Auckland Chartered Accountants & Business Advisors Kevin Murphy & Assoc Ltd - family trusts spouses and equitable rights

By: Kevin Murphy  05-Apr-2012
Keywords: Chartered Accountants, Business Advisors

What you have to know about "Trusts"!

Trusts (Press Ctrl-P to Print)

Essential elements of a trust

For an express trust to be valid:

* its settlor must intend to create a trust; and
* the property subject to the trust must be clearly identified; and
* the beneficiaries (or in the case of a purpose trust, the purposes) of the
trust must be clearly defined.

A trust always involves a fiduciary relationship

Express trusts create the archetypal fiduciary relationship. Every trustee is a fiduciary.
In an express trust, both obligations and rights are conferred on the trustees. Normally they arise by virtue of the express provisions of the trust deed and, by implication, from legislation and case law.
The fiduciary obligation consists of two duties:

* not to place oneself in a position of conflict between duty and interest; and
* not to profit from the position of trust beyond the terms of payment
expressly agreed.

(fiduciary = act in the best interest of the client)

Trustee Obligations

Specific trustee obligations

By virtue of the fiduciary relationship there are a number of things which a trustee is normally regarded as being under an obligation to do or to refrain from doing. If the trustee does not comply with these obligations it will not matter whether the trustee has been careful or honest in doing or in omitting to do things (although this may be a ground for the trustee to obtain relief from the consequences of the breach). In any event, the trustee will be liable for breach of trust.
The most important obligations imposed upon trustees are commonly identified as:
* the duty of efficient management of trust assets;
* the duty of loyalty;
* the duty to keep and to render to the beneficiaries full and accurate
* the duty to act personally;
* the duty to consider whether to exercise a discretion.

Irremovable trustee obligations

There are three commonly acknowledged limitations on the extent to which the trustees' obligations can be modified by a trust instrument.
* Separation of legal and equitable ownership of trust assets must occur at
the point of commencement of the trust.
* The jurisdiction of the court cannot be ousted.
* No clause wholly exempting trustees from liability to beneficiaries can be

Modification of trustee's dispositive obligations

A trustee must necessarily have an obligation either to:
* dispose of the legal title of the trust asset(s) upon termination of the
trust; or
* consider whether to do so (where the trustee is an actual or potential
beneficiary of the trust).

Where there is a fixed trust there is unlikely to be any need to qualify this dispositive obligation. In the case of a discretionary trust there will often be a concern as to the extent to which the trustee is obliged to take into account the interests of discretionary beneficiaries before determining:
* which beneficiaries get trust assets;
* when they get them;
* what assets they will receive.

Trustees Duties

In exercising a discretion the trustee normally has duties:
* not to act for their own benefit or for the benefit of a person not
nominated as a beneficiary of the trust;
* to act impartially;
* to act reasonably.

Each of these duties is premised on a requirement that the trustee act in the interests of the beneficiaries of the trust in dealing with its assets.

Duty to act impartially

The trustee must not act in a way, which favours one class of beneficiaries at the expense of another. The usual example of the application of the duty relates to the need of preserve an "even hand" between life tenant and remainderman. The difficulties inherent in fulfilling and monitoring that obligation are obvious eg, precisely how one achieves equality of capital gain and income can be a vexed question.
This general duty of impartiality can be qualified or removed, eg, by providing that the needs of an income beneficiary are to be treated as paramount, if necessary to the detriment of the capital beneficiaries. Provision of such clauses in the trust deed can substantially assist (and protect) trustees while ensuring that the settlor's basic aims are properly identified and able to be achieved in the context of the trust.

Duty to act reasonably

Recognition of this duty secures to the courts an ultimate "catch all" jurisdiction in relation to the trustee's conduct where the trustee has clearly not acted in the beneficiaries' interest even when the trustee may not have acted against them.

"Sham" trusts

Sham is defined by the Oxford English Dictionary as "something that is intended to be mistaken for something else; spurious, imitation, a counterfeit".

According for there to be a sham, the parties to the sham must intend to create the appearance of something that in fact does not exist.

If the trust is seen to be a "sham" then any of the transactions involved can be overturned or reversed. This could be in circumstances such as an Inland Revenue or mentioned dispute.

Contact Andrew for more information on how you can benefit from a trust.

Keywords: Business Advisors, Chartered Accountants

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