Articles by The Professional Trustee Team
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 opinion, 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ship using old technology so why would you help a client build a foundation for their financial affairs, working from outdated knowledge?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.
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.
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 alter 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 alter ego of Mr R.
Lessons 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 are 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 you 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. Are the memorandum of wishes and Wills up to date given your present circumstances? Do they 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 'What's your game plan when you die?" 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 us. Have a great month and enjoy the build up to Christmas.
Hi Matthew, Just like to thank you for a Great day on Sunday at at the Property Leaders event....certainly worth the trip up from Wellington. We are always impressed with GRA's ability to help their clients.. a rarity among many businesses. Kindest regards, Brian and Janet Adams - Brian and Janet Adams, May 2018
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