Trust Law - With Vicki Ammundsen
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Transcript Commences
Chris Patterson 00:06
Hello and welcome to the Law Down Under podcast with barrister Chris Patterson. We will give you insights into the law in New Zealand and Australia, its application, and the law's future. Each episode features a new guest who will inspire interest in the law and give you a greater understanding of the legal issues that have helped shape our justice system down under. We thank you for tuning in and enjoy the podcast. I have with me in the studio today, Vicky Ammundsen, who is the director of Vicky Ammundsen Trust Law, specializing in all areas of trust and estate law and practice. She is the author of several texts on trusts and trustees, including trustees' liability, A Practical Guide to legal issues for older people, the trustees' handbook, and the taxation of trusts. Vicky is a highly regarded conference and webinar presenter and further created the blog "Matter of Trust." Vicky's approach to trust law is practical, but it's also grounded in a good understanding of trust law principles related to legislation and case law. She has extensive experience in the creation and management of client trusts, believing they play a central role in modern family and business management. Good morning, Vicky. How are you?
Vicky Ammundsen 01:19
Good. Thank you. And good morning, Chris.
Chris Patterson 01:21
Look, it's great to have you here. We've got a lot to cover because trust is actually a very broad and wide topic. And, boy, I'm really looking forward to this. So the first question that I've got for you, and I've just been dying to ask someone who might know. And really, Vicky, I think you're probably the most qualified person that I've come across for a long time on this. Is the modern trust, does it actually serve any practical benefit to society?
Vicky Ammundsen 01:51
A really good question. My first sort of facetious answer would be yes, because that will put my delicious granddaughter through her private school education. And so I have to say yes, and the reason I say that is because historically, trusts have proven themselves as the best form of long-term intergenerational asset protection. But they're not magic, and they're not perfect. And one of the practical realities of trusts is the earliest evidence of a trust or example was what used to be called the "use," and someone incredibly clever, whose son? And when you have those questions, who would you have for your, you know, your fantasy dinner party, and one of the people at my dinner party would be the person who came up with it because the very first example of a trust is allegedly around the time of the Crusades. People worked out pretty quickly that the Crusades were pretty much one-way trips, and you were unlikely to come back. At that point, you couldn't, if you were your average man on the street, so to speak, own farming land, and you've got a wife and some children. But you couldn't bequeath that land by will, and in the event that you did not come back from the Crusades, the land would pass to your feudal overlord. And the wife and children would be literally out in the cold, which was pretty grim for them. So the very earliest and recorded examples of what we now consider a trust was the construct of a might-have-been caught up in the Crusades. "We all know I'm probably not coming back, so I'm giving you my land, and it's not for you. You're going to own it, but it's going to be for the benefit of my wife and children." And I expect that there was a little subtext. And in the unlikely event I come back, you have to give it back to me. But of course, no one ever came back, so that never got tested. So the thing about trusts is that they're the first trusts were constructed, created, or whatever terminology you want, with the best of intentions, but they have always been an avoidance device. So what that means is that the first trusts were reflective of the fact that bequeathing assets by will was not possible. So there's always been this sort of jump step of every time trusts could exploit an advantage, then they would be, you know, commonly a legislative change, or it might be a change in common law, so there's always been this ongoing chicken and balance. And you could use that and say, well, see, that means they've always really been bad. Or you could say to the converse, see, they've always been inherently good, but they must be constantly moderated. So trusts have existed for hundreds of years, and historically, I think it's indisputable that they have proven themselves to be the best form of long-term intergenerational asset protection. But you've got to have them for the right reason. And, for example, in a very good reason, my oldest child is autistic. He is the father of my delicious granddaughter. But my son is an example of somebody who a trust is potentially a really good idea for because he is someone who could potentially be persuaded to make some foolish financial decisions. He's at the upper end of children on the autistic spectrum and can function quite well. Another example is I share the care of a special needs boy. He is 34 years old, but don't tell him that; he thinks he's 33. We haven't had the birthday party yet because of COVID. Unfortunately, you can keep on telling him, "Yes, it will be your birthday," so that he could never own money; he will never have legal capacity. So for people like my son and Joseph, trusts are an opportunity to protect wealth that might be created in a single generation, but to ensure that it's properly managed for future generations. The other thing that trusts have shown themselves to be particularly good for is when you've got significant wealth. If you die, and particularly you've got a large family, as did fragmented among the family members, whereas trusts allow that wealth to be amalgamated so that from great wealth, you can grow greater wealth than you can if you fragmented it. And if some of the family members aren't as capable as others, they get the benefit of good management so that all of the family benefit consistently from generation to generation. Where trusts have been problematic, though, is in most jurisdictions, trusts must come to an end. That is why some of New Zealand's big families have used trusts and have had to manage that transition from the end of one trust to the start of another very carefully.
