware of, proceedural shortcomings are extremely unlikely to undermine the trust itself.

[Keys]

Cynical old me thinks. ....... The rich can afford to run trusts "correctly" those of us who want protection and can't run them "correctly" will be legislated out of existence. Read asset and income testing for the super. Read, if you can afford to provide for yourself - do so. Read, I'm rich, I'm OK thank you very much.

[CJ]

One of my trusts is just for a bach, so there isnt a lot going on anyway from year to year, my dad is a retired chartered accountant so he just sends in accounts once a year.

For something like a bach and ignoring opex costs, I would say there is no requirement to do anything.

Do you really think the barons held annual meetings for the benefit of the maidens while the knights of the round table were off fighting the holy war??

Another point, a mismanaged trust does not make it a sham. You might not get the benefit out of it that you wanted (ie. forgot to do gifting) but it could still be a valid trust.

[Xav]

Another point, a mismanaged trust does not make it a sham. You might not get the benefit out of it that you wanted (ie. forgot to do gifting) but it could still be a valid trust.

Indeed, although "is almost certain to" would be more accurate than "could".

[Perry]

Usual Scare Mongering

. . . designed to sell books and gain clients.

"The mess we're uncovering every day leads me to conclude that the government needs to take action," he said. "I believe we will eventually be faced with some form of compliance regime requiring them to be administered in a correct and proper manner.

"The fact that experts in the field say perhaps 75% of trusts in New Zealand would be overturned if compliance were introduced should be a matter of great concern to those advisers who simply establish a trust, and offer no support services to their clients," he writes.

Those DIY clients intend to run the trusts themselves, but make a total hash of it."

Of course there will be a few like that! But, get
the government involved and it will most certainly
make a complete hash of it.
.

[ChrisD]

It would be more accurate to say that errors may undermine the point of having the trust. Unless there has been recent case law I am unaware of, proceedural shortcomings are extremely unlikely to undermine the trust itself.

I read a NZ book recently (honestly can't remember the title or the author, I'll come back with it) that discussed several cases of trust-busting where trust property was treated as an extension of personal property, and administrative procedures aren't kept up to date. You will lose all protection of a trust, and a trust can be busted all together, if you don't administer it properly. And rightly so.

[Xav]

The book was either wrong or out of date (again, unless there have been recent developments I am unaware of).

In Official Assignee v Wilson the Court of Appeal concerned a very poorly administered trust:

...there was an absence of resolutions or minutes, no annual accounts, intermingling of financial arrangements between the trustees and Mr Reynolds and no record of decisions or other documentation relating to the use of trust properties by the beneficiaries’ parents. The trust records were sent to Mr Reynolds rather than the trustees.

However the court had this to say on poor management:

Evidence of poor administration of the trust is insufficient, of itself, to establish a sham. This may be evidence of a breach of trust, but the fact that the trustees have acted poorly in managing the trust does not establish an intention that the trust operate as a sham.

The end result was:

On a broad overview, it is likely in this case that Mr Reynolds subjectively wished to establish a trust (even if he may not fully have understood the implications or may even have contemplated to breach its terms when it suited him). The documentation which was completed was consistent with a subjective intent to create the trust. On the findings of the Judge, there were non-complicit trustees who entered into transactions and acquired property (and administered that property even if not very well) in the name of the trust and so they cannot be said to have intended the trust to operate as a mere sham.

In short, as long as you intended to create a trust then poor management is not going to render it invalid, but poor management may be relevant in determining whether there was an intention to create a trust or not.

[Bluekiwi]

How valuable is property talk, its a veritable gold mine.
So much expertise and experience at your fingertips.
Its much appreciated guys, all this help.

[ChrisD]

In short, as long as you intended to create a trust then poor management is not going to render it invalid, but poor management may be relevant in determining whether there was an intention to create a trust or not.

You're not seeing the whole picture though. If a trust is determined to be an alter-ego, it will be found to be a sham. The problem arises in that if there is insufficient documentation it can be difficult or impossible to prove that a trust wasn't an alter-ego. If all the facts point to the trust being a de-facto extension of personal property, and there is no documentatino to prove otherwise, the trust will likely be determined to be a sham.

[Xav]

Chris,

Sorry if my previous post was not clear enough. Here are some snippets from OA v Wilson dealing expressly with the issue of "alter ego" trusts.

The assumption of factual control by someone other than a trustee (or a sole trustee if there is more than one trustee) or by someone without legal right to exercise such power cannot of itself invalidate a trust

The alter ego, as factual control, should be an impotent, meaningless concept. In the eyes of the law, factual control has no effect on legal ownership. Indeed a stranger who takes control of trust assets will be considered a trustee de son tort and be liable to account for the property of beneficiaries. Factual control of trust property cannot justify recognition that the controller thereby owns the trust assets.
…
The alter ego concept, as it relates to factual control, serves to attribute an individual’s actions to those of the organisation that he is controlling. It is not a mechanism whereby an individual can appropriate property to him or herself by virtue of the control that he or she exercises.

Alter ego trusts are not an independent cause of action, nor are they the same as shams. In the trust context, alter ego arguments are confined to evidence to help establish a sham.

Such control may give rise to a claim for breach of trust. Evidence of such control may be relevant to the question of whether a trust is a sham in that it may evidence a lack of true intention to form a trust. That is not to say that an alter ego trust is the same as a sham. A finding of effective control may help establish that a trust is a sham if it indicates that it was not intended that the trust take effect according to its terms. To establish a sham, the intention to mislead must be shown to have existed from the inception of the trust (or from the time when particular property was disposed to the trust).

The summary at the end of my previous post is accurate, although I should note that the position in matrimonial property cases may be different (although the court in OA v Wilson doubted that it should be).

[Winston001]

I read a NZ book recently (honestly can't remember the title or the author, I'll come back with it) that discussed several cases of trust-busting where trust property was treated as an extension of personal property, and administrative procedures aren't kept up to date. You will lose all protection of a trust, and a trust can be busted all together, if you don't administer it properly. And rightly so.

I agree with Xav in his above answers. I suspect the book was referring to relationship (matrimonial) property. I can tell you there is a whole area of family law called "trust-busting". There are seminars on the topic and cases are eagerly scanned.

Leave that aside though, and the contesting bodies you are left with are dismayed beneficiaries, IRD, and the Official Assignee. For most people hopefully the first and third will not be a problem, so never try to be too clever with the tax man.

[ChrisD]

Having looked again at some of the cases I'm going to partially capitulate to Xav, though I still think there's a case to be made that legal protection of assets can be jeopardised by the mismanagement of trusts.

Leave that aside though, and the contesting bodies you are left with are dismayed beneficiaries, IRD, and the Official Assignee. For most people hopefully the first and third will not be a problem, so never try to be too clever with the tax man.

Also major creditors like lenders in some cases.