Articles by Janet Xuccoa

Trustee minutes and trustee resolutions

whats the big deal ?

As a Professional Trustee, I’m often asked two questions.  First, what’s the difference between Trustee Minutes and Trustee Resolutions and secondly, why are they so important.

To answer the first question first, Trustee Minutes are really notes made of a meeting of trustees and the decisions those trustees make at their meeting.  Trustee Resolutions on the other hand, are a record of what the trustees have decided to do but they are made when a physical meeting of trustees has not occurred.  For example, where trustees have discussed matters and made decisions by telephone rather than having a physical meeting.

Why are Trustee Minutes and Resolutions so important?  To answer this question, you have to go back to old English law.

As I’ve stated in my book Family Trusts 101 Parliament has decreed that assets held in a Trust are held for the Beneficiaries of the particular Trust in question and, all things being equal, are generally protected.  To obtain that protection however, Trustees have to satisfy a few duties. 

One duty Trustees have is to document the decisions they make in an appropriate manner.  So what does this entail? 

In my book, I’ve explained that I believe it means Trustees have to show they have taken into account all relevant, factual matters before they have actually made their decisions. 

duty in action

An example of this in action is where a property is going to be acquired by a discretionary Trust. 

The Trustees should at the very minimum ask themselves what the assets and the liabilities of the Trust are before the purchase and what they will be after the house purchase has been completed.  Ratios should be compiled.  Trustees will also want to understand how any loans that are going to be picked up will be satisfied. Which of course leads Trustees to reading and considering the loan contracts that are being placed before them.  Finally, a question which I think most important is to ask how is the house purchase going to benefit the Beneficiaries.  After all, the Trust is created for the Beneficiaries so it’s vital their interests are being served by the transaction.

Once all the above has been asked and answered, its imperative to demonstrate the Trustees have met their duty and so Trustee Minutes or Trustee Resolutions have to be prepared and signed.  Of coupe, these Minutes and Resolutions should be backed up with appropriate evidence that Trustees have considered all the relevant factual matters that we’ve just discussed.

Not all Trusts have the benefit of a Professional Trustee so not all Trustees understand how vital the above is as the Trustees in a fairly recent case found out.  The consequences in that case were dire.  Trustees were found to be in breech of their duties and their decisions were set aside.

summary

Moral of the story for all Trustees is satisfy the 3D Rule I discuss in my book Family Trusts 101.  Gather relevant information together before you make your decisions, distribute that information and discuss its contents and implications amongst yourselves as Trustees and then document your decisions in appropriate Trustee Minutes or Trustee Resolutions.  Only this way can you demonstrate that you have met your duties and thus keep the Trust’s assets protected.

If you need any assistance with this, please just let this Professional Trustee know.  I’m always happy to help our clients and a quick discussion (free of charge) over the telephone, can frequently save much heartache, time and money down the track.  You can contact me by emailing jx@gra.co.nz or telephoning (09) 522 7955.

 

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

Money is a jealous mistress

One night last week, in a city away from my home, I found myself at a bit of a loose end.  Not a personality to skulk around, I used the time to see a movie I wanted to enjoy.  ‘Money Never Sleeps’ was my choice.  Not a bad movie as far as movies go.  Quiet realistic in parts although in my view, not as punchy as Michael Douglas’ first movie ‘Wall Street’. 

The following day I mulled over the script.  It struck me the main theme centred around the idea of making money.  The concept of actually protecting the money once the green stuff had been made, wasn’t really explored.  That I found particularly interesting because we all know money is a jealous mistress.  If you don’t pay attention to it, and that surely includes taking time out to look after it, you can wake up in the morning and find it gone.  Michael Douglas certainly knows this as it was one of his lines in the movie.  All this thinking of course has lead me to write this article.

the protection business

Undoubtedly one of the most sensible ways of protecting money and other assets such as your personal home, is to put those assets into a Trust.  Asset protection isn’t the only reason however for someone to use Trust.  Ensuring assets are available for the next generation is also a fairly popular rationale for Trust usage.  Additionally, the existence of government means testing provides a major motivating factor for establishing a Trust.  On this point, it’s my personal belief that means testing is highly likely to be brought into law in the future with respect to New Zealand superannuation.  Hence it wouldn’t surprise me one little bit if Trust usage increases for this reason alone.

means testing in the future

In the last 5 days, I’ve completed 16 presentations on the Budget Changes coming through.  One of those changes involves aligning the top marginal income tax rate with the tax rate Trusts pay.  According to the budgetary commentary that was posted, this alignment is being introduced so that New Zealanders wouldn’t spend time sheltering their income in Trusts.  Great line but I’m not buying it for one single minute.

Put three thoughts in your mind.  First, the Government has known for years that it will have trouble paying out superannuation in the future if no action is taken.  Secondly, when you move assets into a Trust, you are moving them from your personal name and identity into the names and legal possession of the Trustees of a Trust.  Thirdly, means testing is well and truly alive and operating here in the land of the long white cloud.

