Creation Of An Express Private Trust

The Essential Requirements For The Creation Of An Express Private Trust



The Essential Requirements For The Creation Of An Express Private Trust

Introduction

In June 2009, at the Transcontinental Trusts conference in Geneva, His Honour Justice David Hayton said that the New Zealand Court of Appeal had got aspects of the law of trusts wrong in its decision in Official Assignee v Wilson [2008] 3 NZLR 45. The Court held that the test for proving a trust was a sham was whether the trustees and settlor had a common intention that the trust was not to be a genuine entitiy.

Hayton prefers a more objective approach and looks to the objective effect of a shammer's conduct and not look for secret dishonest intentions which will hardly ever be revealed.

Discussion

Hayton's approach would ensure that trust property would be made available to creditors so that they were paid what they were due by declaring the trusts to be shams. Family trusts have become big business in New Zealand and are commonly used to protect a businessman's assets from creditors. While there is nothing illegal in setting up a family trust, it is my contention that the law pertaining to family trusts in New Zealand has become so far removed from the accepted principles of equity as to demand investigation.

In Chudleigh's case in 1594 (Note 1) Sir Edward Coke said that there are “two inventors of uses [trusts] fear and fraud; fear in times of troubles and civil wars to save their inheritances from being forfeited; and fraud to defeat due debts, lawful actions, wards, escheats, mortmains, etc.”. Although the fear of losing inheritances through civil war may be past, many trusts are regularly created through a desire to avoid the claims of creditors, and what have been described as 'unwelcome beneficiaries'.

The setting up of a family trust has been advertised as a smart move to ensure that a business is structured to operate in a financially beneficial way, protecting assets while paying the lowest possible tax.(Note 3). This particular firm refers to trusts as being 'a unique business form' and calls the settlors 'directors' of the trust who enjoy shared control of the assets with the other directors of the trustee company. Very often the companies promoting their services as trust advisers attract clients by offering to help them avoid tax, to shield their wealth from creditors, safeguarding against future inheritance taxes, showing them how to protect themselves against possible means testing on superannuation or medical or residential care benefits.

The family trust is being sold as a clever way to make someone appear poor without him or her suffering the rigours of poverty. While the law continues to assume that trusts are created for altruistic reasons, companies are selling their family trust services on the basis of the fringe benefits that a trust can confer.

In fact if asked a client may reveal that the main heard in the High Court in Auckland in August 2009 the ...