Is Your “Family Trust” Safe?

A recent decision of the New Zealand Court of Appeal has highlighted the need for persons who have established Family Trusts, or who are contemplating doing so, to ensure that best practice is observed in both the setting up and administration of their Trusts.

The case in question concerned a couple who set up a Family Trust in 1998.  They transferred their jointly owned family home to the Trust at a price that had been established by a registered valuation.  They also transferred the shares in their jeweler business to the Trust.

By December of 2002 they had “forgiven” all of the debt owed to them by the Trust.  From the setup of the Trust until that date they had made gifts of $27,000 each per year to the Trust being the maximum allowable without payment of gift duty.

Throughout this period their business had been trading with significant debts to one supplier.  In April 2003 the business went into voluntary liquidation.  Because of a personal guarantee that the Supplier had from the husband he was eventually bankrupted because of the outstanding debts to the Supplier.

The Supplier then commenced Court proceedings to have the transfer of the family home to the Trust set aside because, in the Supplier’s view, the transfer was done with a fraudulent intent i.e. with the purpose of removing the family home from assets available to the Supplier as the result of the husband’s personal guarantee of the business debts. 

The Supplier was unsuccessful in the High Court and a majority decision of the Court of Appeal upheld the High Court decision.  Both Courts considered that the Supplier had to prove an actual intention to defraud at the point in time when the property was transferred to the Trust.  Both Courts rejected the Supplier’s contention that an intention to defraud could be presumed merely by the fact that the family home, being the only substantial asset, was transferred away from the pool of assets available to creditors at a time when the business did have significant business debts.

For persons who have established Family Trusts or who are contemplating establishing one this case confirms key aspects of good “Trust practice” including:

• The fundamental obligation to ensure that assets are transferred to Family Trusts for the current market value of those assets.  This includes the requirement to ensure that the transfer of assets is properly documented;
• The importance of keeping proper records for Family Trusts, including Trustee Minutes relating to transactions involving the Trust;
• The importance of ensuring that Trust gifting is completed in a timely manner.  This should involve a clear understanding of who is responsible for completing annual gifting and gift statements (e.g. the parties’ Solicitor, Accountant or the parties themselves);
• The importance of having a bona fide purpose for setting up a Family Trust.  It is true that where assets are transferred to a Trust so as to defeat the claims of creditors against individuals then it is likely that any such transactions would be set aside by the Court on the bankruptcy of the individual.

Based on the above case it appears that the Courts accept that a general intention to protect assets by transferring those assets to a Family Trust is a bona fide purpose even for individuals who may have relatively high levels of indebtedness to third parties.

For further advice about Family Trusts contact us on (04) 4736850.