The Catchword for Trusts is ’Independence’

Media Release 10 May 2007

The Catchword for Trusts is ’Independence’, Says Senior Adviser

The assets of many New Zealanders are being endangered by widespread confusion about trusts and a growing trend for the younger generation to challenge trusts, in the view of Mark Cassidy, Manager of Business Innovation for Guardian Trust. He says trusts are a valuable instrument, but there is general misunderstanding about their benefits and how they should be used and managed. People need to get the right advice from the outset to ensure they don’t unwittingly put themselves at risk.

Mr Cassidy said that major societal shifts in recent decades had prompted an increased interest in and need for trusts. “Family make ups are changing, people are living longer, and the way small businesses are structured and operate is constantly evolving, so there is a greater need for people to protect their personal wealth from potential risk.”

Critical steps in the process of establishing a trust were to get the right advice and choose the right trustees, but Mr Cassidy said these points were often given too little attention. "A trust is a complex and sophisticated legal structure that can provide substantial benefits, but this does come at a cost beyond the initial set up fees. As well as giving trustees the ability to hold assets out of harm's way, it also places legal duties on them and gives family members rights. A good adviser will be able to assist in not only drafting a trust deed that reflects a client's wishes, but will also make sure the client understands exactly what they have created, why they have done so and what needs to be done to ensure that the arrangement is future proofed."

Deciding on who should be the trustee is as important as deciding who should be giving the advice. Mr Cassidy said all too often he meets people who are trustees in their family trusts, or have appointed advisers or trust companies set up by their advisers as their trustees, without having understood what the role of the trustee is and what is expected of them. A question he frequently puts to his clients that he says helps people clarify their thinking about trusts and trusteeship: You wouldn’t buy a new Mercedes and then service it yourself, so why would you do that with a trust? Trustees are like mechanics for your wealth, he says. “They will make sure everything to do with your trust keeps running smoothly.”

The golden rule in setting up a trust, Mr Cassidy says, is to appoint trustees who can act independently. Being a trustee can often prove quite delicate. On the one hand a trustee is expected to not merely act as a puppet for the person setting up the trust, but on the other hand they are also charged with carrying out that person’s original intent of establishing the trust. Increasingly we are finding that trustees, in carrying out these duties, are having to make decisions which can sometimes be unpopular with some members of the family. “Our role is to look after the interests of all the beneficiaries whilst honoring the wishes and intentions of the family member who set up the trust in the first place."

With Guardian Trust having been around for 125 years, chances are we will have seen it all before. We have learnt a lot about human nature, particularly when it comes to families dealing with wealth, separation and death. These factors can bring out both the best and worst in people and create huge divisions that have lain dormant until an event occurs that triggers off enormous upheaval within the family.

The lawyer or accountant who traditionally has provided advice to the family may not always be best placed to fulfill this often difficult and demanding role. There is a potential risk that one side of the family may view them as being biased and favoring some family members over others, as was recently canvassed in a high profile court case reported in the media. “This is not merely hypothetical, as the mere suspicion of bias is enough in some arrangements to render these trusts dysfunctional and upset what are otherwise well thought out asset protection arrangements," said Mr Cassidy.

Another issue highlighted by Mr Cassidy was the use of private trustee companies with no asset backing and were technically insolvent. The trustees are personally liable for breaches of trust and although carefully drafted exculpation clauses in the trust deed can limit that liability, trustees will remain personally liable for acts of negligence. Mr Cassidy commented that "the whole purpose of having trustees is to protect the rights of the beneficiaries and if things go wrong as a result of their negligence the beneficiaries are confident that the trustees will be in a position to make good. When it comes to your financial security, you don’t want a ‘man of straw’ in charge.”

So, how best to select an independent trustee? It is not a decision to be taken lightly, and people should view choosing a trustee in the same way they would a new doctor or lawyer, Mr Cassidy says. “This person is going to play an important role in your financial well-being, so the key is to find someone with a strong track record in administering trusts. Trustees have clear duties and are fully accountable under the law. If you’re in doubt, the best starting point is a conversation with an adviser at a respected trustee company.”

The growth of interest in trusts has led to some unexpected trends, with a notable one being a proliferation of DIY-style books and internet sites on how to set up and run your own trusts. “Well, there are obvious problems with trying to get on with it yourself,” Mr Cassidy said. “For starters, books go out of date. When you’re talking about your own financial welfare and possibly that of the most important people in your life, do you really want to follow a set of instructions in a manual?”

However, Mr Cassidy said he understood the impetus behind buying a book about trusts, because many people found the subject daunting and didn’t know where to start, or even whether a trust was right for them. “In fact, not all situations require an independent trustee (non family member), or even a trust. A good adviser is the best person with which to discuss your specific needs. They will look at your situation in depth, and will ensure that a trust is the best option for your intentions and that it will stand up to any legal scrutiny.”

ENDS

About Guardian Trust

Guardian Trust has been serving New Zealanders for 125 years and is a market leader in wealth management. It is one of New Zealand’s foremost trustee companies in asset management and protection, providing wide-ranging advice and expertise in areas including estate planning and administration, mortgage finance, financial planning, and personal and corporate trusts.

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