To assist in filling its coffers, the Government introduced Kiwisaver.  Initially this was optional to join.  Later it became compulsory but Kiwis had the ability to opt out on certain conditions.  In other words, the rules got changed.

Telling New Zealanders not to move their assets, including their income, into Trusts, just gives the Government the ability to means test Kiwis in the future.

Imagine this.  In about 15 years time, Mr Smith rocks up to the powers that be and asks for his fortnightly government superannuation payments.  The Government clerk requests he fill out an asset and liability schedule which establishes that Mr Smith owns his own home, bach, shares, a little cash and his own Kiwisaver fund all with a grand asset total of $1.2m.  Now on the basis that the entitlement to government superannuation is means tested, do you think Mr Smith will get his regular superannuation payments in full?

If you think I am wrong consider this.  Right now to get a rest home subsidy from WINZ you generally can have only $200K worth of assets in your own name and that includes the family home.  More than this and you are told to either sell down your assets and use your own money or a charge is put against your home.  Which means that when you die and/or the home is sold, the Government is paid back what they have been paying out up to certain limits.  Whatever is left over (which could be as little as $200,000 based on today’s figures) is then distributed to your heirs.

Medical science now keeps us alive for longer even if quality of life isn’t what it used to be.  So you can spend years in a rest home.  At an average weekly rate of $900 + GST for rest home care, the bill can really mount up.

I can hear some people out there saying Government superannuation will never be means tested.  Well if they can change the Kiwisaver rules they can certainly change the entitlement to Government superannuation.

If I’m wrong and you’ve put your assets in Trust all you suffer is great asset protection along the way.  If I’m right and your assets are in Trust, when you are means tested you will be able to state you own nothing and then will be entitled to collect your Government superannuation payments.

other reasons why you need asset protection

Its not just means testing we need to worry about.  We can lose our assets through a myriad of other ways such as a business failing or a personal relationship demising.  I’ve already written about these events in my free e-book so I won’t go into any detail here in this blog.  What I will say is that often it is outside your power to control events.  What you can frequently have however, is a large degree of influence over the consequences these type of events bring about. Download a free copy of my e-book to get the low down on this.

fear and control

There are lots of fears about moving assets to a Trust.  Probably the most common one is that people think they will lose control.  Not possible of course if the Trust is created correctly but the fear exists nevertheless.  So let’s put this worry to bed. 

When you create a Trust, you are creating a vessel.  This vessel like all containers will hold something, namely assets such as money, shares, homes, bachs, jewellery, artworks, etc.  Predominately anything that increases in value and that you want protected.

There are two very important people involved in a Trust.  These are Appointors and Trustees. The Appointor hires and fires the Trustees so they have ultimate control over the Trustees.  The Trustees’ job is to decide a variety of things including what assets the Trust will hold, buy and sell and who they will allow to use the Trust’s assets.  Clearly, if you are an Appointor and a Trustee you have great control over the actions of the Trustees and the assets of the Trust.

managing the trust

Not all Trusts are created equal and not all Trust documents ensure you get the benefits a Trust can bestow.  To demonstrate, let me tell you about Mr Smith.  He sets up a trust and puts his home into it.  At the time of transferring the home to the Trust, the Trustees give Mr Smith an IOU for the value of the home.  A couple of years later, Mr Smith incurs a large business debt and through no fault of his own, is unable to pay the money he owes his creditor.  The creditor subsequently sues Mr Smith and forces Mr Smith to call up the IOU.  This in turn, forces the Trust to sell the house.  The sale proceeds go to the creditor.  So, at the very time Mr Smith needed the Trust to protect his assets, it failed.  This sorry ending could have been avoided if the IOU had contained appropriate asset protection clauses.

The moral of this story is simply ... setting up a Trust and moving an asset into it, is not enough to ensure asset protection.  Documentation must be correct.  In particular, vital asset protection clauses need to be in the documents at the time the IOU is given.  Your GRA Professional Trustee can assist you with this.

Of course not only does a Trust’s documentation need to be in tip top shape but the Trust actually has to be managed.  This bit needlessly trips up a lot of people.  The golden rule is contained in what I have called the ‘Trust Commandments’ and it’s called the ‘3D Rule’.  Succinctly put, ensure you discuss, decide and document all the affairs of the Trust with all of the Trustees.  The discussing and deciding exercise is usually the easy part to complying with the 3D Rule.  It’s the documentation part that causes big problems.  Documenting what the Trustees have decided, why they have made their decisions and the basis of their decisions is vital and it’s crucial to get the wording of documents correct.  Failure to adhere to the 3D Rule can mean the Trust can be challenged as a Sham and all the benefits that the Trust bestows, such as asset protection, can be lost.  That’s not where the bad news stops however if a Sham Trust is found to exist.  Next comes along ugly tax consequences.  Big headaches in other words that no one needs.

smart people lead to smart solutions

An easy way to avoid all of the problems associated with managing a Trust is to put a smart independent professional trustee on your ‘A Team’.  These creatures are usually pedantic in nature.  They lie awake at night and worry about the little details in life that cause migraines if they aren’t attended to. 