Chris Patterson 06:55
What we might do over here. So I think we'll come back to that point because we're jumping over quite a few topics. And I know that listeners will probably want a deeper dive into some of those points that you've made because you made some amazing points. I know I'm super keen to explore some of them with you in a bit more detail. Let's take a step back because, well, put it this way, a number of the listeners come to this podcast with a different level of knowledge around law and trust law. As you know, it's a somewhat cloaked in mystery because of its historical origins, like you rightly say, it goes back hundreds of years. Why don't we start off with, first of all, how would you in layperson's terms describe what a trust actually is?
Vicky Ammundsen 07:44
You can look at it two ways. One, you can look at the definition, and the trust state. And for anyone who's not familiar with trusts, New Zealand got a new trust state law that came into full force and effect last year. At the very fundamental level, a trust requires three things: you must have certainty that the trust is intended, you must be able to identify who can benefit, and you must be able to identify trust property. And that, at the really simple level, it's as simple as that. You do not even require a written document.
Chris Patterson 08:18
Okay. So, I guess it probably reflects to a degree the historical context of trust law and New Zealand, in particular. I mean, trusts were a creation of the courts, or well, at one point, the courts of Chancery in equity, as it, as it were, right? Yep. And New Zealand, of course, when we were settled, like Australia as well, there was somewhat of a fusion or merging between the common law courts and the courts of Chancery and equity. So we have here in New Zealand, we've got our High Court, which generally will deal with most trust issues. And likewise, in Australia, most of the states and territories have the Supreme Courts, which also have the same structure. But in some of the states, I know, in New South Wales, they still have an equity court. So, they've, although it's a division of their Supreme Court. Well, does this reflect somewhat that historical shift? And you've mentioned that we've got a new act? What has the new Act primarily brought to the table in terms of our laws here in New Zealand?
Vicky Ammundsen 09:37
What the new Act has brought to the table primarily as it melds what the common law was called the three certainties, which are those fundamental aspects of a trust. But it also confirms
Chris Patterson 09:48
so just to recap, so intention as a person
Vicky Ammundsen 09:51
to have intention, who can benefit, and property. And property, Okay, great. But what it also does is it recognizes the fact, just going back to the early example of the Crusades, the division of legal ownership and beneficial ownership, so that how trusts work is that you've got the trustees who you might consider the legal face of the trust. You might settle a family trust for the children and wider family. They can be the trustees, they don't have to be, they can have a professional trustee as well. Can
Chris Patterson 10:22
Let's explore this. You've mentioned settlers, what's the role of a settlor versus a trustee?
Vicky Ammundsen 10:30
The settler is the person or persons who have that initial intention. Some trusts are actually settled by trustees, by way of declaration in the trust deed.
Chris Patterson 10:41
Okay. So this goes back to that first essential element, all three elements of trust. And that's that certainty of intention, and this is where the settler will often play a role, correct?
Vicky Ammundsen 10:51
Yes. And the role of the settlor at times is overstated because all they do is they start it. So if you've got a conventional trust deed, a trust, you'll have a trust deed, and you'll have someone named as a settlor. Historically, in New Zealand, prior to, well, prior to the Trust Act, we used to have a certain estate duty. And so back then, trusts were commonly set up. There might have been a family with a reasonable amount of wealth in a farming family, for example, a classic use of a trust. And an M is, two reasons that farms are big uses of trusts. Well, they can be big wealth. In fact, three reasons. One, they can be big wealth. Two, they can also be to avoid that fragmentation so that you don't end up having to divide up the farm on death, because, you know, one farm, three children, you know, do the math, you can see the problem. And then the other aspect of it is perhaps farms, almost more than any other trusts, the benefit of specialized trustees who have specialized knowledge and can properly guide is really important. And so, you've asked about trusts in New Zealand. New Zealand started really adopting trusts. The first ones were mostly around the '60s, and up until then, trusts were virtually unheard of. And by that, I'm not talking about testamentary trusts that might arise under a will, but an inter vivos trust, or trust settled during someone's life, up until the '60s were largely unheard of. And then New Zealand started to become more popular and handled along until the '90s. And in the '90s, they really took off. Can I
Chris Patterson 12:38
Can I just jump on the edge? So one of my first jobs that I've ever had, in fact, I don't think I've ever had a better job since, I was working for a small provincial rural law firm in central Hawke's Bay called Mackay Mickey. And one of the founding partners of that firm was Kevin Mackay. And I understand his brother, Ian Mackay, was a president of the Court of Appeal at one point. Anyway, Kevin, when I was, this was going back to the early '90s when I was working there as a summer clerk. It was such a great job. Kevin would come into the office at about 10 o'clock in the morning, and he'd leave at about 2:30. And he would have been in his late '70s. And I said to him, "Well, why do you keep coming in here?" He said, "Well," he said, in the '70s, he said, "I formed a lot of trusts, like a lot, in fact, more than anyone else in the country." There was a lot of work done. He said, "And here we are, 25 years, a quarter of a century later." He said, "it's actually growing a lot." And he said, "there's a lot of work to be done." And he said, "this is just how trusts are going to operate going forward. They're something that will be intergenerational, and they will keep legal practices, like this one, busy for four decades." I mean, has that been your experience looking at trusts that have been around for a few years?
