COVID-19 Update - Is Your Trust Fit For Purpose

As we look at reducing the alert levels over the next few months New Zealand as a country will face an uncertain economic climate and it is likely a lot of businesses will lay off large numbers of staff or fail completely. If a business fails, it will be important as a business owner that your personal assets are protected in the event that creditors look to owners who have personally guaranteed the borrowings or trade suppliers of the business. Most business owners would have set up a trust to hold assets such as the family home, but does the trust actually offer sufficient protection? In other words, is the trust still fit for purpose.

A trust structure has traditionally been used for asset protection, but it is by no means a silver bullet. Over time there have been various ways developed to effectively unlock trust structures so that creditors can attack the assets held in the trust to satisfy claims against either individuals or wholly-owned businesses. These attacks have focused on who has effective control over the trust and in a number of cases it is not really the trustees that have control but instead another party. This was not intended by the parties but through a combination of how the trust documents were drafted as well as how the parties have interacted with each other the protection a trust was thought to provide does not actually exist.

These matters are further complicated when a business is run in the trust itself and causes the trust to become insolvent. We would also recommend a trading business be held in a separate company that is owned by a Trust, but historically this has not always happened. The major issue if a Trust becomes insolvent is that the trustees will be personally liable for the debts of the trust. This is an issue if you are acting in your personal capacity. However, recent case law in New Zealand has also shown that directors of corporate trustees could also be in the firing line especially if they are involved with the trust in a different capacity, i.e. settlor and/or beneficiary. As we saw in the Clayton litigation a couple of years ago Courts in New Zealand are looking at the substance of arrangements and who is really in control.

We also anticipate the current economic climate and lockdown will put a great deal of pressure of relationships, with a number of them failing. For partners that have a lot of assets in trust structures, this is going to mean a lot of work to unwind those structures and effectively divide the relationship assets. Parties who brought substantial assets held in a trust into a relationship will also need to ensure the trust structure will provide protection in these circumstances.

Then there are the financial aspects of the structure. Are individuals owed money by the trust? Has the accountant kept on top of the loan accounts and inter-entity advances to ensure that assets in the trust are in fact protected?

If you need certainty the team at Covisory can help you by reviewing your existing trust structure to ensure it does provide you with sufficient protection heading into these uncertain economic times.

We will include a detailed review of the overall architecture of the structure and the associated documentation. It will also be important to determine how the parties have interacted with each other in the past and whether there are any ‘control’ issues that need to be considered. Finally, a review of current Wills and Enduring Powers of Attorney should be done as they make up part of the overall succession plan for you.

If you need our help please contact either

• Marcus Diprose, marcus@covisory.com, +64 21 424 443
• Nigel Smith, nigel@covisory.com, +64 21 377 280

Let's work together to ensure your trusts provide you with sufficient protection

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