Time for a new clearer trusts act

MARTIN HAWES
Last updated 05:00 23/03/2014

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OPINION: Earlier this month Justice Minister Judith Collins announced the Government would update and make more accessible the law governing family trusts.

It is a shame the media didn't make more of this because many New Zealanders have an interest in trusts. How many? There are probably 300,000-500,000 family trusts in this country and I would think on average each would have two trustees and at least five beneficiaries. Therefore, there are probably well over one million people who ought to be concerned about the law of trusts - for my money, that makes it an important issue.

In September last year, the Law Commission produced 51 recommendations including introducing a new trusts act which would make the trust law more accessible. Collins has said she agreed with the commission's core recommendations and Government will do its own detailed analysis to develop new legislation.

The real difficulty with trusts in New Zealand is that a great number of them have been settled by people who are not financially sophisticated and probably not well advised. In other countries such as the UK and Australia, family trusts tend to be for wealthy people who often have close relationships with their lawyers and accountants. While there are Kiwis who are similarly well off and well advised, there are many who have settled trusts and then effectively been left to their own devices. This has meant that the management of trusts in New Zealand is often poor.

Forming a trust and then managing it badly is a bit like insuring the house and walking out and leaving it unlocked. By doing this you invalidate your insurance. By managing a trust badly you leave it open to successful attack by some other party.

Many trusts have been settled by people who have not really known what they were doing - they are unaware they had divested their assets and that the trust has to be managed according to the trust deed for all of the beneficiaries rather than just for their own narrow self-interest.

To have a valid trust there have to be three certainties: firstly, that there was an intention to form a trust; the assets of the trust are what they have been stated to be; and thirdly who the beneficiaries are. When a trust is attacked, all three of these are scrutinised but it is the first of them (certainty that the settlors truly intended to create a trust) that will receive most attention.

The form of the trust in terms of the documentation (especially the trust deed) states that a trust is intended, but the way that the trust has been managed may show that in substance no trust was ever really intended. In effect, the trust was simply a guise or device for the settlors' own purposes and the documentation was only to give the appearance of a trust when there was never any real intention to divest assets.

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Management of many trusts in New Zealand indicates to anyone who may want to challenge a trust that the settlors of the trust never intended to separate themselves from the assets. Many people continue to treat the trust assets solely and completely as if they are their own: when making distributions they do not consider any other beneficiaries, they do not keep good records, the trustees seldom (if ever) meet formally and assets continue to be managed as if they are still their own property. In many instances, it would be relatively easy to show that there had never been a genuine intention to form a trust.

Family trusts have been relatively cheap and easy to form and so accessible to all. While that is good, the law is not accessible; it is made up of a number of acts of Parliament and case law which stretch back centuries. Importantly, this body of law includes the Trustee Act 1956 which the Law Commission describes as "unreadable". I think a new trusts act which simplifies and makes accessible much of the law of trusts is essential and I hope Government can analyse the Law Commission's report quickly and then legislate accordingly.

Martin Hawes is an authorised financial adviser. A free disclosure statement is available on request or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.

- Sunday Star Times

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