Vicky Ammundsen 20:56
Yes, the scenario you've described is quite accurate. There was a time when owning rental properties in New Zealand through a trust was a popular strategy due to potential tax advantages. It was believed that this would allow property owners to offset their income against the costs of holding the properties and enjoy tax-free gains. Many people were encouraged to set up trusts for this purpose. However, it's crucial to note that tax laws and regulations have evolved over the years, and the advantages associated with owning rental properties in a trust may not be as significant as they once were.
The New Zealand government has introduced various measures to address the perceived tax advantages associated with property investment in trusts, such as the introduction of a bright-line test to tax capital gains on residential properties. As a result, the tax landscape for property investment has changed, and owning rental properties through a trust may not provide the same benefits it once did.
It's essential for individuals to seek professional advice and stay updated on current tax laws and regulations to make informed decisions about property investment and trust structures. Trusts can still serve various purposes, including asset protection and estate planning, but their use should be based on individual circumstances and goals while complying with relevant tax laws and regulations.
Vicky Ammundsen 21:25
Huge driver behind it. And to a certain extent, it could work. But it depended on being very clear which trusts owned what. And so what people would commonly do, they'd settle one trust to own the family home, because that was sacrosanct, then there would be another trust, that might own shares. And a lock three company used to be as seen last tribute and qualifying company, or those shares might be held personally for a period of time. So that you would have call it the Bank Trust or the asset trust that you'd borrow against. And so that would provide security for the trust or company that was going to own the rental properties. So there was still exposure to the bank, but not to anybody else. And so in that way by dividing up that ownership, you can then use one trust for the deposit to borrow. And then the other trust would borrow the rest of the borrowings. So the reason you needed the trust and the was to create this differential ownership, even though ultimately it might be the same set laws behind it. But where some of them got really unstuck is, you know, in negative equity, and in negative gearing, you know, those were the buzzwords, and at that point, deposit requirements were very low. And so you could make those schemes work. And I say scheme, not because it was necessarily anything bad about it, but it was a plan in your head to follow it through. And where people started getting into trouble is the wrong trust would pooch us or they would, in some of them where they really started to make serious money. They'd register for GST. And so the property is that the family home owning trust would not be registered, but the others might be registered. And so that meant because they were then saying we've got an activity we're actually carrying on a taxable activity. So we're not just buying rental properties for a long term hold, we're trading. So then they could claim a GST input tax claim the GST input tax purchase on the purchase. So that was funding the deposit. And so if it was managed well, it was really good. But then we started to get a lot of inflation, and the Fritzt going in became a lot more GST going out on the sale. And on the sale. So it started to unravel a bit. But the basic premise of keep your, keep the things that are important in a trust that doesn't own your risky things, that model can still work really well now, because.
Chris Patterson 24:11
This is your kind of your asset protection, creditor protection model. Look, one concept, one trust label, or can be defined as a sort of a label applied to some trusts that I wanted to cover off with you is the concept of a sham trust. And I'm thinking of Regal Castings and Lightbody, you know, the sort of scenario where the use of trust structures or shall I say, a misuse of them isn't accepted by the courts and the courts say, well, we're not going to recognize that as a trust. So what's a sham trust?
Vicky Ammundsen 24:49
A sham trust is a very, very rare beast, we're talking more in reality, but it's a term that is used a lot. So, if we just take one step back to your real castings type scenario, commonly, you've got these valuable assets in a trust, and you might have a business. And you're gifting off in so how trust used to work because we used to have gift duty, you know, Chris couldn't take his multimillion-dollar property and say, gosh, you know, I didn't know Vicky gave me some advice, and it was, you know, I'm thinking she might sue me. So I want to protect it from here and my next girlfriend or whoever it might even be, my children, I don't want them to have a crack at it.
