Every so often we remind clients of the risks involved in being a trustee. It doesn’t matter whether the trust is a family trust or a charitable trust. Trustees are directly responsible to the beneficiaries for their management of the trust assets.
Beneficiaries can sue trustees. In a family trust, it is not necessarily a beneficiary who causes the trouble. It can be the spouse of the beneficiary who makes the bullets. There are also obligations to Inland Revenue. Until you advise Inland Revenue you’ve ceased to be a trustee, you’re still personally responsible for its taxes.
The wait for profits
Also from a tax perspective, you should remember if the trust makes losses they can’t be passed out to the beneficiaries. You have to wait until the trust makes profits before you can use up the losses. So, if you buy an asset that is expected to generate ongoing losses for some time, it might be better to not have it owned by your family trust. Perhaps it should be owned by someone who can use the losses to save tax. It can be transferred to the trust for asset protection purposes at a later time. This would normally be when it’s making profits (trustees don’t generally want loss-making assets) but, of course, this may mean additional costs.
Don’t be passive
There is no such thing as a passive trustee. If you choose to be passive, be it on your own head. Some years ago X and Y were appointed trustees of a family trust. Immediately, they decided they would hold quarterly meetings. At one of these meetings, one of them proposed the trust should take out an insurance policy on a factory owned by the trust, for loss of rent in the event of a fire or other accident. Two years later the factory burnt to the ground. This serves as a very good example of how trustees ought to operate. They ought to hold regular meetings and minute decisions made.
What if the person who set up the trust wants to interfere? Maybe he/she didn’t want to incur the premiums for taking out that loss of rents insurance policy. The answer is simple. If you’re a trustee, it’s your job to steer the ship. Your responsibility is to look after the interests of the beneficiaries. You and your co-trustees make the decisions. If anyone starts to bring pressure on you to do as they wish, the correct course of action is to resign.
Above all, never be a passive trustee.
Specialising in commercial accounting, trusts and IT, Craig strives to help clients improve their systems by keeping up to date with all the latest in business technology, process, systems and software.