PONSONBY PROFESSIONALS
TALKING TRUSTS: RICK & JESSICA Rick and Jessica had set up their trust almost 20 years ago. It owned their family home, a commercial investment property and the shares in their residential investment property company.
Tammy McLeod
They were the trustees together with their lawyer. Rick and Jessica had two adult children and they had been considering helping them into their own homes. The trust didn’t have any ready cash but it did have a lot of equity and Rick and Jessica were thinking of ways that the trust could access the equity to help their kids.
Rick and Jessica had also heard about the changes to trust law under the new Trusts Act which had come into force earlier in the year. They were keen to make sure that they complied with the new Act, but were relying on their lawyer to make sure everything was OK. They hadn’t heard anything from him, and a friend mentioned that they had been to see a specialty trust lawyer to check that the trust deed was OK. The friend told them that the lawyer’s specialty was asset structuring and so she could also help with making sure that they structured things correctly when helping their kids. Rick and Jessica really wanted to make sure that they would be helping their kids only and protecting their kids from the ramifications of any relationship split. They made an appointment and took their trust documents in to see the lawyer. She said that some of the terms of the trust needed some tweaks because of the new Act, but she was mostly concerned with the power to appoint and remove trustees. She explained to them that most lawyers used precedents when they were preparing documents for clients, but sometimes those precedents weren’t carefully used and you could end up with unintended consequences. In their case, the precedent had been used in such a way, that their lawyer had the power to say who the trustees of the trust were. The lawyer explained that sometime this may be OK; for example if they both died it may be appropriate for the independent trustee (in this case the lawyer) to be able to say who the trustees would be to retain some independence. However, in this case, the lawyer could actually say who the trustees would be now. This could become an issue if Rick and Jessica separated and the lawyer chose to remove one of them and side with the other. The lawyer kindly said that she thought this was a mistake in the trust deed, and
not something which the lawyer who prepared it had intended to happen. However, she said that it was a good reminder for people to have a good review of their trust deeds to ensure that not only were they up to pace with the new Trusts Act 2019, but that there were no unintended consequences with a mis-use of a precedent. The other issue with the power of appointment of trustees in Rick and Jessica’s trust was that it didn’t provide for what would happen if the person who had the power of appointment and removal of trustees loses capacity. As the population ages and life expectancies increase, lack of capacity is becoming more of an issue with trusts. Previously when life expectancies were lower, people often died before they lost capacity. These days, people are living longer, but physical health does not equate to mental health and more people are losing their mental capacity as they age. This can become a problem in trusts which don’t provide for that occurrence. Even though there was a fundamental flaw in Rick and Jessica’s trust deed regarding who held the power to hire and fire trustees, there was also no provision for what would happen if that person lost capacity. Their new trust lawyer explained that this can be a real problem, and even though the new Trusts Act deals with how to remove an incapacitated trustee, it does not deal with what to do if the person who has the power to appoint and remove trustees loses capacity. If that happened, they may need to go to Court, depending on the circumstances. The lawyer recommended looking to see if there was a power to vary the trust deed to make Rick and Jessica the people to have the power to appoint and remove trustees while they were alive, and further to provide for what would happen if one or both of them lost capacity. Fortunately there was the power to vary the trust deed in their trust. But the lawyer explained that there are many trusts which do not have the power to vary the terms of the trust and so people can be stuck with trust deeds that do not work as intended. This story illustrates how important it is to understand the terms of your trust deed and make sure it says what you actually want it to say. Now is the perfect time to get expert specialised advice on what your trust deed actually says, and then a plan on how to fix it. PN
DAVENPORTS LAW, 331 Rosedale Road, Level 1, Building 2, Albany, T: 09 883 4400, www.davenportslaw.co.nz
58 PONSONBY NEWS+ July 2021
PUBLISHED FIRST FRIDAY EACH MONTH (except January)