Chris Patterson 25:30
Yeah, all of those reasons. And so I'm going to put it into a trust. Nowadays, you can put it into a trust, and you can gift everything, and there's no gift duty. Back on the Regal Castings days, you couldn't gift, if we think you could only gift off at 27,000 a year. So there'd be these gifting regimes that would go on every year, that accountants would prepare a gifting statement and forgiveness, data forgiveness, etc. Whereas that's not there anymore. And actually, it's a real pity it's not. And I'll explain why. Because back then, you could only gift off, say, $270,000 for obvious reasons, because trying to divide $70,000 by 10. So I could gift off $27,000 a year. So I would sell the asset that I own to the trust, try and $70,000 immediately forgive $27,000. And then each year thereafter, would forgive another $27,000. So I would have an exposure still, for example, to a creditor, up to the amount that has not yet been forgiven. But any capital gain is protected in the new trust. And what happened in Regal Castings, though, is that there were three trustees of the trust. It was a gifting program continuing. And what the other trustees didn't know about was that there'd been a guarantee given to some trade creditors. And so when they were doing their gifting, what the court decided is that even though the other trustees didn't know that when Mr. Regal was making his annual gift, I'll call him the name is not quite correct, but it sort of makes sense here making his annual gift and you go to that little meeting, and the CO trustee is the lawyer or the accountant who has been involved from the start. They didn't know about this guarantee that was fluctuating year in year out. And so what happened when the gift was made is that they were imputed with the knowledge that one year when he made the gift, it was to defeat creditors. And so it didn't make the trust a sham. But it had the same sort of effect because it meant that the gift was in effect void, because even though the trustees who were affected weekly receiving the benefit of that forgiveness of debt, they're infused with his knowledge.
Chris Patterson 28:05
And this is where our Property Law Act would click in on that idea of a person distancing themselves from an asset in this case, it's a debt, but with the intention to defeat creditors, and that can be unwound Korea.
Vicky Ammundsen 28:21
If you're defeating creditors, it doesn't make the trust itself a shame. But it means the transaction whereby you've transferred assets can be unwound, in whole or in part.
Chris Patterson 28:32
Okay. Now, there's also another concept, which is really, for some, mainly creditors, to attack trust. And that's the concept of an alter ego, where they say, this was never actually ever a trust in the first place. Now, as that going back to your point of the three essential elements of trust, and that certainty of intention that we're at fits on these two things.
Vicky Ammundsen 28:54
There, one, it goes back to that certainty of you know, those elements to make up a trust, but if you've got a sham, or what might be referred in some jurisdictions is an alter ego. What you've got, there is something that on paper looks like a trust. But you and I would do something like we'd say, okay, Chris, here's my trust date. I'm going to name the trustees as you and me or you and whoever. But really, it's just me, and we'll put it away, and we're never going to talk about it. But if anything bad happens, we'll pull it out. And then we'll go Tada. Oh, it was a trust. And so it
Chris Patterson 29:34
sits in a drawer for 15 years gathering dust where you just behave like life goes on. And then as a form of insurance and a claim comes in for some reason, and you go oh, I've got this trust deed, let's pull it out and and think about it for the first time in 15 years.
Vicky Ammundsen 29:53
And that would be what is called a sham. Or because what you've got is that you never intended a trust, you go back to the Susan Hayes. And although we had a trust deed, that was all just a big fat lie.
Chris Patterson 30:05
So what you're saying here, Vicki is us. We're, you know, the action subsequent actions since the formation of the trust, the courts can draw an inference to say, well, they can't have been the intention here, because you actually haven't treated it as if it as a trust since it was formed.
Vicky Ammundsen 30:22
No, believe it or not, no, it sounds right. But it's not so that what used to be called an emerging shame. So sometimes what happens is, you might start off with a perfectly good intention, you're not intending a shame, you don't do it properly. You don't have trustee meetings, your independent trustee has got no idea what's going on? And so And why do you want it to be a shame? Well, let's say that you're in a relationship, and all of the assets are on a trust, and then the relationship turns sour. And then you know, the partner or spouse realizes that hang on a minute, these no relationship property, shock horror. So ignoring the remedies for now, under the property relationships act, it's very common in relationship breakdowns to argue it's a shame, because if it's a shame, even though we might have all the legal niceties, and Chris's name is on the title as one of the CO trustees, if it's a shame, it's nothing and it goes back. And so then my relationship partner, or if it's a business creditor claim, all those assets are really still the case. And so they're available to those creditors. But the reality is proving a sham is incredibly difficult. And when we got the trust sec, that we talked about at the very start, one of the things that the Law Commission looked at is should we say in the trust what a shame is? So rather than just have this, what does it need? What do you have to have to have a trust? Should we say what we have to have to not be a trust, and he was a purposeful decision made, that we would not do that? Because the Law Commission didn't want them to be a target. They didn't want people to be able to say, okay, that's what a shimmers. So we'll go as close as we can, but not quite get there. So we can make it look like a trust, we don't have to do anything. But it's still a valid trust if we need in. So there are very, very few cases in New Zealand where shame has been found. But what I think we're going to find happening moving forward, is this gonna be something worse than a sham?
