Issue 19, Spring 2014 Trust eSpeaking
TrusteSpeaking, No 19, Spring 2014
Welcome to the Spring edition of Trust eSpeaking. We hope you find thearticles in this e-newsletter are both interesting and useful.
If you would like to talk furtherabout any of the topics covered in Trust eSpeaking,or about trusts in general, please dont hesitate to contact us our detailsare above.
INSIDE:
Dying without a Will?
Messy,expensive and time-consuming
Mostpeople know that its important to have a Will and to keep it up to date. Butwhat happens if you die without a Will? You might assume everything will go toyour spouse or partner but thats not usually the case. In fact, dying withouta Will can mean a messy division of your estate between your spouse/partner andchildren.
Common Intention ConstructiveTrusts
Thenew weapon of trust law?
The widelypublicised separation and property dispute of Sally Ridge and Adam Parore sawthe High Court consider the concept of a common intention constructive trust.While well-established in Australia and England, this concept is relatively newin the context of New Zealand trust law.
Importance of an IndependentTrustee
Reducesrisk
The lawrequires all trustees to act independently and impartially. The termindependent trustee is used to describe a trustee who does not benefit fromthe assets of the trust. Often the settlors of a trust (the people whoestablished the trust) will also be trustees and beneficiaries. But it can alsobe worthwhile having another trustee to help ensure the trust is run correctlyand does the job it was set up to do.
Dying without a Will?
Messy,expensive and time-consuming
Mostpeople know that its important to have a Will and to keep it up to date. Butwhat happens if you die without a Will? You might assume everything will go toyour spouse or partner but thats not usually the case. In fact, dying withouta Will can mean a messy division of your estate between your spouse/partner andchildren.
There can be many reasons why somepeople die without a Will (the legal term is intestate). Possibly they triedto draw up their own Will and failed to get it signed correctly. They may havemeant to make a Will but never got around to it. Sometimes a person had a validWill but is unaware that their Will was automatically revoked on marriage. Itsimportant to talk about your Will with your lawyer after events such asmarriage, divorce or separation.
If you dont leave a valid Willthen the law has to make some rough and ready allocations of who should get what.The law doesnt take into account your individual circumstances or the needs ofyour dependents.
Sowho gets what?
The Administration Act 1969 setsout who is to benefit if you die without a valid Will.
If youleave a spouse or partner but no parents, children or other descendants: Thespouse or partner receives the whole estate.
If youleave a spouse or partner and children or other descendants: Thespouse or partner will receive the personal chattels plus $155,000 (withinterest) and one third of anything that is left. The children receive theremaining two thirds. If any of them have died, their children receive theirshare and so on for each generation.
If youleave a spouse or partner and parents but no children or other descendants: Thespouse or partner is entitled to the personal chattels plus $155,000 (withinterest) and two thirds of anything that is left. The parents receive theremaining third.
If youleave children or other descendants but no spouse or partner: Thechildren receive the whole estate equally and if any of them have died, theirchildren receive their share and so on for each generation.
If allelse fails: The next in line (in order of priority) are: anysurviving parent or parents; brothers and sisters (if any have died then theirdescendants); grandparents; uncles and aunts and their descendants.[1]
If youhave none of the above: Everything passes to the State. Dependentsand anyone who might reasonably expect to have benefited may apply to theNew Zealand Treasury which may pay out some of the estate to them.
Pointsto note
The spouse or partner who may benefit would includea civil union partner and any de facto partner or same sex partner. If theresmore than one spouse or partner, they must share this entitlement equally.
Personal chattels are defined to include almostanything that can be moved. These could be, for example, vehicles, boats,horses and equipment for them, as well as furniture and personal items such asclothing and jewellery.
The figure of $155,000 is current at the time ofwriting. It has increased steadily over the years and is likely to be increasedwith inflation in future. Interest is payable on this amount from the date ofdeath until the date when it is actually paid out. The rate of interest is currently5% pa but this is updated from time to time.
If theres a Will but it only deals with part ofthe estate, then the rules outlined above will apply to the part of the estatenot covered by the Will.
Makesure you have a Will
If you die without a Will, theprocess to sort it all out is usually slower and more expensive to get thenecessary High Court order for an intestate estate (called Letters ofAdministration) than it is to get probate of a standard Will. Special searcheshave to be made to make sure there are no children born out of wedlock and soon.
Just as with a Will, its possiblefor someone who feels they have been left out unfairly to bring a claim againstthe estate under the Family Protection Act 1955, Property (Relationships) Act1976 and similar laws.
Common Intention ConstructiveTrusts
Thenew weapon of trust law?
The widelypublicised separation and property dispute of Sally Ridge and Adam Parore sawthe High Court consider the concept of a common intention constructive trust.While well-established in Australia and England, this concept is relatively newin the context of New Zealand trust law.
Whatis a common intention constructive trust?
A traditional constructive trustis created where there has been no direct or indirect declaration of trust, butthat it would be unfair for a legal owner to have full beneficial ownership. Acommon intention constructive trust is based on the assertion that the partieshad a common intention for assets to be held for their equal benefit,regardless of the legal ownership of those assets.
