Can You Trust a Trust?

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When I first started practising law in the early 1970s family trusts were relatively rare.  They were largely the preserve of farming dynasties and a few wealthy industrialists.  Most lawyers had very little to do with them and often you would find the so-called trust “experts” were obscure country lawyers, who practised in remote but wealthy farming districts.

That all suddenly changed and I cannot really remember why.  Probably some bright spark realised there was a tax advantage or saw a way to avoid the government taking assets if dear old mum went into a rest home. Anyway they suddenly became the flavour of the month and clients began beating their way to solicitors’ doors seeking family trusts, often for no other reason than their next-door neighbour had one or they had read about them in a lifestyle magazine.  The Law Societies began holding continuing education seminars for lawyers and we turned up in our hundreds to learn about this new income stream for the legal profession.

I am not sure how helpful the seminars really were.  I remember walking out of one seminar after an hour or so, because the seating was so uncomfortable and the “expert” panel could not agree on anything.  At another seminar we returned to our seats after the afternoon tea break to find a prepared photocopied statement sitting there from a self-proclaimed trusts’ expert rubbishing everything the seminar presenter had being saying for most of the day.  This led to a quite unseemly argument that was very exciting and quite unusual for a stuffy Law Society seminar. However, none of this was much use to a suburban solicitor just wanting to make sure the odd family trust he reluctantly prepared was done correctly.

Although there are still some people promoting trusts the enthusiasm has waned somewhat.  The big legal topic these days is not whether you need a trust but whether the trust you set up a few years ago is worth the paper it is written on.  Interestingly, some of the pro-trust enthusiasts of a few years ago are now earning their living challenging trusts. If you have any doubts about the status of your trust ask your solicitor and if he/she confidently advises you that there is no problem at all with it, ask them to put it in writing on their firm’s letterhead. Hopefully none of my former colleagues will be stupid enough to comply.

Attacking Family Trusts has become a popular pastime in the Courts. Everyone from the Commissioner of Inland Revenue to unhappy spouses and ex-de facto partners are having a go. In the case of the Tax Department or Official Assignee in Bankruptcy, whether the trust really was a separate entity from the individuals it benefited is often the crucial issue.  If the individual trying to keep the assets away from the taxman or OA is really, despite the presence of trustees, still calling all the shots and controlling the trust as if they still own the property a court might decide the trust is a sham. Needless to say, if a trust was set up in a way to obtain an unusual tax advantage and that appeared to be the only reason for the trust structure there could be problems too.  Where property has been transferred into a trust at a time when the transferor was in financial trouble and the effect was to remove property out of the reach of creditors then such a trust can also be easily attacked.  In the current climate of business collapses and property investment failures family trusts are being given much greater scrutiny than in the past.

Even for those who have not been involved in major financial or investment failures a family trust might not protect their personal assets from creditors in the event, for example, of the failure of a small family business, particularly if there is doubt whether the trust has been administered correctly and the trust paperwork has not assiduously been kept up to date. Often people set up a family trust with all the bells and whistles but a year or so later start to intermingle trust and family assets, and treat the trust property as if it were still the property of the original settlors and fail to keep proper trust records.  In these circumstances a court might decide that a proper trust never really existed at all.

In the relationship property arena the Family Court has a very wide discretion to attack family trusts if it thinks the trust structure disadvantages a spouse or partner from receiving their usually expected entitlements under the Property (Relationships) Act 1976.  The Family Court, and other courts, have been very creative in recent years in using different bits of legislation to overturn, modify, or in some cases, totally ignore the existence of family trusts. It is probably doubtful whether any family trust set up after a couple commenced living together or married is really safe, and some of those prepared before a relationship commenced might be problematic if property/funds acquired during the relationship has gone into the trust or there has been intermingling of trust and family assets, or there have been personal contributions made to trust owned property. The circumstances in which a family trust might be successfully challenged in a relationship breakdown seems to be an ever-growing field with shifting boundaries limited only by the ingenuity and imagination of lawyers, and dare I say it – some judges also.

Where does this leave you if you have a family trust?  If you are not involved in a financial disaster, a nasty relationship breakdown dispute, or actively fending off the next generation discretionary beneficiaries who want their share now, your family trust should chug along quietly under the radar for many years to come. Just make sure that you keep all the paperwork up to date, and if you are a trustee remember you are in a fiduciary relationship. All decisions you make relating to the trust should be made in good faith. They should be in accordance with the trust deed (when was the last time you read it) and only after you have taken into account the interests of all the beneficiaries of the trust.

Disclaimer: This article is only a summarised and very general look at a complex area of the law.  It should not be relied upon for personal advice or action. Any one with family trust or other legal problems should consult a lawyer who is an expert in the area of law that concerns them.