Chris Patterson 32:29
Okay, that sounds frightening, what and what would that be?
Vicky Ammundsen 32:32
Breach of trust. And so what's going to happen? And we're starting to get the first nibbles now, because what the trust SEC did is what much of the trust it restates the law. But one of the things that did is it changed the legal test or obligations regarding disclosure. And so and so what that means is that you'll hear us talking about we've talked about, you know, what is the trust, you know, you intend to trust, you've got some stuff and you've got some beneficiaries. What does it mean to be a beneficiary of a trust? Okay.
Chris Patterson 33:09
So I understand from the Law Commission that one of the main recommendations that they made, which seems to have made it into our Trust Act is creasing the amount of information that beneficiaries can get? Can you tell us what the limits were prior to the Trust Act? And then what the Trust Act did to change that in terms of information flow between beneficiaries with trustees?
Vicky Ammundsen 33:32
Yes, I can. There's effectively a two-stage process up until about 20 years ago. If you wanted information, you had to show that you were what is often referred to as a final beneficiary. So trust then could last for 80 years, generally, now they can last for up to 125. And because most New Zealand trusts that we're talking about today are what are called discretionary trusts, you get what the trustees give you at their discretion.
Chris Patterson 34:03
Okay, right. So with the discretionary Trust, which I agree with you, that's my perception that the large majority trust in New Zealand family discretionary trusts, you have the trustees who often formed the trust, and one or more of there may be a final beneficiary. And then there'll be a list of these discretionary beneficiaries, which often are family members, maybe the next generation down. That's your experience.
Vicky Ammundsen 34:29
Usually, the final beneficiaries might be children or grandchildren. And that reflects the fact for how long a trust can last is a big misunderstanding, in my view, over what a final what it means to be a final beneficiary. And my view as a final beneficiary, all you are is your repository for if the trust comes to an end, and all these assets, let's say it's around it's it's 80 years or it's 125. All those final beneficiaries really are Ah, that goes back to the certainty so that we know, if the trustees never did anything, or the staff left, who's going to get it when it ends. However, the rods, the place of the final beneficiary has often, to my mind, been artificially elevated. But why it was important for disclosure is up until about 20 years ago, if you wanted information, you had to show that you had a proprietary interest in the trust, not a discretionary interest isn't you get what the trustees give you. And so to get information, you had to show you're a final beneficiary, and not many people actually meet that test.
Chris Patterson 35:40
So the discretionary beneficiaries kind of have this almost like contingent interest in trust is contingent on the trustees going, Yeah, we're actually going to make a distribution to these discretionary beneficiaries. It's only the final beneficiaries that actually have a proprietary interest in the trust property.
Vicky Ammundsen 35:59
Correct. And so about 20 years ago, a case called Rosewood mismatch, the court said, Hang on a minute, this is wrong. You don't have to prove a proprietary interest. Because exactly as you just said, Chris, as a final beneficiary, you've got what the courts in New Zealand and Johnson Johns called a future contingent proprietary interest. So lots, you've got nothing unless you get to the end, and you're still alive, and there's still property. So what the courts then started saying was, well hang on a minute. If you're a beneficiary, you've got a right to be considered. He's got to be more. And so what the court started doing was saying, if you ask for information, then the trustees have to seriously consider giving it to you because that's how you ensure the due and proper administration of the trust. But prior to the trust act, the test was one no obligation, generally for discretionary trust, to tell someone they're a beneficiary. And so there was no positive obligation. And if anyone wants to question that, we lost a case a couple of years ago against the New Plymouth family court, when we tried to argue that if the trustees didn't tell the beneficiaries, surely it was the court's obligation. And the court said, No, not their obligation, not ours. And so at that point, but if you knew or suspected, and you asked for information, then it was an exercise of discretion for them with no presumption either way. So okay.
Chris Patterson 37:49
So can I just run a couple of concepts past you? The first idea is this. It does seem to me to make logical sense that the person who's or a person who's going to be interested in whether trustees are actually discharging their duties, there's going to be a beneficiary because they've got an interest in making sure that the trustees are actually doing the job. Right? Would you agree with that?
Vicky Ammundsen 38:12
Yes. Theory? Very big interest? Yeah. Okay.