Professional trustees need to have accounting and law degrees, skills, education and experience in pertinent areas to do their job well.  They need to understand a myriad of issues including business, insurance, finance, tax, accounting, equity and contract law to name but a few topics.  Chose your professional trustee well as the Trust and its affairs will be run only as well as your professional trustee’s capabilities expand to.  Another client war story will show you the point I’m making.

Mr and Mrs P landed around 500 pages of correspondence on my desk one Friday morning telling me they wanted to purchase a property that afternoon.  According to them, I had no need to read any of the correspondence or documents because their solicitor had already looked over the papers and was happy with everything.  Now my job as an independent professional trustee is to keep the assets of a Trust safe and in ship shape condition so there was no way I was going to sign a legal document without reading it first. 

Once I’d read the 500 pages I explained to Mr and Mrs P that I could not sign the legal papers.  I explained why as well but they were absolutely determined to proceed.  So quite simply, I dragged the chain.  I did all I could to delay matters. 

Sometimes you have to have big shoulders as a professional trustee. You have to stand behind, next to and if necessary, right in front of your clients.  That’s your job – protecting all assets.  It’s not always an easy role either, especially if your clients are giving you a difficult time.

I offered to resign as their professional trustee but told them that this would take about a week to sort out.  You see we needed a week to get the story to the media.  We knew once this happened, Mr and Mrs P would have cooled down and would not want to do this deal.

This story has a happy ending.  The newspapers picked up the story the following day.  One week later, I received an email from Mr and Mrs P.  It simply said “Thank You”.  We had just saved these clients around $500,000 and the transaction I’m talking about was buying a Blue Chip apartment.

It is true professional trustees do render fees.  We do.  Our fee is $250 a year.  I think you’ll agree however that’s a small price to pay in light of the financial disaster Mr and Mrs P were about to create with their Trust.  So you do need to be aware of fees but don’t ever be someone who knows the cost of everything and understands the value of nothing. 

summary

Michael Douglas was right – money doesn’t ever sleep.  Whilst it is awake and working however, it needs protecting.  There are 24 hours in a day, 7 days in a week and 365 days in most years.  That means protecting money is well and truly a full time job, one that a Trust is best equipped to deal with in my book.  Talking of books, if you have any questions about Trusts, let me know.  I’d be happy to help answer them.  You might also consider purchasing my book.  It’s called ‘Family Trusts 101’.  To be sure I’m not Dan Brown and I haven’t written the Da Vinci Code but ‘Family Trusts 101’ is on the way to being a best seller.  It was only released in July of this year and we’ve sold thousands of copies so far.  It’s a small investment in your money future considering its’ cost is only $30.  You can obtain a copy clicking HERE.  If I’m not out and about presenting, you’re find me having fun with the team at Gilligan Rowe & Associates, Newmarket, Auckland.  My email address there is jx@gra.co.nz and my telephone number is (09) 522 7955.  Until I hear from you, happy travelling everyone with building your financial future and protecting what you grow.  Ciao. 

As the Trustee Services Partner at Gilligan Rowe & Associates, I’m often asked by Trustees what we think is going to happen in the economy, the property market and with interest rates. We answer questions like this all the time as helping people make and protect their money is our business.

Matthew Gilligan is particular strong on these topics and there are many clients out there who thanks to his advice, did pretty well on the last lot of interest rates ups and downs.

The one million dollar question on the table at present is does a Trust fix its interest rates on its existing loans right now or not?

The last thing Trustees want to do is fix a Trust loan at a rate of say 7.25% pa and then rates move downwards the following month. Likewise, a Trustee will not be happy when they choose not to lock in their loans and find rates move upwards and against them and the Trust.

A couple of months back the answer to this one million dollar question would have been fairly clear. Now however, it really is a game of snakes and lizards and everyone is wondering which way they should roll the dice. Below are some tips that might just help you decide what to do with Trust loans.

The Reserve Bank and the OCR

In simplistic terms, the Reserve Bank’s main job is to establish and implement monetary policy. It does this by setting the Official Cash Rate (“OCR”) with an aim of controlling economic activity and inflation. How does this affect Trustees and Trust loans?

Well, again in very loose terms, Banks borrow money which they then lend on to us. Banks borrow money from several sources such as from overseas lenders, term deposit holders and of course, the Reserve Bank.

When a Bank borrows funds from the Reserve Bank, it usually does so at a rate around the OCR. When a Bank then lends funds on to us, it does so by putting a bit of a margin on those funds. So if a Bank borrows funds from the Reserve Bank at say 5% and if it adds a mark up of say 2%, we can expect that Bank to lend those funds to us at 7% or thereabouts.

Accordingly, when the OCR moves, it affects the wholesale rates Banks borrow funds at which in turn, affects the interest rates the Banks are prepared to lend money to us at.

