Trusts & Equity

Anecdotally, it is widely known that New Zealand has more trusts per head of population than any other country in the developed world. Oftentimes accounting and legal professionals encourage the use of family trusts as a tool to assist in succession planning, as a means of assets protection and to protect assets from claims on the breakdown of marriage, civil union or de facto relationship.

But how trusts work and why are not always questions that average people understand or have ever had cause to find out. Following are some of the typical questions I am asked frequently by new and existing.

What is a trust?

A trust is a separate legal entity, established usually in writing, when a person (settlor) transfers ownership of assets to others (trustees) to hold and manage for the benefit of others (beneficiaries).

The settlor may – but not always – reserve to him/herself the power to appoint and remove trustees. Alternatively, a separate person (appointer) might be given that task.

Typically the trust deed sets out the powers of the trustees which in a word will enable them to stand in the shoes of the former owner to administer the trust assets as freely as is possible within the confines of the law and their fiduciary duties and responsibilities to the beneficiaries.

A fiduciary duty is an obligation to act without self-interest or personal favour in the best interests of another and usually involves custody of money or assets. It carries with it the highest standards of honesty and integrity and goes to the very heart of what a trust is all about.

Importantly, once assets are settled on a trust, the settlor parts with legal and beneficial ownership. In circumstances where this has not occurred, the courts may find these trusts/settlements to be “shams” and therefore of no force or effect.

What is the main purpose of a trust? 

As I broadly mentioned in the introduction, a trust can be used as an estate planning tool for succession, for asset protection in business and or in a relationship. I get to see instances of all three. But the overarching and common thread in each is to protect and preserve assets within a separate structure. So, for instance in a relationship where one partner – or even both – come to a relationship with separate property he she or they may choose to put that property in a trust to ensure that in the event of a breakdown of the relationship the property is protected from claims. That said, busting trusts has become a major feature of relationship law nowadays in circumstances where it can be established that property and or efforts arising out of a relationship have benefited those trusts intended to be ringfenced from claims. Indeed, a good deal of my work relates either to trust busting or defending trusts under attack.

What are the disadvantages of a trust?

For a trust to be effective, it needs to be well managed. Good record keeping is the key. Not all trusts are well managed however, and frequently I find that trusts that really serve no usual purpose and probably should not have been formed in the first place.

The complete transfer of property to a trust is something that needs to be carefully considered, because once inside the trust, ownership and control (by the former owner) of assets technically disappears. Normally the only way that an unwise transfer of assets can be undone is for the trust to be wound up and its assets distributed. One would expect that the original settlor would be amongst the discretionary beneficiaries, but this may not always be the case. Besides even if he/she is, if there are several or many beneficiaries, then each of them has a right to considered. The trustees could be in breach of their fiduciary duties and responsibilities were they to favor the needs and wishes of original settlor over the needs and interests of all other beneficiaries.

Also, trusts can be expensive not only to form but to run, especially if they hold assets that produce income, such as shares and rental /investment property. That income needs to be accounted for in the form of annual financial accounts, so accounting advice/expertise is likely to be required too.

What are the main types of trusts?

There are a variety of different trusts set up for a variety of different purposes. My work largely focuses on Will Trusts, which arise out of a deceased estate, and express inter vivos (living) trusts which own and manage assets during the life of the trust which is currently 80 years. But note, under the Trusts Act, 2019 which comes into force on 30 January 2021, the maximum life of a trust will be 125 years.

There are also Charitable trusts set up for a charitable purpose. The assets are managed for the benefit of that charity in perpetuity. Charitable trusts also attract tax deductibility and other tax benefits.

For the most part, then objectives and purposes of a trust are written down. But not in every case. Frequently in my work I deal with a different paradigm of trust called a constructive trust – a creature of equity or fairness within our court system. A constructive trust can be found in circumstances where a person contributes (direct or indirect) to the property of another, with a reasonable expectation that in so doing he/she will benefit. In my work I am frequently asked for advice under the constructive trust doctrine, especially in circumstances where the Property (Relationships) Act, 1976 does not apply.