Running a trust

Once your trust has been established it is very important that it is administered properly. Your trust achieves its objectives by separating ownership of your family’s assets from you personally. If the trust is not administered properly to make this separation of ownership clear then the trust could be challenged as a sham.

Such a challenge could be made by a business creditor, relationship partner, the IRD or Work and Income New Zealand. If such a challenge is successful then the trust assets could be treated as your own personal assets and the benefits available through the trust structure will be lost.

General administrative requirements

When establishing your family trust, we will discuss with you the requirements for administering your trust properly. They will also be able to assist with the ongoing administrative requirements for the trust if required. In general, trustees of a family trust should

• meet on a regular basis, at least annually, to review the trust investments and the needs of the beneficiaries;
• be involved in all trust decisions and record their decisions in writing;
• ensure that they comply with the legal obligations imposed on trustees; and
• ensure that the trust meets its income tax obligations such as filing a tax return if the trust receives an income.

Trustee obligations

Under the Trustee Act 1956, trustees have a duty to invest prudently and to “exercise the care, diligence and skill that a prudent person of business would exercise in managing the affairs of others”. Although many modern trust deeds exclude or reduce these obligations, all trustees are still expected to exercise a reasonable level of responsibility and prudence in carrying out their responsibilities. The Trustee Act therefore provides a useful guideline for any trustee making decisions.

As a guideline, trustees should have regard to the following matters:

• the desirability of diversifying trust investments;
• the nature of existing trust investments and other trust property;
• the need to maintain the real value of the capital or income of the trust;
• the risk of capital loss or depreciation;
• the potential for capital appreciation;
• the likely income return
• the length of the term of the proposed investment;
• the probable duration of the trust;
• the marketability of the proposed investment during, and on the determination of, the term of the proposed investment;
• the aggregate value of the trust assets;
• the effect of the proposed investment in relation to the tax liability of the trust; and
• the likelihood of inflation affecting the value of the proposed investment or other trust property.

Although not all of these matters will necessarily be relevant in all circumstances, they do provide a useful guideline for any trustee making an investment decision. 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.

Trustee liability

Trustees are personally liable for all debts incurred by the trust including tax liabilities. Where loans are arranged from banks or similar lending institutions, it is customary for the liability of independent trustees to be specifically excluded. It is also quite reasonable for independent trustees to request a settlor to personally indemnify them for any losses they incur as a result of their trusteeship.

Taxation obligations

Taxation obligations will vary between trusts and, where appropriate, trustees should take specialist accounting advice to ensure that they comply with their trust’s taxation obligations. One issue which is often overlooked is the need for trustees to resolve how any income earned by the trust will be treated. The trust income can be:

• distributed to, or applied for the future benefit of, all or some of the beneficiaries and taxed at their tax rate (there are some limitations for distributions to children aged under 16); or
• reated as trust income and taxed at the trustee rate (currently 33%); or
• divided using a mixture of these two options.

If a resolution is not passed within an appropriate time frame, the income will be treated as trust income and taxed at the 33% tax rate. This could mean that potential tax savings are lost.

How long can your trust last? The law permits trusts to operate only for limited periods. The usual maximum period is 80 years. However, a shorter period can be stipulated in the trust deed if required. Usually, trust deeds provide that the trustees can bring forward the date of winding up. How can you access trust income?

Distribution of trust income is totally at the discretion of the trustees. They may do any of the following:

accumulate and retain all or any part of the trust’s income within the trust;
make distributions of income to any one or more of the beneficiaries in any proportions; or
credit income to the current account of any beneficiary with the trust (the income will then be taxed as beneficiaries’ income and will be payable to the beneficiary on demand).

How can you access trust capital? Before the trust is wound up any distribution of capital is usually at the discretion of the trustees. Capital can usually be paid to any one or more of the discretionary beneficiaries. If you are a beneficiary of the trust you can therefore receive distributions of capital 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).

Can you use a house owned by your family trust?

If your family trust owns a house then 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 can 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’ regular review of the trust’s investment policy.

Can a trust carry on business and invest?

Most trusts effectively give the trustees an unrestricted power to act as if the trust were a natural person, with no limitation on what the trustees can or cannot do. Trusts can therefore conduct a business in the same way as a natural person. However, some care needs to be taken where a trust is conducting a business as particular legal, taxation and risk management issues can arise.

We can discuss these with you if you intend to use your trust to operate a business. How do trustees make decisions? The trust deed can provide:

• that the decisions of the trustees will be unanimous; or
• that a decision of a majority of the trustees will be binding.

If the trust deed does not make either provision, the trustees’ decisions must be unanimous. Most trust deeds also provide that trustees’ decisions must be made or ratified in writing.