October 06 2010
Make sure it stands up to scrutiny
The Sunday Star Times recently published an article about Do-It-Yourself family trusts and how failure to manage them correctly can put the integrity of a trust at risk. This article provides some management tips for trustees so that you can best ensure your family trust will hold up to scrutiny.
Once you transfer property to a trust, it no longer belongs to you. It belongs to the trustees who hold it on behalf of the beneficiaries. If you continue to treat the property as if it were your own, then you run a very real risk of a court deciding that there is no trust if its existence is ever challenged.
A trust is not a separate legal entity, unlike a company. The existence of a trust is evidenced by proper administration and record keeping. The following are suggested as basic requirements.
Trustees should meet regularly to review the asset position of the trust, to consider the needs of the beneficiaries, and to review the financial statements and trust investments. Even if your trust’s only asset is the family home, we still recommend that the trustees meet and/or pass a resolution every year to confirm that the structure of the trust has been reviewed.
Trustees should maintain a file containing all documents relating to the trust including a true copy of the trust deed, details of beneficiaries, details of the assets and liabilities of the trust and any contracts entered into by the trustees.
There should also be a minute book in which all resolutions of trustees are recorded. You only need to record the fact that you have considered the financial position of the trust, its purpose, the interests of the beneficiaries and what your decisions have been. You do not need to put down all the reasons for reaching those decisions. The minutes should be dated and kept in proper order in the trust minute book for easy reference.
If your trust does not have an independent trustee, then there is an even greater obligation on you to keep good records as evidence that you hold property as trustees and not in your own names.
Ensure any independent trustee is treated as an equal trustee with you and consult all trustees prior to any decision being made about trust property. If the independent trustee acts simply as a ‘rubber stamp’ trustee, this may be evidence that the trust is simply your ‘alter-ego’.
Further, if an independent trustee does not properly take part in decision making, they may find themselves liable to compensate the beneficiaries for negligence for any resulting loss in the value of trust property. If you are a trustee for a family member or friend, then you should be vigilant in making sure that you are an active trustee - see more on this here.
If the trust earns any income, ensure it has a separate bank account and only conduct trust transactions through that account. Trust investments should not be mixed with your own investments.
Keep an efficient diary system to remind you about matters which require regular action; maintaining a gifting programme, reminders for preparation and filing of annual returns, income and other tax returns, and so on.
If you are to fulfill your role as a prudent trustee correctly, then you have a duty to manage the administration of your trust in the very best way possible to achieve the objectives for which it was established.