DIY trusts under siege

By ROB STOCK - Sunday Star Times

Man the battlements: Jonathan Cron, below, says trust accountants and solicitors use trusts to lock in clients.
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Leaky trusts could become the next great New Zealand financial scandal because many are so neglected they have fallen into total disrepair.

In his new book – Family Trusts in New Zealand – Jonathan Cron, of New Zealand Trustee Services, a private trustee company, calls for rapid government intervention to sort out trusts, three in every four of which he believes are providing little, or none of the protections, their settlors believed they signed up for.

"The mess we're uncovering every day leads me to conclude that the government needs to take action," he said. "I believe we will eventually be faced with some form of compliance regime requiring them to be administered in a correct and proper manner.

"The fact that experts in the field say perhaps 75% of trusts in New Zealand would be overturned if compliance were introduced should be a matter of great concern to those advisers who simply establish a trust, and offer no support services to their clients," he writes.

Those DIY clients intend to run the trusts themselves, but make a total hash of it.

Cron says it was not an understatement to say "most" trusts that he reviewed lacked things as rudimentary as a trust minute book, records stating why the trust was created, or any minutes recording why trustees made the decisions they did. In some cases, the neglect of any form of process in the management of trusts was profound.

"In some cases we see people who have not signed a trust document in 10 years, who say, `If anything had needed signing, somebody would have called us'."

Elementary errors are occurring, such as people completing only one year of "gifting" an asset, such as a family house into trust, meaning even if the trust was not deemed a sham, only a small proportion of the asset was owned by the trust, with the remainder continuing in the ownership of the settlors.

"I have lost count of the number of trusts we have reviewed where the sale of assets to the trust had not actually taken place as the certificate of title was still registered in the clients' names and not those of the trustees."

The DIY approach just does not work for trusts, he said.

"The solicitors and accountants are doing it from a self-perpetuating standpoint. They don't want their client to be involved with anybody else who could take them away."
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The cost of professionally administering a trust is around $250-$500 a year, Cron said, but many are not willing to pay. But, without professional administration, the errors people make can fatally undermine their trust.

TRUST TRANSGRESSIONS

Jonathan Cron outlines 10 common trust blunders

- People simply do not read the trust deeds that are prepared for them, and later discover what they have really signed up to. "A surprising number of people come to us having established a trust after a relationship had ended only to have us discover that their former partner is included as a potential beneficiary," Cron said, sometimes against their express wishes.

- Poorly drafted trust deeds that would allow a surviving trustee to resettle the trust excluding some current beneficiaries, for example, in the case of one of the settlor's dying, and the other settlor deciding to cut out one, or more, of the children.

- Rental properties running at a loss are commonly put into trusts ring-fencing the losses so they can't be used to reduce the settlor's income. In one case, Cron said, the settlor's own home was not in a trust, while their two loss-making rental properties were.

- Either the gifting programme fails and only the first gift is made, or assets are "placed" into a trust later, with no attempt at gifting at all. It is not uncommon to find people who have no idea, or record of what is in their family trust. Some are not even sure whether they have one or not.

- People running their groceries and personal spending through trust accounts, potentially tainting the trust.

- Capital is injected into a trust, sometimes by a non-beneficiary, such as a new partner, with no gifting acknowledged.

- Total failure to hold annual meetings, or keep paperwork, or a minutes book.

- Independent trustees who have no involvement in the management of a trust and who do not understand their duties at all.

- People failing to assign their trust as the beneficiary of their life insurance, meaning claims would not be protected from creditors.

- Gifting 100% of the shares of a company into a trust, thereby wiping out accumulated tax losses within the company.