SallyRidge and Adam Parore case[2]
Following the separation of SallyRidge and Adam Parore, the division of property between them was made difficultas the majority of the assets were held in two family trusts. Both Sally Ridgeand Adam Parore and their four children were beneficiaries of each trust. Sallyand Adam were also trustees of each trust.
The parties assets wererestructured so that the family home was owned by Sally Ridges trust and the businessassets held by Adam Parores trust. This structure was set up in early 2007 toprotect their family home from any trading liabilities of the couple. Theevidence showed that it was the intention of the parties that Adams trustwould fund the parties lifestyle and allow the income and assets of bothtrusts to be shared equally between the parties.
Its not clear whether Sally Ridgereceived independent legal advice in relation to the restructure, but it isclear that she was kept well informed, as she attended meetings with, andreceived email correspondence from, the lawyer instructed to put therestructure in place. Sally was, however, not particularly interested in thedetails of the restructure and relied on Adam to ensure the arrangements wereappropriate.
In mid-2008, Adams trustpurchased a company called Small Business Accounting (SBA). SBA was successfuland allowed Adams trust to fund the parties living expenses.
Sally Ridge and Adam Paroreseparated in 2010. Sally claimed that the parties had a common intention thatSBA would be held equally for the benefit of the parties and therefore Adamstrust was holding half of the shares in SBA on a common intention constructivetrust for her trust.
While few, if any, cases of acommon intention constructive trust have been recognised in New Zealand,the Australian and English authorities are clear that such trusts are foundedon proof of a subjective common intention, clearly and unequivocallyestablished by words or conduct.
One problem that Sally faced wasthat in each of her pleadings before the court, the parties to the allegedcommon intention kept changing. At one point Sally claimed Adams trust washolding the shares for the parties personally; at a later point it was thatAdams trust was holding the shares for the benefit of the two trusts.
The court found that Sallys claimwas contradicted by the evidence:
The 2007 restructure was completed to clearlyseparate the family home and business assets. There was never a suggestion thatthe trustees of Adams trust would hold assets for the beneficiaries of Sallystrust, and
The concept of equal sharing was achieved by thetrustees of each trust exercising their discretions to benefit Sally and Adamas equal beneficiaries of each trust, not by sharing ownership of the assetsbetween the two trusts.
As Sally couldnt show a clear andunequivocal intention that half of the shares in SBA were held by Adams trustfor her own trust, the court declined to find in her favour.
This case illustrates theimportance of properly recording your intentions if those intentions arentconsistent with the formal documents or structures that have been to set up toown your trusts assets.
Importance of an IndependentTrustee
Reducesrisk
The lawrequires all trustees to act independently and impartially. The termindependent trustee is used to describe a trustee who does not benefit fromthe assets of the trust. Often the settlors of a trust (the people whoestablished the trust) will also be trustees and beneficiaries. But it can alsobe worthwhile having another trustee to help ensure the trust is run correctlyand does the job it was set up to do.
Although theres no requirement atlaw for a trust to have an independent trustee, an independent trustee can playa vital role in demonstrating the trust is a genuine trust and make sure trustadministration is properly carried out and decisions are recorded. Without anindependent trustee, the purpose of the establishment of the trust can bedefeated and the trust can be open to attack from various parties, such ascreditors.
An independent trustee should haveprofessional expertise and skills that will assist the other trustees withdecision-making and administering the trust. A lawyer, accountant or otherprofessional can have valuable knowledge and experience to avoid risks and helpwith managing the trust assets and ensuring the trust is properly administered.A trust which is poorly run and managed can lead to arguments that the trustassets are being treated by the settlors as their own property. This leaves thetrust open to attack. Ensuring that the trust is properly run can help shieldthe trust assets from external claims.
Avoida sham trust
Without an independent third party,a trust is at risk of being a sham. This may mean, for example, that:
A claim can be made by a former spouse or partnerthat the assets are relationship property rather than trust assets because thetrust is a sham and therefore does not exist, or
A claim can be made by creditors that the assetsbelong to you and therefore must be used to pay off your liabilities.
If the settlors are the onlytrustees, theres the risk that the settlors are seen as treating the trustassets as their own personal property and that, in effect, the trust doesntexist. The protective value of the trust is then lost and the trust assets areopen to claims by the settlors personal creditors.
Bringsimpartiality
The independent trustee can playan important role in ensuring that all of the beneficiaries of the trust aretreated impartially and fairly. This is of particular importance in familysituations where competing interests and family tensions can place trusteesunder strain. An independent trustee should be able to bring a robust anddetached perspective to decision-making and support the other trustees inmaking the right decisions.
Another advantage of having anindependent or third trustee is that the record keeping of the trust can beimproved. Most professional trustees will insist that major decisions arerecorded in writing and that, where necessary, legal, financial or accountingadvice is obtained.
Its important, however, that theindependent trustee carries out his or her duties carefully and conscientiously.Trusteeship is not a passive role. All trustees must take part in importantdecisions and should be actively involved in the trust administration. Ifproblems arise with the trust, its never an answer to say a trustee waspassive or included simply for the sake of appearances.
So, while there will be feesassociated with having a professional trustee, the right independent trusteecan be an insurance policy against attacks on the trust by disgruntled familymembers or outside parties and can help ensure that the purposes for establishingthe trust are not defeated.