In the past, it was common for trustees of a trust – especially a trust that only owns the family home – to meet only if there was a plan to change the trust assets (such as selling a property and buying a new one).
With the changes brought about by the Trusts Act 2019 (the Act), trustees need to be more proactive with trust administration. Increased scrutiny from beneficiaries and the courts means it’s vital for trustees to manage trusts regularly and carefully.
In this article, Nick Robertson explains the importance of regular trust administration.
Managing a trust involves more than you might think
Even a trust which ‘only’ owns the family home can involve more administration than the trustees may realise. For example:
1. Beneficiary disclosure
Under the Act, trustees must regularly consider disclosing to beneficiaries. This obligation is ongoing, and as circumstances change (e.g. as children and grandchildren grow up) the trustees must re-evaluate whether further disclosure is necessary.
2. Ongoing contributions
If a settlor or beneficiary puts money into the trust (for example, by paying down bank lending in the trust’s name or for renovations to the trust property), these payments should be properly documented and accounted for. While this is important for any trust, it’s particularly important if a trust was set up for asset protection, as it helps avoid the unintended situation where the trust owes that settlor or beneficiary a significant debt that can be called upon by creditors and other claimants.
3. Making and documenting decisions
Under the Act, all trustees must actively and regularly consider whether to exercise one or more of their powers. In a nutshell, this means trustees should make regular contact regarding the trust’s position, complete any outstanding trust administration, and record this all in writing.
4. Core trust records
The Act requires trustees to keep (and pass on to their successors) core trust documents, including records of trustee decisions and records of the trust’s property ‘appropriate to the value and complexity’ of that trust. Trustees who fail to keep adequate records could be in breach, even if all the decisions made have been above board.
Neglecting trust administration can be costly
While we often hear that regular trust administration is “a waste of time and money“, it’s a drop in the bucket compared to the time and money wasted or lost if a successful challenge is made.
If trustees’ decisions are ever challenged (whether by beneficiaries, outside creditors, or other claimants), evidence of the trustees’ administration – or misadministration – will come under scrutiny and may undermine the trust’s entire purpose.
In short, the level of asset protection gained by a trust is often in line with the amount of effort put in by the trustees – you get out what you put in.
The risks of sub-par administration
Decisions made on an ad hoc basis or without involvement from all trustees are a weak link that claimants will likely attempt to exploit.
Courts have also used a lack of resolutions (or evidence of all the trustees being involved in trust administration) to ‘bust open’ trusts, ruling that the independent trustees had effectively delegated all their responsibilities to their co-trustee.
Once a trust is challenged or attacked, it’s often too late for the trustees to attempt to fix any errors in their administration, leaving the trust’s assets exposed to risk.
What should I do from here?
Here’s the bottom line: the age of ‘set and forget’ trusts are over, if it ever existed.
Going forward, trustees need to expect a greater level of scrutiny for their actions. Trustees who fail to complete their administration and comply with their duties should be mindful that the trust may not fulfil its intended purpose.
If you’re a trustee with concerns, please contact us to discuss your situation further. Get in touch at enquiries@armstrongmurray.co.nz or 09 489 9102.
This article is brief and general in nature. You should not treat it as legal advice and should seek professional advice before taking any action in relation to the matters dealt with in this post. Armstrong Murray accepts no liability for losses suffered by any person or organisation who may rely directly or indirectly on this post.