When setting the OCR, the Reserve Bank looks about 2 years out. In other words, the Reserve Bank doesn’t just deal with what is going on right now in our economy when it sets the OCR. Rather, it looks about 24 months ahead and sets the OCR on what it expects is going to happen in the future.

In the last OCR review, which happened on 29 July 2010, the Reserve Bank set the OCR to 3%. The Reserve Bank said the economy might not grow as quickly as previously thought and inflation might not reach the heights it was previously expected to reach in 2012. What does this mean for interest rates?

If all was going according to the Reserve Banks prior expectations, the OCR would have risen to around the 6% mark by the end of 2012. That meant we could expected interest rates to be around the 9% mark by the end of 2012. But now that the Reserve Bank has brought back its expectations, it thinks the OCR will only reach 5% by the end of 2012. This of course means interest rates could come back a bit, to around the 8% mark.

So given the above information, does a Trustee fix or continue to float the Trust’s existing loans?

Floating Rates

If a Trust’s existing loans are on floating rates right now, you might as a Trustee, choose to continue along this path if you think New Zealand’s economy will be long and slow in growing. Of course if you hold this view, you’re be expecting interest rates to stay low and the OCR not to rise as quickly or as high as was previously envisaged. You will recall the Reserve Bank has recently indicated this.

As a Trustee you might also continue to float if you think the global situation (especially in Europe) will deteriorate. Why would you do this? Well a deteriorating global situation could lead to a decrease in the rates our Banks pay to pick money up off shore. If Banks have to pay less to get the moolah that they on-lend to us, then perhaps they won’t charge us so much for the pleasure of borrowing it off of them eg: fixed rates will come down.

If a Trust is in funds, perhaps it receives rental income for example, you may as a Trustee be intending to pay off some of the money the Trust owes the Bank on its existing loans. If this is the case as a Trustee you would probably also choose to float because if you fix the Trust’s loans, penalties may be incurred for making early repayments.

Fixed Rates

If you are thinking you might fix the Trust’s interest rates on its existing loans, you are probably of the mind that the International Monetary Fund growth forecasts will come true. Likewise, I expect you will believe the New Zealand economy is going to experience fairly rapid growth and inflation in the near future. You might be basing your Trustee opinion on the fact that the vehicle sales, dairy, forestry, education, exports and manufacturing sectors in our economy have grown and will continue to grow at a relatively quick pace.

Of course if you hold these beliefs, you will be expecting fixed interest rates to increase. As a Trustee wanting to do the best for the Trust’s Beneficiaries, you will be hoping to get in early so the Trust doesn’t have to suffer the rate increase later on. Hence, you are likely to fix the Trust’s interest rates now.

The Trust might also be in a financial position of being able to pay the additional monthly increase in payments it is going to experience if the rate is fixed now. I say this because if the loan is currently on a floating rate, the Trust is probably paying around the 6% pa mark. But if as a Trustee you choose to lock in the interest rates right now, you are most likely going to do so around the 7.0% to 7.3% pa mark. Consequently, the loan repayments will increase in size.

Of course the extra the Trust pays in loan repayments on a fixed rate might well be worth the peace of mind that is gained. Which is another reason why a Trustee might choose to fix their interest rates.

Look Left & Right Before You Jump

This heading says it all. Whatever you decide to do, get some information before you implement your decision. Do the numbers. Work out the figures. Check to see which alternative will be to the Trust’s financial advantage. Get help from someone independent. By the way, your Bank is not independent.

If you need help doing this financial check, then talk to us. Over the years we have helped thousands of clients with their Trust affairs. Of course a large part of our role is working out what is advantageous to clients from a financial perspective. This includes Trust clients and businesses and individuals.

So give us a call on (09) 522 7955 for a free chat. We’re here to help you.

Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

I’M TELLING ALL !

After plenty of anxious moments and sleepless nights, I’ve done it. Yes, I have written a Book. “Family Trusts 101” has finally been born.

Trusts are never easy creatures to understand but I think this Book should help all New Zealanders comprehend the creation and administration of Family Trusts. In a way, it’s a ‘go to’ Book.

If you’ve ever been confused or frustrated about how a Trust is supposed to operate or if you’ve ever wanted to know the in’s and out’s of a Trust, then this book is a must read for you.

I’ve spent many days and months using my little grey cells to bring you a Book written in plain English. It’s an easy read, packed with great examples which will demonstrate the points I’m making.

You won’t need any previous knowledge to understand this Book as I’ve made a massive effort to ensure it won’t bamboozle you with legal jargon. So a word of warning should be given. If you are looking for a concise legal text on equitable structures, coupled with judicial dictum and ratio decidendi, then this Book is not for you!

If however you want a guide on Trusts, which covers the following points, then you should seriously consider buying this Book:

• How Trusts came to exist;
• What a Trust can do for you;
• Steps to take to place your assets into a Trust;
• What a gifting programme is;
• How Trustees should act;
• What a Professional Trustee can and should do for a Trust;
• Whether you need a Bank account;
• If financial statements should be prepared for the Trust;

And so much more.

