The Sunday Star Times (27 November 2011, D4) questions whether trust professionals are “urging people with family trusts to continue gifting at $27,000 a year despite the abolition of gift duty … to bolster their own profits.”
Jonathon Cron of New Zealand Trustee Services is quoted as saying that “compliance saving [as a result of the abolition of gift duty] is looking increasingly like pie-in-the-sky as trustee services such as his own have to continue charging fees at an unreduced rate to be able to continue in their role of advising people with trusts.”
Mr Cron also questions whether clients who “go it alone” will result in neglected trusts and empty minute books that would make it hard for the trustees to convince a court that a trust was real should it come under attack.
The article raises some important issues. However, these issues have been mixed into a single question largely focussing on whether continuing gifting is for the ultimate benefit of the trust’s adviser.
Firstly, I would like to say that I totally support the statements attributed to Mr Cron regarding the need for improved trust regulation.
New Zealand’s love affair with trusts is well documented. It is also clear to most trust professionals that a large number of those trusts will not meet the settlor(s)’s objectives due to a mixture of ignorance as to how a trust operates and a refusal to accept the need in most cases to invest money to ensure the on-going satisfactory operation of the trust.
The Government’s projection that gifting was essentially a $70 million drain in the economy was always, in my view, a somewhat one-eyed approach to the subject. See for example my comments in Lies, Damned Lies and Gifting.
While it may or not be true that some professionals are advising clients to retain $27,000 a year gifting programs, the reasons for doing so may well be valid. Particularly if clients wish to preserve any existing ability to claim a residential care subsidy, which could otherwise be lost with a single gift in excess of $27,000. See my comments along that vein in Gift duty – a tale of smoke and mirrors. It is also important to appreciate that with unclear rules regarding satsifactory determinations as to solvency, a largely tried and true practice may seem safer for all parties.
It may also be that regardless of whether gifting programs are being maintained, professional trustees who are entitled, presming that the deed of trust permits this, to charge for trustee services are beginning to see that the services being provided are of value and need to be rewarded comensurately if the service is to be provided. Anyone who questions this needs only to review current professional indemnity policy fees paying particular to attention to the sky-rocketing excessed being attributed to trustee services.
Moving on, let’s take a step back and ask why trusts are settled. However this is dressed up – it is almost always to protect assets from future as yet unidentified (or maybe not so unidentified) harm. To do this assets are sold, or now with gift duty gone, gifted to trusts. The orignal owner of the asset divests control, and presuming this person is a beneficiary of a discretionary trust, swaps absolute control for a right to be considered. The asset is protected from any harm that befalls the settlor because the asset is no longer the settlor’s exclusive property. This is the case even if the settlor is a beneficiary of the trust.
It is common for the trustees to whom the assets have been sold / gifted to include an independent trustee because most modern deeds of trust require this and because without such a trustee it is virtually impossible to satisfy a subsequent creditor or other party who wishes to question the bona fides of the trust as to just that. It is also important to retain a professional trustee to ensure that the trustees meet and are aware of their on-going obligations as trustees.
This is where I do not entirely agree with Mr Cron’s commments – he says that it is difficult to convince a court that a poorly managed trust is real. To date the numerous unsuccessful attempts to have trusts declared as shams by the courts would suggest that concern in that regard is misplaced. The far greater concern is that poorly managed trusts are real but that the trustees have not acquitted their obligations to the required standard. Where this is the case, and presuming a trust that is under attack, any losses may well be required to be met by the trustees personally. See for example the recent decision in White v Williams and Spencer v Spencer.
Returning now to professional trustees charging for gifting programs, whatever name is attributed to these fees, if advice as to whether to gift or not, advice regarding the importance of documenting the trustees’ decisions and general stewardship of a trust so that assets worth say the value of the average house price in New Zealand of approximately $400,000 (according to QV) are protected, the $400 fee quoted by Mr Cron sounds pretty reasonable. What other “insurance” allows an asset to be protected against so many non-natural disasters for a fee as little of 0.01% of its value?