In New Zealand, trusts are fast becoming a popular legal tool offering both businesses and families enhanced asset protection, as well as peace of mind that intended parties will ultimately benefit from accumulated wealth.
For a trust to be considered valid however it must be formed in such a way as to comply with specific legal requirements and people given key designated roles in establishing, administering and benefiting from the trust.
Namely the three key parties involved in a trust are the Settlors, the Trustees and the Beneficiaries, with each having defined roles as outlined below:
Settlors: are usually the people who want to set the trust up and who have assets they wish to transfer to a trust. There must be a genuine reason for the Settlor(s) to want to establish a trust, and rules such as valid intent, objectives and subject matter must be met in order for a trust to be considered valid under New Zealand law. Settlors hold a key role within a trust and have the ongoing power to appoint and remove at will both beneficiaries and trustees of the trust. It’s also important to note that under New Zealand’s tax laws, anyone who settles or puts assets into a trust (even if they do not hold any powers relating to the trust) is also considered a settlor for tax purposes. This may be of consequence if your trust is a foreign trust or if you plan to move to Australia.
Trustees: are the people who hold legal title to the trust assets and who typically administer the trust on behalf of the beneficiaries. The trustee’s names will appear on any titles to the trust property and any other documentation such as rates demands, insurance, bank documents etc. Trustees do not have any beneficial ownership of the trust assets – they simply holding them on trust for the beneficiaries. However, a trustee can also be a beneficiary of a trust – in that event, the trustee must abstain from decision making whenever a trustee decision benefits him or her as a beneficiary.
The appointment of beneficiaries is key and it comes back to the word “trust”. You need to appoint people you trust implicitly to act as trustee and who will act in accordance with your wishes.
It is getting more and more common to appoint professionals (lawyers or accountants) as trustees. This is because the risks of being a trustee are increasing and people are increasingly looking to their professionals to administer their trusts to ensure that they are done correctly (ie; trustees need to fully understand the effects and implications of the decisions they are making and what they are signing to prevent becoming personally liable and open to court action from the beneficiaries). Furthermore, professional trustees are a step removed from the beneficiaries and can often be more objective than relatives or friends.
Beneficiaries: are the people who will ultimately benefit from the assets held in trust. Most trusts these days are discretionary trusts. This means that the trustees have the discretion to decide who will benefit from the trust and when. Beneficiaries of discretionary trusts do not have an entitlement to trust property, but do have the right to be considered when distributions are made and they do have the right to hold the trustees to account. It is important to ensure that the class of beneficiaries only includes people who you actually want to benefit from the trust.
Contributed by Trust Law Expert, Tammy McLeod – Davenports Harbour Lawyers.