John’s friend, Tom, was an old university friend. They had been to the same student hostel together and remained friends over the last twenty years, although now their lifestyles were vastly different – John had settled down, got married and had three small children.
The trust was going to be purchasing a commercial property. Tom had recently inherited some money from his father and thought that commercial property would be a good investment. The building the trust was buying was the only asset it was going to own. Tom had never purchased a home to live in and was still renting – he seemed to spend all his money on holidays and going out.
John agreed to become trustee of Tom’s trust. He didn’t meet with Tom’s lawyer or accountant, just signed the numerous documents Tom gave him to sign, which included an application for an IRD number and GST number for the trust. John didn’t get copies of the documents and while he knew that the commercial building was tenanted he didn’t hear much from Tom in relation to the building or the trust. In fact, they had no trustee meetings and the only thing John did in relation to the trust was sign financial accounts once a year.
John was hugely surprised then to one day find a letter from Inland Revenue in his letterbox. It was in relation to GST payable for Tom’s trust. It seemed that the trust had not been paying any GST on the rent it was receiving for the past 18 months. Inland Revenue was writing to John because as a co-trustee he was personally liable for payment of the GST as well as interest and penalties. John tried calling Tom leaving message after message for him. He then rang the number on the letter from Inland Revenue to find out what had been going on. Inland Revenue told John that no GST returns had been filed in 18 months and as a trustee he was personally liable. It didn’t matter that it was actually a trust to benefit Tom and it also didn’t matter that Tom was a co-trustee. Trustee liability is personal and so Inland Revenue was quite within its rights to demand payment of the GST and associated penalties and interest from John.
John’s next phone call was to his lawyer. John’s lawyer confirmed that trusteeships are personal and that while John could be reimbursed by the trust through the indemnity that was in the trust deed and also part of the Trusts Act 2019, John had to act quickly to make sure that his own record with the IRD was not tarnished.
John’s lawyer advised that the trust role of the trustee had become more serious over the years, and trustee duties and obligations were now even more stringent because of additional obligations under the new Act. Trustees had the obligation to read and understand the trust deed and also needed to keep a copy of the deed and any other core documents relating to the trust. John remembered seeing the trust deed when he came on as a trustee, but certainly didn’t hold a copy and had no idea what the other core documents might be. John’s lawyer told him that it was also advisable to get a lawyer to review the terms of the trust to ensure that John knew what he was signing up to as all trust deeds had different terms and obligations. She was also concerned that John understood the needs and requirements of Tom’s two sets of children from different relationships and understood what those children could ask of John as a trustee.
John had learned the hard way that trusteeships are not just about signing documents when called upon. In this litigious day and age and also with new obligations set out in the Trusts Act, it was more often advisable to leave being trustee to the professionals. John quickly contacted Tom, told him he no longer wished to be trustee and instigated the process to remove himself as trustee. He also learned that it was not enough simply to retire as trustee, but that in order to fully absolve himself of his duties as trustee, he would need to be replaced. What had started out as a favour to a friend, ended up costing John a lot of time, money in legal fees and also the worry of being a trustee.
John learned the hard way that in 2021 independent trusteeships are most often best left to the professionals.
For more information on trusts and asset structuring, talk to the team at Davenports Law.
Davenports Law, 331 Rosedale Road, Level 1, Building 2, Albany, T: 09 883 4400, www.davenportslaw.co.nz
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