Smallbusiness owners should review their trusts before 2021

MANY smallbusiness owners in New Zealand are suffering hardship and making tough financial decisions as a result of the Covid19 pandemic. While they are busy dealing with the daytoday reality of keeping a business financially viable in these challenging times, they may not have turned their minds to the family trusts that many of them created when they established their businesses.

What good is a family trust to a business owner who is suffering financial hardship now?

The answer to this question will depend a lot on how well the family trust was set up in the first place and how well it has been managed since.

Where a gifting programme has been in place for a period of time, assets such as the family home can be ringfenced from creditors. There are some situations where this can be challenged by creditors, for example where the person making the gift is insolvent at the time of making it, or where the intention is to defeat creditors.

If a business owner has debt that cannot be paid, creditors cannot automatically access the assets of a family trust to satisfy that debt, unless the trustees have provided a guarantee for the loan or account.

Unfortunately, if a trust has not been well managed, creditors can sometimes have back door access to trust assets by seeking to have the court declare that the trust is a sham. This is particularly the case when there is no independent trustee (that is, a trustee who is not a beneficiary of the trust), the trustees have not kept proper records or the trust does not operate its own accounts separate from the accounts of the settlor.

Creditors and beneficiaries of trusts will also have more options available to them under the new Trusts Act 2019, which was passed into law by parliament on July 30, 2019, and will take effect from January 30, 2021. One of the motivations behind the creation of this new law was to make trustees more accountable and trusts more accessible.

The new Trusts Act strengthens protection for creditors and gives beneficiaries of trusts powerful rights to seek information and hold trustees to account.

Trustees duties are increased and consequently, the costs associated with administering family trusts will inevitably increase and there will be fewer professionals who are willing to take on the risk and responsibility of being a trustee.

All trustees in New Zealand should be seeking advice on the Trusts Act 2019 and reviewing the trusts that they are responsible for before January 2021.

Business owners who have family trusts and find themselves with a bit more time on their hands during the Covid19 lockdown could use this time to review their trust and make sure that it provides the protection of personal assets that they intended it to, and that it will continue to provide that protection after January 2021. If a review shows that the trust does not in fact provide any real protection of assets and if the costs and time associated with keeping the trust compliant with the new Trusts Act do not provide any real value, it may be time to consider winding the trust up. While there will be an immediate cost associated with winding the trust up, this will be balanced against the future savings from not having to maintain it.

Stephanie Pettigrew is a partner in Marks & Worth Lawyers and specialises in trusts, asset planning and relationship property.