Putting your property, investments and even businesses into a family or discretionary trust can be a good idea for asset protection. But this is only the start. You must ensure that the trust is properly managed and administered each year otherwise there is a good chance that the trust will fall foul of the current tax laws. The IRD in New Zealand is very active in paying attention to trusts that do not conform to the regulations and takes action against those Trustees. As a result many Trustees have received heavy financial penalties for failing to administer their trust correctly.
Why do you need to administer a trust?
Many people make mistakes with a trust because they still think that they own those assets that are now held by the trust. To be clear, they do not own those assets. Therefore they must be able to show interested parties what they have done on behalf of those parties.
Some of those interested parties include other trustees, beneficiaries of the trust, family members and the tax department.
What admin is necessary for a family trust to be compliant?
The simplest way to think of the administration for a family trust in NZ is to document everything. You must be able to show a paper-trail for every transaction that the trust undertakes.
There are a number of different tasks that need to be carried out each year for the trust to run in accordance with the tax rules. These include:
- Annual accounts
- Gifting or forgiving the debt of the trust.
- Minutes of any transactions
- Annual General Meeting
- Paying any tax that is due.
As the Trust is a financial entity which owns various assets, it is likely that there will be various transactions which need to be recorded.
However, the trustees cannot simply decide to buy or sell an asset. They must record a minute of that decision in the Minute Book. This shows that the transaction was agreed by the Trustees.
Again, since it is a financial entity, it is obvious that the trust needs to have a full set of accounts collating those transactions. The accounts must be verified by a qualified accountant.
The Trust also needs to have an AGM which reviews and accepts those accounts. The AGM also needs to follow a strict protocol including appointing trustees, advisers and making sure that the documentation for the year is correct.
There are other admin tasks too and of course paying bills and tax that might be due.
Trustee responsibilities
The trustees are responsible to make sure that all of those administrative tasks are carried out correctly. Even if they do not undertake the task themselves, it is their responsibility to ensure they are done.
The trustees should act in the best interests of the beneficiaries. This can sometimes be a challenge when family members so not agree with the decisions of the trustees.
If any of those trust management tasks are not carried out and the IRD decides that the trust is not compliant, it is the Trustees who will be held accountable and be personally liable for any penalties that are applied.
How to ensure trust management is correct
Trust law is complex and the management of a trust is intricate and very detailed. Most people do not understand the requirements nor do they have the skills and patience to follow through with all the necessary tasks.
The easiest way to ensure your family trust does not incur penalties from the tax office is to hire a trust administrator. Often your lawyer who set-up the trust will also have a trust administration department. These people will be fully aware of any changes in the law and will also know what task need to be carried out by what date to make sure the trust remains compliant.
If you have a family trust and want to avoid penalties then it makes sense to contact a North Shore family trust lawyer who has a dedicated trust administration department.