I really hope you love reading this Book as much as I loved writing it.

Of course, this is the first of many Books so any feedback you wish to give me would be much appreciated.

The cost of this Book is $29.95 + GST + postage. To order your Book NOW please CLICK HERE.

To else see me talk more about my book on TV One's Breakfast Show Click Here

Happy reading everyone.

GREMLINS IN THE TRUST DEED
As you can imagine, we see lots of different types of Trust Deeds here at GRA. Despite there being a variety of Deeds around, there are some common provisions we like in all our clients’ Deeds of Trust. One of these provisions relates to decision making. I’ve been talking about this particular issue for about two decades now. Some people have commented I’m seeing Gremlins where there aren’t any but now, finally, we have a High Court case to prove this particular point. Gremlins can exist and when they come home to play, they can cost you big money. Read on to ensure you and your Trust don’t fall into this situation.

THE CASE
I won’t recite all the facts but the bare bones of the case are as follows. A Trust decided it wanted to purchase and develop some land. To complete the purchase, it needed to borrow funds so it approached a lender. The loan was duly granted and the legal papers were sent to the solicitor who was acting for the Trust. The solicitor called the Trustees together to sign the legal loan papers.

This Trust had 5 Trustees in total but only three of the Trustees actually turned up at the solicitor’s office.

The solicitor put before the Trustees the loan papers and gave them an explanation of the documents. It seems from the evidence given that none of the Trustees really fully understood what documents they were signing. They certainly didn’t appreciate the fact that they would incur personal liability for the loan. One of the three Trustees even went so far as to say that he just ‘assumed’ the documents must be ‘all right’ because his co-Trustees were signing them.

The loan was duly taken out and the land was purchased by the Trust. Of course there wouldn’t be a case if everything remained okay. But like a lot of things in life, things didn’t pan out as planned. The loan repayments weren’t kept up and the lender ended up suing the Trustees. This is where things got really interesting.

THE JUDGMENT
Remember I told you there were five Trustees in this Trust but only three Trustees turned up at the solicitor’s office and signed the loan papers? Seems the other two Trustees didn’t ever sign those loan papers. But that didn’t make them any less liable. Why? Because of the Gremlins in the Trust Deed.

GREMLINS AT PLAY
At the beginning of this article I said there were certain provisions we like all Deeds of Trust to have. One of those provisions is Unanimous Decision Making. What does this mean? Simply this. All Trustees, yes every single one of them, have to agree to a transaction before it can go ahead. If agreement cannot be reached, the transaction cannot proceed. Most importantly, one or the majority of Trustees cannot bind all Trustees, including the Trustee/s that don’t agree with the proposed transactions.

Why is having a Unanimous Decision Making provision so important in a Trust Deed? Well in the words of Associate Judge Doogue “... if a majority makes a decision, it must be the case that the minority are bound by it in all respects. Otherwise ... those dealing with the Trust could be confronted with a situation where some of the owners of the Trust property would agree to executing securities affecting their properties ... but the minority could defeat the contractual objectives of the parties by declining to co-operate.”


In other words, where there is a Majority Decision Making provision in a Trust Deed, enabling the majority of Trustees to bind all Trustees, including the minority, those that dissent must expect to be bound. The minority Trustees will be contractually bound and legally liable as if they had agreed and had signed the legal loan documents.

GETTING RID OF THE GREMLINS
What can you do to ensure you don’t have a Gremlin in your Deed of Trust? Try calling us to start with. Then let us review your Trust Deed. If you are not one of our existing clients and you bring in your Deed of Trust, we will often see you free of charge.

When we review your Deed of Trust, we will look for other provisions that we think should be in the Trust Deed. Provisions that will protect you and the assets of the Trust.

Most importantly, we’ll be on the look out for the Gremlins we know can lurk in a Deed of Trust. Gremlins that can cause havoc amongst Trustees and Beneficiaries.

We all know prevention is usually easier that cure. Prevention frequently saves us emotional heartaches and most importantly, money. So take some time now and send us an email or call us and let us check your Trust Deed.

All the best.

Janet Xuccoa BCom, LLB
Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants
Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955
P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth. GRA are accountants who provide expert accountant advice both in NZ and offshore.
P.P.S. Check out our sister website, www.familytrusts.co.nz for more family trust information.

© Gilligan Rowe & Associates Ltd
Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

Hello Everyone (Free gifting promotion has finished)

Well the New Year has well and truly started for us. In Trust Land we’ve conducted hundreds of Annual Trustee Meetings. Out of those ATM’s we found a common issue arose – Gifting. So I thought I’d talk a little about Gifting and hopefully remove all the confusion. 

Additionally, for those of you who didn’t know, my GRA Birthday is fast approaching. That special day where it all began for me as your Professional Trustee was 29 March 2005. So to celebrate my GRA birthday, we are going to give you a gift ourselves...

Read more about that at the end of this post.

