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CLIENT NEWS: Family trusts: roles and responsibilities of Trustees

We know that there are as many as half a million trusts in this country, and when it comes to protecting the ownership of assets – a family home or farm from creditors – a discretionary family trust provides important protection, especially to the self-employed and those running a business.

There is a lot of interest in family trusts – and confusion – so it’s important to be clear about how they operate. Last month I wrote about who needs a family trust, and this month I will detail the different roles of people involved with a family trust and, in particular, focus on the responsibilities of Trustees.

Trust roles
There are three main parties involved in a family trust – Settlors, Beneficiaries and Trustees.

A Settlor is the person who creates the trust by transferring their property, money or assets to the care of the Trustees of the trust.  The Settlor settles the Trust with their personal assets.

Beneficiaries are the people identified in the Deed of Trust as the people who will benefit from the trust, and these can include the original owner/s of the asset/s (the Settlors). They may also include the children or grandchildren of the Settlors, for example.

Trustees are the people who manage the Trust according to the rules contained in the Deed of Trust. There tends to be two or more people on a family trust, and Trustees can include the original Settlors, family members and, often, an unrelated, professional Trustee such as a family lawyer or accountant.

Trustee responsibilities
If you are asked to be a Trustee on a family trust, think it through carefully.

Being a Trustee on a family trust comes with its fair share of responsibilities and obligations, so you have to understand what you are taking on.  The obligations can be equated with that of a company director.

They include regular meetings, keeping a record of those meetings (minutes) and acting in the best interests of all trust Beneficiaries. It is a serious commitment, and a long-term one.

As a trust lawyer it is not uncommon to see Trustees breaching their Trustee obligations to their beneficiaries and treat the trust asset as their own asset, on the basis that they were the original Settlor and the Trust’s assets are really theirs. 

The reality is that by creating a separate legal entity in which to settle your assets, you are no longer in direct control of the asset, nor are you the owner of the asset.  You become, in effect, the caretaker of the trust asset on behalf of the listed beneficiaries (and hopefully, your trust deed includes you, the Settlor, as a Beneficiary). 

My experience is, and recent cases suggest, that many Trustees do not fully understand their trustee responsibilities.  There is a growing body of law and litigation where Beneficiaries are suing their previous Trustees for poor decision making in relation to the erosion of the value of the Trust assets. 

Trustee responsibilities and obligations are in the spotlight, and change is coming. The Law Commission recommended in 2015 that a new bill replace the 1956 Trustee Act. The Trusts Bill aims to clarify and simplify trust law and trustee obligations. This new legislation is seeking to ensure good governance, accountability and transparency to Beneficiaries.

It is currently before Parliament and public submissions can be made until March 5, 2018.

The trustee duties that have been recommended in the new trust legislation are:

  1. To be familiar with the terms of the trust;
  2. To act in accordance with the terms of the trust;
  3. To act honestly and in good faith;
  4. To act for the benefit of the beneficiaries or to further the purpose of the trust in accordance with the terms of the trust;
  5. To exercise stewardship over the trust property for the beneficiaries or the purpose of the trust; and
  6. To exercise their [Trustee] powers for a proper purpose. 

These proposed changes have set the cat amongst the pigeons within the legal profession, with many law firms reconsidering whether they wish to provide the service of being a professional Trustee.

My advice is to exercise caution if asked to be a Trustee on a family trust, and ensure you are able to commit to the responsibility of the role.

To those looking at setting up a family trust, understand what is involved and ensure you choose Trustees who can act prudently and fulfil their obligations. Consider things such as Trustee succession planning, which is another topic altogether.

And, with any of this, it pays to consult with your lawyer before you do anything else.