Q: My friend has recently set up a trust. She is in a new relationship and thinks this will protect her assets from her partner if they break up. She has asked me to be an independent trustee. I don’t know much about financial matters, but she’s been there for me in the past so I want to help. Is this something I should do?
A: It is wonderful that you want to help your friend in this way. However, being a trustee comes with onerous obligations and puts you at risk if anything goes wrong.
Obligations of a trustee
Trust law has recently undergone some significant changes. These major changes will come into effect from January 30, 2021. One of the aims of the reform was to strengthen a beneficiary’s ability to hold trustees accountable. Your friend may be a beneficiary of the trust as well as the settlor. However, she may have also settled the trust for the benefit of others, such as any future children.
Deciding whether to accept an appointment as a trustee is not a decision that should be taken lightly. Trustees have unlimited and personal liability. As a trustee, you would be liable to the beneficiaries to ensure any assets held by the trust are managed and invested in the best interests of those beneficiaries.
You would need to be actively involved in every trustee decision. If you do not engage in the decision process, your own assets could be at risk if a beneficiary chose to claim against you.
To ensure the trust was being administrated correctly, you would be required to hold all the trust paperwork on file. You would also have an active duty to consider at “reasonable intervals” whether you should make basic trust information available to beneficiaries.
The role of a trustee is usually taken on by someone who has had experience administering trusts such as a lawyer, an accountant or a professional trustee. If you were to take on this role, would probably need to seek advice sometimes. You would have to pay for this advice yourself.
Protection against relationship property claims
Your friend has set the trust up to shield assets from her new partner. A trust can be a good way to protect personal assets. However, there are some ways for a spouse or partner to “claw-back” assets that have been transferred to a trust in order to defeat a future relationship property claim. The trust would be particularly vulnerable if the family home is owned by the trust, but your friend’s new partner contributes to the mortgage or adds value to the home.
To ensure the trust assets are adequately protected, your friend should enter into a Property Agreement with her new partner. This agreement should include a provision that confirms that her new partner will not have a claim against the trust if the relationship ends.
You should only accept the appointment as a trustee if you feel able to comply with the onerous duties of a trustee and bear the risk of liability if you breach any of the duties. As you do not have experience as a trustee or with other financial matters, I suggest you do not accept the appointment. You could recommend to your friend that she appoint a commercial trustee, such as Perpetual Guardian. If you still decide to become a trustee, I suggest you speak with a professional trustee organisation or a lawyer before accepting to understand the role more.
A further discussion of changes contained in the Trusts Act 2019 can be found here.
This article first appeared in the New Zealand Herald 0n the 17th of July 2020