Chris Patterson 38:14
And the second part to that is that the trustees may actually possibly be in conflict with a beneficiary. And I've just given one common example. And that is where the family has separations within the family. So you could have the children from the first marriage. And then you've got the children from the second marriage. And then you've got a trustee who was the husband or the wife from the first marriage, or a grandparent from the first marriage. And there could be a scenario where you've got, effectively two interest groups being tied up in one trust? Is it something you've come across?
Vicky Ammundsen 38:56
Yes, it does. And often that comes down to bad or ill-considered drafting. So what the Trustee Act said is that the law changed so that we went from this exercise of discretion to a presumption that trustees will give basic trust information to every beneficiary. Okay.
Chris Patterson 39:17
So far more of an open-book scenario. So that if you're named as a beneficiary, you can get access to presumably not all information that the Act has categories of information that trust beneficiaries can get.
Vicky Ammundsen 39:36
There are two things going on. One is the presumption of basic information and the basic information is literally that it's basic. You are a beneficiary. These are the, this is how you contact the trustees. There's also an a presumption that every time there's a change of trustees, you update the beneficiaries. You can ask for trust information, including the trustee deed and any other information, which the
Chris Patterson 40:02
makes sense because if you're being named as a beneficiary, you should be told that you've been named as a beneficiary of a trust. I mean, it's kind of ludicrous that you'd be there and not know that you're a beneficiary of a trust. You would think.
Vicky Ammundsen 40:15
But then you've got to go back and look at the trust deeds. So what the Act also sees as that's the first starting presumption, but how do trustees make that decision. And these factors sit out in the act, huge range of factors to take into consideration and deciding whether or not to make that basic information available.
Chris Patterson 40:35
Okay. So let's jump back a little bit. What part of all of this is so that the beneficiaries who have got a vested interest can actually be in a position? Because knowledge is power? So to know whether or not the trustees are discharging the duties, what are the core duties of a trustee?
Vicky Ammundsen 40:55
The most core duty is the duty of utmost fidelity and good faith. Okay, what does that mean? That means that you manage the trust assets for the benefit of the beneficiaries. But this is where it gets tricky. Because if your trust is a simple trust with a small class of beneficiaries, with the beneficiaries might be, you know, Chris, and his spouse or partner and children. That's pretty straightforward. But a lot of our trust deeds, particularly back in the 80s and 90s, had huge classes of beneficiaries. So they might name it relative to the sixth degree. So you might actually have a really large class of beneficiaries.
Chris Patterson 41:34
For example, a family who have got a large tract of land that's owned across structure might name literally hundreds of beneficiaries.
Vicky Ammundsen 41:47
Correct. I want advice on a trust deed with beneficiaries where every person in New Zealand, it's a family trust. And so part of that obligation, or the presumption that you will make information available is identifying within those classes. And sometimes beneficiaries are there by name, sometimes they're in a class, it's identifying by reference to perhaps what the settler intended, what the value of the assets, you know, if you've got a bigger assets that might warrant further disclosure, not many assets, not so much disclosure. But but this is where it starts to go back to your example of the blended family, where you might have a trustee who is sided very much with the first family or the second family, if they don't properly execute the duties and respect of both limbs. That's a breach of trust.
Chris Patterson 42:39
So what are the consequences for a trustee if a court says you've breached your duties and there's been a loss suffered by the trust?
**Vicky Ammundsen 42:50**
If you've breached your duties and there's been a loss suffered, you can be required to make good the trust. Even if you are an independent, even if you didn't benefit from the trust, there's a case called Spencer and Spencer. That's where a trust was settled following a relationship breakdown. The trustees were Mr. Spencer, his lawyer, and his accountant. The trust was meant to pay a fixed amount to one of his children. However, over time, his co-trustees allowed the trust to enter into some pretty sweetheart management deals, lease arrangements, and the trust ran out of money. Consequently, the trust was sued for not making those payments. They felt they had acted with the friend's interests in mind. The court made it clear that as a trustee, you should avoid mixing the moral ideas of duties with honesty in a trust context. You are effectively a functionary or an automaton who works with precision to identify the beneficiaries, their needs, stays informed, and makes decisions.
**Chris Patterson 44:06**
Okay, so what happens if you have three trustees and one of the trustees has gone a bit rogue and has breached duties as a trustee? Are the other two trustees liable for that?
**Vicky Ammundsen 44:20**
That's a good question. Some trust deeds will say you have no obligation as a co-trustee to sue your co-trustees. However, when that happens, it is generally incumbent on the remaining trustees. If they can't get the rogue trustee removed and deal with the breach, they should go to court for directions. However, trustees are often reluctant to go to court because it's a public forum, it takes time, and it costs money.