Family Trusts: How to Gift

You cannot simply transfer your assets to the Family Trust. If you did this, the law would deem that you have made a gift and gift duty would be payable. So to avoid gift duty, you need to sell your assets to the Trust at market value.

When you do this, the Trustees will probably not pay you cash for the assets. Rather, they will give you an IOU, which is often referred to as a Deed of Acknowledgment of Debt. This Deed of Acknowledgment of Debt will record that the Trust owes you a particular sum of money for the asset it has just purchased from you.

The balance owed to you by the Trust under the Deed of Acknowledgment of Debt will be an asset in your hands and a liability to the Trust. To reduce down the credit balance owed to you by the Trust under the Deed of Acknowledgment of Debt, you need to gift.

The Process

Gifting is a process involving you annually forgiving part of the debt owed to you.

At law, you are able to forgive up to $27,000 per person, per year, without incurring gift duty. If you chose to forgive more than this balance, you will be liable to pay gift duty on the amount of the gift you have made over and above this $27,000 threshold.

The gifting process involves five steps: |

Some people try to shortcut this process and only have the Donor sign the gifting documents. I think this is a dangerous practice as I believe you should be able to show that a gift has been made and accepted.

Why Gift?

Each time you gift you transfer in more wealth to your Trust and you transfer wealth away from yourself. Hence if a creditor attacks you personally and all the assets are in the Trust, those assets should be protected.

This means that should anyone bring a successful legal claim against you, they will not be able to satisfy their judgment against your personal assets as you will not own any assets of significance. Rather, it will be the Trust that will hold all the assets and all the wealth.

Of course having said the above, you cannot transfer assets to the Trust to avoid creditors that are already on the horizon. Additionally, the correct transfer process that I have previously discussed must have been undertaken. Most importantly, the administration of the Trust must have been carried out correctly.

Potential Problems

There are two problems I frequently see in practice. The first involves no gifting and the second involves incorrect gifting.

People often believe that once they have completed their first gift they either don’t have to gift anymore, or that their gifting will happen automatically. They are usually wrong on both counts.

If a credit balance is owed to you by the Trust, you need to keep gifting until that balance is eliminated. You also need to ensure that someone actually completes the gifting process. Often this will be a Professional Trustee.

If you do have a Professional Trustee you should ensure they prepare your gifting documents for you. They may for example think one of your other advisors is taking care of this. They may even forget. Accordingly, your gifting may become overlooked. To avoid this, simply diary out your gifting date and call your Professional Trustee or whoever is completing your gifting documents and prompt them.

Incorrect gifting is the second issue that can arise. This can occur when financial statements are not prepared and financial statement reviews are not completed.

Simply put, what happens when this issue arises is the balance recorded in the Deed of Acknowledgment of Debt that the gifting is based on, is not congruent with the balance noted in the financial statements.

This incongruence arises for different reasons, often because the Trust has given back funds to the Settlors. Accordingly, the credit balance owed to the Settlors is less than that shown in the previous year’s gifting documents.

When financial statements are not prepared and the annual financial statement reviews are not completed, the issue never becomes identified and lays dormant. Identification only occurs when an individual or a Trust is questioned or attacked. That’s when the problem is highlighted and comes home to roost.

Of course this can be avoided if you make sure the Professional Trustee does their job and ensures annual financial statements are prepared and carries out that all important annual financial statement review.

Summary

I hope the above shines some light on Gifting. As you can see, it’s a really important part of gaining asset protection and has to be completed correctly.

Failing to have your Deeds of Acknowledgment of Debt contain the all important Hawkins and Entrenchment clauses can undo all the good work gifting brings about. Not gifting from the correct balances recorded in financial statements just creates havoc with the gifting programme. Taking short cuts with the preparation of the gifting documents themselves doesn’t pay.

So if you are going to set up a Trust and put assets into it to gain asset protection, take care to correctly complete your Gifting.

Our Gift To You (Free gifting promotion has finished)

To help celebrate my GRA birthday here is our Gift to you:

We invite all clients and prospective clients who do not have their annual gifting documents currently prepared by GRA, to take advantage of this gift.

As with all offers there are a couple of conditions...

First, your Deeds of Acknowledgment of Debt have to be up to date and in a form acceptable to us. Secondly, we must prepare your gifting documents for the 2011 and 2012 years at our standard fees. By the way, those fees are $200 + GST per person per gift. 

Lastly, this offer is only available for a limited time. 

So, don’t look a gift horse in the mouth! Contact me now by email or telephone and take us up on our Gift. By the way, with all the money you are going to save through this Gift, remember to send your Professional Trustee a Birthday Card – she’ll really appreciate it (hint!)

All the best.

Janet Xuccoa BCom, LLB
Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

Life has a great way of teaching us lessons and one big lesson I’ve learned is this - if you get the right people on the bus, sitting in the right seats, life just flows a whole lot easier.  So, what’s this lesson got to do with Trusts?  Well simple really.  If you are going to set up a Trust, then you should do it once and do it right.  Usually this means calling in the specialists who can give you appropriate advice, pertinent to your particular circumstances.

