Regular review (at least annually) and update of your Trust, its operation and investments is vital.
Is the Trust's administration in order?
At least one case (before the Taxation Review Authority) has held that despite there being a trust deed in place and an intention to create a trust, the administration of the Trust was so inadequate and the Trust assets so intermingled with those of the settlors, that the assets were actually not the Trust's but still the settlors.
In that case no separate bank account was in place for the trust, banking transactions were undertaken for the trust through the settlor's personal account; expenses were charged to the trust for children's basic necessities (the parents' primary obligation); there appeared to have been no meetings of trustees and there was no minute book for the Trust.
Law changes
Changes in the law have also impacted on the form and operation of Trusts, and the proliferation of Trusts has lead to greater focus on aspects of them by the Inland Revenue Department.
Provisions in the Property Law Act 2007 and decisions of the Supreme Court make it highly problematic that a Trust will be effective against business creditors if those creditors were creditors at the time the Trust was set up and had no knowledge of it or the effect of the associated gifting programme with the result that you were left with remaining assets which, given the nature of the business, were unreasonably small. You need to consider this aspect very carefully.
The Law Commission is currently undertaking a full-scale review of the law of Trusts. Please see our article Law Commission Review Of The Law Of Trusts for further information.
Trust deed
Let us go back to the beginning and start with the trust deed.
A review of your Trust Deed's terms, set up structure and ongoing administration should be undertaken at least annually.
Is there at least one independent trustee of the Trust?
Are trustees required to be unanimous in their decisions?
Does the trust deed have:
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Right of variation
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Right of resettlement
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Perpetuity period
Letter/Memorandum of Wishes
In addition to the Trust Deed the settlor usually completes a Letter of Wishes addressed to the trustees setting out the settlor's intentions in setting up the Trust. The Letter of Wishes (sometimes called a Memorandum of Wishes) indicates how the settlor would like the Trust to be administered (or distributed) particularly after the settlor's death.
Has there been any change in circumstances of any of the beneficiaries of the Trust or special needs which must be met?
Wills
In many Trust Deeds the power of appointment of trustees is held by the settlor and on death of the settlor often then transfers to persons named in the settlor's will or to the executors of the settlor's will. Are those named in the settlor's will still appropriate?
Are the settlor(s) wills in order and do they adequately address the power of appointment of trustees if the Trust Deed provides for the Settlor(s) wills to govern the power of appointment?
Money matters
Was the initial settlement of the Trust made? Trust Deeds usually provide for an initial sum to be settled on the trustees. Failure to pay the initial settlement sum may cause the actual establishment of the trust to be questioned at a later date which raises the question if the initial $10 settlement was not made does the Trust actually exist?
Is a bank account needed for the Trust and where there is an account do all trustees have equal signing authority? If your Trust bank account has only settlor trustees as signatories and the independent trustee is not involved you are clearly flagging that the independent trustee is there in a token capacity only which may impact unfavourably on the ability to rebuff a challenge that the assets of the Trust are not adequately separated from the those of the settlors.
Trustee minutes
All trustee decisions must be recorded in a minute on a regular basis, usually at least annually. Is the minute book for your Trust up to date and does it adequately record the decisions of the trustees? Have changes in trust investments, income distributions and the reasons for those been recorded?
Income allocations to beneficiaries must be minuted no later than 30 September in the financial year following receipt of the income by the Trust or no later than 31 March of the following financial year if the Trust Deed or any variations provide otherwise.
Gifts and debt reduction
Gift duty is to be revoked from 1 October 2011. The impact on gifting programmes will need to be carefully considered. There are a number of factors which settlors and trustees need to take into consideration before deciding to gift all outstanding debts or further assets after 1 October 2011.
Taxation compliance
Where a Trust receives income it can be held within the Trust as trustee income and taxed at 33% or can be allocated to beneficiaries and taxed at the beneficiaries tax rate. Annual accounts should be completed showing the movement in funds, the allocation of income and a tax return filed. The penalties regime of the Inland Revenue Department should not be dismissed when dealing with trust income, particularly the penalties for carelessness and adopting an abusive tax position.
Minor beneficiaries
Distributions to beneficiaries under the age of 16 years will be taxed at 33%.
Investment strategy
The review of the Trust should also include a regular review of the investments and investment policies of the trustees. What were the objectives of the trustees in their investment strategy? The lessons from the Re Mulligan (Deceased) case (where the trustee company was found liable for not insisting upon a balanced investment portfolio) make it clear that trustees who do not have a prudent investment policy which is reviewed regularly may well be personally liable.
In Mulligan a widow, Mrs M, received a legacy in the Estate of Mr M (Mrs M's deceased husband) and a life interest in the balance. Mrs M lived for a further 40 years. The trustees sold the main asset of the Estate, a farm, 16 years after Mr M's death. Subsequently, the trustees invested the estate's assets in fixed interest securities. This maximized Mrs M's income but significantly eroded the real value of the capital. The trustees recognised the drastic effect inflation was having on the Estate's investments yet did not take sufficient steps to address the problem. The trustees were therefore found liable to the residual beneficiaries.
The investment returns to the Trust should be reviewed, the investment allocation considered and changes in assets undertaken where appropriate. Wise trustees will seek independent financial planning advice.
Looking ahead
Having undertaken a review of your documentation, attended to gifting matters, completed the Trusts accounts and tax return and minuted all relevant decisions, anticipated activity for the Trust for the next year should be outlined and appropriate arrangements made to meet the needs of the activity, such as identifying the assets most appropriately realisable to meet financial needs and when they should be realised.
For further information, please contact Tony Fortune or one of our trust administrators, Kesha Meredith and Katherine McCarthy.
September 2011