**Chris Patterson 44:51**
Well, who pays for that? If one trustee says, "We've got a rogue trustee who won't step down, and we need to get directions from the court. We have $300,000 in the Trust Bank account, so there's money available. Can we use that money to fund these applications?"
**Vicky Ammundsen 45:10**
They can, but there can be a sting in the tail. Generally, trustees assume that anything they do for the trust will be paid for from the trust. However, for that to happen, it must be a properly incurred expense. There are two ways to determine if something is properly incurred. You can file proceedings or defend proceedings, using money from the trust. But when you reach the final court decision, the court might say that defending that decision was a bad idea, and you will be incurring costs. Cost decisions have become very detailed, and the court may say that up to a certain point in the proceedings, it was reasonable to use trust funds, but beyond that, it was not. So you might get part of your costs from the trust, and the rest you'll have to cover personally. If you were largely unsuccessful in the proceedings, you may have to pay the beneficiaries' costs. To avoid this issue, trustees can seek directions or request a Beddoes order to determine if an action is proper and if they will get their costs.
**Chris Patterson 46:48**
Can opposing parties, such as beneficiaries or others, try to prevent trustees from using trust funds for these applications?
**Vicky Ammundsen 47:11**
Yes, in most cases, beneficiaries, more often than not, are the ones challenging and saying they don't want the trustees to use trust funds to cover costs because every dollar spent on trustee legal fees is a dollar less available for the beneficiaries. Bureaus applications are meant to be quick and straightforward to get a decision from the court. These are heard independently of the main proceedings, but there are requirements and details to consider. Fortunately, we got high court rules last year that will make the process easier, as there wasn't absolute consistency in how applications were heard or their requirements before that.
**Chris Patterson 48:02**
Were these applications typically filed as part 19 originating applications or as a statement of claim?
**Vicky Ammundsen 48:08**
There wasn't always consistency in how these applications were filed or their requirements. However, new high court rules should make the process more standardized.
**Chris Patterson 48:18**
Being a trustee seems challenging and risky. Why would someone want to be a trustee when there's potential personal liability and significant costs involved?
**Vicky Ammundsen 48:38**
Many trust deeds include indemnities. However, these are now subject to the statutory indemnity in the Trust Act. Trustees can't completely immunize themselves, even if the trust deed allows it. Some trustees get an indemnity from the settlor, but this can be problematic if all of the settlor's assets have been transferred to the trust. Trustees can also consider getting insurance to mitigate risks.
**Vicky Ammundsen 49:33**
Trustees can get insurance; it's not common. If you're a professional trustee, it will commonly be covered under your professional indemnity insurance. Some, as a group of trustees, can get insurance, but there are not a lot of products on the market. You can't insure against everything. For example, if you don't pay your taxes, you can't get an insurance policy that covers you if you didn't pay income tax or GST. A good example is the case of Selkirk and McIntyre, where a commercial property was sold with GST registered. The GST wasn't returned because the professional trustee thought the co-trustee would do it, but they didn't. When the Inland Revenue Department (IRD) came knocking, it was all on the professional trustee. The penalties grew larger, and eventually, the trustee was told to pay the GST or recover it from the co-trustee, or they'd go bankrupt. This led to court proceedings, not over the payment of the tax, but because the professional trustee wanted an order that the co-trustee had to repay it all. The court ruled that both trustees were required to meet a proportionate share, but they would only order one trustee to pay in very limited circumstances.
**Chris Patterson 51:08**
This is when a trustee is acting in a personal capacity. What about the use of corporate trustees? What is a corporate trustee, and why would someone use one?
**Vicky Ammundsen 51:18**
There are two types of corporate trustees: statutory corporate trustees like Public Trust and Perpetual Guardian, and more common corporate trustees that don't have any assets. Some people view them negatively. Personally, I like corporate trustees if used correctly. I have two reasons for that. Firstly, having a corporate trustee means I get reminders to file tax returns and annual company office returns, which keeps everything on track. It ensures you don't overlook the trust's obligations. The second benefit is that if you need to change trustees, it's much easier with a corporate trustee. Instead of conveying all the trust's properties to a new trustee, you can manage the transition by changing shareholding and director appointments. Some may find this approach unconventional, but it's entirely transparent, and I always get permission from the bank. It simplifies the process of changing independent trustees over time.
**Chris Patterson 53:05**
It can save a lot of administration and cost.