 
In my book a task that a specialist will always have is to ensure their knowledge is up to date.  After all, you don’t build a rocket ship using old technology so why would you help a client build a foundation for their financial affairs, working from outdated knowledge?
 

Lots of professionals forget this and they fail to do their bedtime reading much to the detriment of their poor clients. Sure we are all busy but we need to keep up to date and if that takes us a few hours reading a week then so be it.

 
Which brings me to the whole point of this blog.  A court decision was released early this year.  Since its release there has been substantial debate and much written about what the decision means in the legal beagle world.

One particular point from this case however seems to have been overlooked and I think this point is really crucial to all those who have Trusts.

The Facts

 
Mr R was the Settlor of a Family Trust.  Mr W and Mr H were the Trustees.  The Trust purchased a property which we will call the 1st Property.  In order to be able to afford to buy this property, the Trust borrowed from the Bank and Mr R gave the Bank a personal guarantee for the borrowings.  A little while later the Trust sold the 1st Property to Mr R. Mr R then entered into an Agreement on behalf of the Trust to purchase another property for the Trust.  We’ll call this the 2nd property.  In order to buy this property, the Trust would have to borrow very heavily.  Mr R then decided to sell the 1st Property but he didn’t manage to achieve a sale until after the Trust had completed the purchase of the 2nd Property and until after he had been declared bankrupt.

The sale proceeds derived from the sale of the 1st Property went towards satisfying the Bank borrowings which had been raised in order to purchase the 2nd Property.

The Argument

Before we start on the legal argument, I need to tell you about someone called an Official Assignee or “OA” for short.  This is a person who legally steps into your shoes if you are declared bankrupt.  They will be entitled to run your affairs, sell your assets and pay off your liabilities.  There are some strict rules about what assets they can sell and what liabilities they can pay.  Overall, the main aim of their game is to liquidate assets to repay creditors.  In my view, anyone facing the prospect of bankruptcy should immediately seek professional advice,  before they visit an OA’s office.

Back to the argument of this particular case.  The OA said the Trust had not been well administered and was a sham or was the altered ego of Mr R.  Of course what the OA wanted was the 2nd Property, which consequently was the only asset the Trust owned.  If they could prove the Trust was a sham and the 2nd Property really belonged to Mr R, then they would be able to seize the property, sell it and apply the sale proceeds to repay the creditors.

The Legal Decision

The case was initially heard by the High Court who dismissed the OA’s claim.  Then the OA appealed to the Court of Appeal who also dismissed the appeal.  In other words, the OA plain ran into a brick wall with its claim that the Trust was a sham or the altered ego of Mr R.

Lessons For Us To Learn

Irrespective of the great specialists sitting on your bus, no one wants their bus to have to travel to Court.  Going to Court is an expensive exercise and I don’t just mean in monetary terms.  Litigation is emotionally draining and because it can take a couple of years to get through a case like this, it can really take its toll on not only the bank balance but also the human relationships you are involved with.  So as my old grandmother use to say ... an ounce of prevention is worth a pound of cure. 

What this means for us is that we need to take steps to avoid accusations that our Trusts are shams.  And we don’t just take steps to avoid sham trust allegations so that the Trust assets stay safe.  We take these steps to avoid personal liability.  Remember ... Trustees are personally liable and you don’t want other Beneficiaries suing you if you lose the assets of the Trust.

So what specific steps can we take to avoid sham trust allegations?  Well here’s 9 things you can do to ensure your Trust is ship shape and up to date:

1.       Review financial statements prepared for the Trust against the Minutes, Resolutions, Deeds and Agreements you are holding on the file you have for the Trust.  If you don’t have financial statements, get them.  They are the backbone to any Trust and are surprisingly inexpensive for Family Trusts.

2.       Make a list of any Resolutions that are required and complete these.  Usually you will at the very least have year end resolutions to prepare and execute.

3.       Ensure all loans made by yourself to the Trust and those made by other parties to the Trust are evidenced in Deeds of Acknowledgement of Debt and Variable Interest Loan Agreements.  It goes without saying the Deeds need to have Hawkins and Entrenchment clauses in them to protect these loans from being called up by say a Creditor or the OA..

4.       If the Trust has made a loan to you, look to see if a Deed of Offset is appropriate, offsetting what the Trust owes you against what you owe the Trust.  This could help for example in reducing the balance the Trust owes you personally, consequently reducing the number of years it takes for you to gift.

5.       Check to see if your gifting is up to date and that you are gifting off of current balances.  Look at the financial statements in this latter respect.

6.       Ensure all the Trust Registers are current.  This includes the Registers for Professional Contacts, Assets and Liabilities, Beneficiaries, etc.

7.       Go over the Estate Plan.  Is the Memorandum of Wishes and Wills up to date given your present circumstances?  Does it have all the necessary clauses?  Look at my previous blogs or talk to me about this is you have any doubts.

