Be Aware of your Responsibilities as a Trustee
As accountants we are often asked to give advice on business structures, including family trusts. Trusts continue to be very popular in New Zealand where it is estimated that there are between 300,000 and 500,000 in existence. The exact number is unknown, because unlike companies, there is no central register of trusts. Many trusts simply exist to own the family home and where they have no taxable income, they do not need to register with the Inland Revenue Department.
While there is no standard definition of a trust the most common way of describing how a trust works is that a trust is a relationship between trustees (in whose name property is held or dealt with) and people called beneficiaries who are intended to enjoy the benefits of that property.
Individuals, business people and farm owners form trusts for various reasons including asset protection, provision for family members, farm succession, ease of management, and the ability to appoint trustees to assist with decision making, to name a few. Trusts may also provide tax advantages but recent changes to tax law have reduced some of these.
In general trusts work very well but it is very important to consider the responsibilities of being a trustee. This article briefly looks at some of these.
Trustees have three broad duties – duties of loyalty (to beneficiaries), prudence (when decision making) and to obey the trust deed. A trust is therefore a relationship of trust and confidence. The rules concerning a trust are governed by its founding document called a Trust Deed. Trustees must familiarise themselves with the deed as obeying the rules of the deed is a critical aspect of a trustees duty.
The duty of loyalty is the duty not to favour yourself as a trustee over the interests of beneficiaries and a duty to be impartial – not to favour one beneficiary over another.
Some beneficiaries will be discretionary - in which case the trustee must consider them but not necessary make a distribution, while some will be fixed - in which cas they must benefit within the terms of the trust. In general however, the needs of all beneficiaries must always be considered. Under New Zealand trust law a trustee may also be a beneficiary.
Perhaps the most important and onerous duty is to manage the trust assets prudently for the good of its beneficiaries. A trustee can be taken to task (at a much later date), by a beneficiary for making an unwise or imprudent investment decision. Generally a trustee will not be blamed for droughts, an economic downturn or something else that could not be envisioned at the time of making a business decision. But all decisions and risks must be thought out carefully.
If the courts consider that an investment made by a trustee is imprudent then the trustees will be enforced to make good any losses that flow from their poor decision. It must also be considered that unless the trust deed authorises it, a trustee is forbidden to delegate their decision making to someone else. Trustees are advised to seek expert advice (such as investment advice) when necessary but they must remember that the final decision on whether to invest remains with them. Trustees must keep good financial records and records of how decisions were made.
There are words of warning coming through from case law for people who might consider themselves as silent or passive trustees (trustees who sit back and are not actively involved in the management of the trust). The courts have made it clear in saying there is no such thing. Despite the fact that a trustee may not be a beneficiary of the trust and not involved with the day to day trust business, they are still jointly liable with the other trustees. For this reason trustees must be aware of what their co trustees are doing. A professional trustee can face liability that flows from decisions that they may have not been actively party to. It is therefore very important that all trustees are consulted on important business or investment decisions.
The Law Commission has been undertaking a review of the law of trusts with the first stage culminating in the release of its report released in August 2013 "Review of the Law of Trusts: A Trusts Act for New Zealand", which sets out recommendations for a new trusts act to replace the 1956 Trustee Act. The report makes several recommendations to modernise the law of trusts as some existing laws are complex and difficult to understand. The review addresses some key matters which are currently mainly covered by case law and aims to provide much clearer guidance as to what the rights, obligations and duties of trust settlors, trustees and beneficiaries are.
Trusts will continue to be popular, particularly in farming and business situations. They serve many benefits and in the vast majority of cases work well from an administrative and financial point of view. The duties of a trustee can be onerous however. It is vitally important that if you are considering forming a trust or are asked to become a trustee that you get good legal advice, trust your other trustees, be competent and skilled at decision making and most importantly – be aware of what your responsibilities will be.