**Vicky Ammundsen 53:08**
Yes, it can. However, corporate trustees also come with extra reporting obligations due to FATCA and CRS. When a non-natural person becomes a trustee, it can trigger greater reporting requirements. Using corporate trustees can help you do the job of a trustee more effectively. It ensures you don't forget about trust obligations. But there is an extra layer of obligation that comes with corporate trustees, as you have to meet all the obligations of a company. If a corporate trustee is used to avoid tax liability, it can expose the trust to greater reporting requirements.
**Chris Patterson 54:23**
Is there a risk that if you have one corporate trustee managing multiple trusts and something goes wrong with one trust, a claim is brought against the corporate trustee, and you could end up with a liquidator who calls upon the assets of other trusts, even if they are not related to the issue?
**Vicky Ammundsen 55:00**
Typically, other trusts are isolated, and claims related to one trust don't affect the assets of other trusts. However, there might be scenarios where cross-guarantees or other arrangements exist. When using a corporate trustee for multiple unrelated trusts, if one trust faces an insolvency event, all the other trusts will need to appoint a new trustee. In some cases, it may create additional reporting obligations due to FATCA and CRS, as bringing in a non-natural person as a trustee can trigger greater reporting requirements.
**Chris Patterson 56:03**
That's quite extraordinary. Now, let's talk about the appointment of trustees, retirement, and removal. But before that, could you explain what a bare trust is?
**Vicky Ammundsen 56:17**
A bare trust is a situation where you hold an asset, and it's not yours. You've been given something, and you say, "Hold on to this, don't do anything with it. You can only do with it what I tell you."
**Chris Patterson 56:40**
Say I've got a really nice piece of artwork. I can give this to you and say I want you to hold this as a bare trustee for me.
**Vicky Ammundsen 56:49**
And that means I don't have any discretion. I can only transfer it as you direct. From a tax perspective, if I'm holding an asset as a bare trustee, the Income Tax Act looks through me to who the true owner is.
**Chris Patterson 57:24**
Correct. If the trust deed sometimes specifies how a trustee retires, you follow those instructions. However, in some cases, when professionals want to retire, co-trustees may be reluctant to let them go. You can't prevent someone from retiring, but retiring to avoid liability is not allowed. Trustees who retire or are removed may still be liable for any breaches of trust that occurred during their tenure.
**Chris Patterson 58:36**
What about when a trustee has gone rogue, and you need to remove them as a trustee? We were talking about the removal process. How does that operate?
**Vicky Ammundsen 58:36**
In contentious situations, you may need court assistance to remove a trustee. The Trust Act provides provisions that make it easier to remove a trustee. It could be due to a trustee going rogue or losing mental capacity. The process involves vesting the trust assets in new or continuing trustees and separately dealing with any claims against the removed trustee. In cases where court intervention is necessary, an application must be made to the High Court.
**Chris Patterson 59:42**
Alright. Let's jump to the tail end of a trust's life. For whatever reasons, a decision is made to wind up the trust. Who makes that decision?
**Vicky Ammundsen 59:42**
Some trusts have a power of revocation that allows for winding up. However, this is not common because it can risk exposing the trust assets to creditors if the settlor has the power to wind up the trust. The Clayton and Clayton case raised questions about trust independence, and the court considered Mr. Clayton's extensive powers as the sole trustee in that context. If the assets are worth $10 million, the trustee might need to account for $5 million in relationship property, which could affect the value of the trust assets. The best way to avoid these issues is to create trusts with more limitations, making it harder to unilaterally deal with trust assets.
**Chris Patterson 1:02:23**
Given a degree of independence from the trustee and settlor, what's involved in winding up a trust when it reaches its natural end or due to other reasons, such as a relationship separation or asset distribution?
**Vicky Ammundsen 1:02:23**
When a trust reaches its natural end as specified in the trust deed, the assets vest in the final beneficiaries, and the trustees have no discretion. They distribute the assets according to the deed's instructions. The trust's natural course concludes with the assets handed over to the final beneficiaries. The trustees ensure any taxes are paid, and the trust is closed.
**Chris Patterson 1:03:31**
Amazing. Look, Vicky Amundsen, author of several books, including "Trustee Liability: What Every Trustee Needs to Know," and its second edition published by CCH New Zealand. Thank you very much for coming on the "Law Down Under" podcast. Greatly appreciated. We covered a lot in this session, and it's evident that there's much more beneath the surface. I encourage people to check out your publications. Thank you so much.
**Vicky Ammundsen**
Thank you. Thank you for tuning in and listening to this episode of the Law Down Under podcast. You're welcome to join in on the discussion via my podcast page, which you can access at patterson.co.nz. That's p-a-t-t-e-r-s-o-n.co.nz. Thanks for supporting the podcast, and tune in again for more on the law, its application, and the future of the law here down under.