8.       Have a look at insurances.  Is your life insurance policy assigned to the Trust?  If not, get hold of your broker and get it sorted.  Is there enough insurance in place?  If not, talk to a broker about your needs.

9.       Write a Plan For Death – see my previous blog on this particular subject for guidelines. 

Get A Professional Trustee On The Bus

Sometimes, despite our best intentions, we just don’t get round to doing the things we know need to be done.  Even if we have the time, some work is better done by the specialists.  So, if you need a hand putting into effect the above 9 steps, now is the time to put a Professional Trustee on your Bus.  And if you already have a Professional Trustee sitting on your bus, now is the time to put them to work.

As always, if this Professional Trustee can help you, please contact me.  Have a great month and enjoy the build up to Christmas.

Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

Hello Everyone,

This week I had an interesting conversation with two individuals who had received some really poor advice from their advisors. This advice has cost them dearly in terms of the assets they are about to lose. But the rot doesn’t stop there as the loss of their assets will have a long term effect – it will most definitely deprive their children of their inheritance.

[By the way the lessons from this story will be covered in my next upcoming Auckland seminar entitled "Family Trusts Tips & Traps" ].

The story goes something like this ...

Mr and Mrs Smith were offered a business opportunity which they decide to take up. Before they did so, they approach their advisor who told them to set up a Trust and move their family home into the Trust. This would of course bestow asset protection upon the home the Smith’s were told. And the Smiths being sensible individuals relied on that advice.

A Trust was duly set up and the Smiths sold their family home to that Trust. Because the Trust did not have any money to pay the Smiths for the home, the Trustees gave the Smiths an IOU – a Deed of Acknowledgment of Debt in legal speak.

At this point the first error was committed. There was no Hawkins or Entrenchment clauses in the IOU and we all know what that means. Just in case you don’t however, don’t worry. We are going to tell you because this would be one of the largest mistakes we see when Trusts are set up and IOU’s are given out.

The Smiths were then told to enter into a gifting programme and to forgive $27,000 of the debt each and every year that was owed to them by the Trust. Again, the Smiths being the sensible individuals they were, relied on that advice. They were also under the impression that their advisor would take care of preparing the gifting documents for them on an annual basis. After all, it was the advisors job to do this.

At this point the second error was committed. The advisor didn’t run a computerised gifting programme. That advisor simply ran a paper spreadsheet. Unfortunately, the other member of their staff, who was also responsible for completing Trust work, also ran a manual paper spreadsheet. Neither the advisor nor the staff member had regular Trust Department meetings so neither of the spreadsheets were ever checked to ensure that all clients actually got put on to a spreadsheet. Truly a recipe for disaster!!! As it turns out, clients gifting was often missed because they were never noted on either of the manual spreadsheets.

If the above two errors weren’t bad enough a third error was committed. It was this error that was truly fatal for the Smiths.

The Smiths business venture was really going well so they decided to sell their house and get a bigger one. This did mean they would have to take on a bigger mortgage but because the business was prospering, the thought of a larger loan didn’t bother them. So they instructed their advisor to attend to the conveyancing of the property. Once the house was sold, the sale proceeds were placed in the Smith’s personal bank account. We all know the danger of this, but just in case you don’t worry. We will tell you and we’ll do this because this is another very, very common mistake we see.

After the house was sold, another business opportunity came up in connection with their existing business. This opportunity however would require the Smiths to move overseas for a couple of years. They decided to take up this new business venture, so delayed buying another house. They were unsure about what they should do with their Trust so they called their advisor.

The advisor told the Smiths to put the sale proceeds they got from their home on term deposit and that there wasn’t any further need to gift as they were now heading overseas. Therein lies the nail in the Smiths coffin unfortunately but the Smiths, holding the view that their advisor knew what he was talking about, relied on that advice. They did indeed put the sale proceeds in a term deposit account held in their personal names and they did indeed stop their gifting programme.

All went well in the lives of the Smiths for about two years. But then the market turned. Their business overseas went into liquidation. They returned to New Zealand to find the manager they had left in charge was not coping and to make matters worse, the market in New Zealand had also changed. What was once a profitable business, was now in the red. Rather than producing money each and every month, all it produced was more debt.

The New Zealand business duly went into liquidation, leaving a sizeable debt owed to the Bank. At the time when the Smiths originally purchased their New Zealand business they gave a personal guarantee to the Bank. But don’t worry – the Bank got paid in full!!! How? Easy. The sale proceeds on term deposit were held in the individuals personal names so the Bank simply applied the guarantee against those proceeds and took them, crediting those monies against the monies the New Zealand business owed them. We’ve told everybody for years how to handle the Banks. Don’t worry if you are unsure about this point. We’ll gladly tell you because this is probably one of the largest traps people fall into.

How could all of this been avoided? What does this have to do with stopping the gifting programme? How do you handle the Banks?

To find out the answers to these questions and the ones we’ve highlighted above, simply come to my next seminar called “Family Trusts Tips and Traps”.

Go on - Register Now. It could save your assets – even if you don’t go into business!!!

All the best, Janet.

Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.