BEWARE THE SHAM TRUST

Trusts are under attack.
They now seem to have become “fair game” for some people, including some professional advisers, who say that they are no longer of any use.
That flawed logic seems to be based on two points.
  1. Tax rates are flatter than they used to be so there is no longer a differential between the top personal tax rate and the trust tax rate. Granted, that is the case. But a distribution to a beneficiary of a Trust is still going to be taxed at their personal tax rate.
  2. The Trust might be a “sham”. Of course it might be. Any Trust could be a sham if it is not administered correctly. But is that a good enough reason not to use a Trust if there are better reasons why it might be useful? Of course not.
The key then, is to administer it correctly.
Don’t ever give me “oh, I don’t know how it works or why we need one”.
I’ll tell you right now, you’d better understand or we won’t be helping you get one set up. And if you don’t set one up, and we think it would be beneficial for you to have one, we’ll let you have that in writing. That way you can’t blame anyone but yourself later if it all comes home to roost, and you could have saved yourself by taking our advice. Sorry to be blunt.
But first lets zero in on “sham” trusts.
What is a sham trust?
Well, we know what a Trust is. It’s a legal vehicle set up by people (often business owners) to hold certain assets so that those assets are protected from risk. Whether it be business risk, the risk of getting sued, the risk of breaching your duties as a company director, the risk of a relationship breakdown, or some other risk, they can reduce that risk if their assets are owned by a separate legal entity.
A sham trust is basically a trust that is not genuine. A façade, if you like. In other words, it was set up to perform the role of a Trust with all is benefits, but it hasn’t been administered properly, so its effectively a façade for the person who set the trust up.
If you form a Trust, you must treat it as a separate legal entity, because it is. It is not your personal slush fund. Before any decisions are made regarding what to do with trust property, the Trustees must meet, discuss and then record decisions made, and those decisions have to be in the best interests of the beneficiaries.
Why is this so important?
Because if you don’t do it, and then someone wants to sue you, you are going to say “I’ve got nothing, everything belongs to the Trust. Sorry.” And then that person who is suing you is going to try to break the trust down. If they can do so, suddenly all the assets, which you think are owned by the Trust, are on the line. Make no mistake!
And because many people are very lax with their record keeping, or they simply don’t pay enough care, it is going to be easy in some cases to prove that the Trust is a sham, it doesn’t exist, or is simply your “alter ego”. And suddenly, all those assets that you thought were safely tucked out of harm’s way are right in the firing line.
That’s why you need to treat it seriously. If it was important enough for you to set up a Trust in the first place it should be important enough for you to administer it properly.
Call us on 03 4500000 or russell@queenstownlaw.co.nz to make sure you are safe.