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Trusts: Do what's right, not what's fashionable

Mark Cassidy explains how to get the structure of a trust right.

Wednesday, December 2nd 1998, 12:00AM

by Philip Macalister

by Mark Cassidy
New Zealand Guardian Trust, business development manager

In previous articles I have discussed at some length the importance of administration of trusts in maintaining their integrity. However, it is just as important to get the structure of your trust right in the first place. The place to start is not however with the trust itself but with an understanding of where a trust will complement existing investment arrangements.

In order to be able to do this an adviser has to appreciate that a trust is only a structure for ownership of assets and that a client may currently own a number of different assets in a variety of ways. Both the nature of the assets held and the form of ownership structures may have developed by accident rather than by design. Alternatively the original reasons for the way a client has organised his or her affairs may have changed over time. As a result, both may be ill-suited to the client’s current lifestyle as well as their immediate and long term financial and lifestyle objectives.

Know your client

Before giving any meaningful advice on asset and estate planning, you must first know your client’s past and present situation as well as their future goals. Each part of a financial plan must be carefully tailored not only to meet the client’s particular need, such as asset protection, but to match and complement other structures that may already be or have to be put in place to meet other requirements such as tax efficiency. Some objectives may on the face of it seem difficult to reconcile and may actually be impossible without a complete change in the client’s present arrangements. Failure to recognise this may lead to disastrous results for the client and for the adviser.

Take the opportunity to add value
On the other hand, an appreciation of the possibilities that may exist for the client through restructuring asset ownership can give rise to some very exciting opportunities for you to genuinely add value. More often than not these will be savings in tax , which will offer an immediate benefit for the client. This will therefore provide you with a client who is more than happy to be an advocate for your services -a genuine win/win situation. The important point that you should not to lose sight of, however, is that the tax savings are merely an incidental consequence of the restructuring and not the reason for it. Therefore, anti-avoidance provisions would not apply in these circumstances.

A good example of taking advantage of this would be the rearrangement of borrowings that are not currently tax-deductible. These could be made so by being transferred to the trustees for the purpose of acquiring business assets currently owned by the client. This opportunity arises at the time of restructuring but may easily be missed if the adviser is either unaware of the possibilities that exist or fails to fully understand the client’s existing position. No two situations are the same and, as any adviser will attest to, all clients are different. It is this variety that opens up opportunities for the adviser to be creative and to offer the client exciting and innovative solutions.

It is likely in most cases that a multi-disciplinary approach will be required to achieve such results. In this approach, specialists advise and assist in the implementation of the plan. An adviser who has an overall appreciation of the client, the family and their hopes, fears and aspirations, is well placed to coordinate such advice and ensure that what needs to be done is actioned.

The Supertrust?
Having considered the overall picture, you are then better placed to consider how to structure the trust arrangements. There is no such thing however as the "supertrust"; i.e. the single trust that is able to achieve all your client’s objectives and which is completely impervious to any adverse affects of any future changes in legislation. The reason for this is that, although as a matter of convention legislation is rarely retrospective, its effects can be as new legislation may adversely affect existing arrangements.

Do what is right, not what is fashionable
Practitioners have, however, been in search of this "supertrust" holy grail and have suggested solutions such as the infinitely variable single trust, cross or mirror trusts or parallel trusts. More recently, certain advisers have suggested the use of single asset /purpose trusts. All of these solutions tend to fall in and out of fashion depending on what both advisers and clients perceive to be of paramount concern at the time. If, for example, Estate Duty is brought back on the agenda as the result of a political change of direction, then the cross or mirror trust might be seen as the most suitable option to minimise the risk. Such advice, however, is too often based on the assumption that Estate Duty would merely be reactivated in the same form as before.

This argument has potential flaws. Firstly, such a tax may not be the same as before and one only has to look at other countries to see that there are alternatives. Secondly, the use of mirror trusts has not been tested through the courts as to whether or not the arrangement is effective in all situations. I have certainly heard it suggested that, where the two trusts are set up at the same time, a nexus may exist between the trust that might taint them. Thirdly, such an arrangement can lead to complications on the death of the first partner or on a marriage split.

To summarise, it is better to design the structure of the trust arrangements based on what is known rather on what might be. You should ensure that the deed(s) provides for maximum flexibility to meet changes in your client’s personal circumstances as well as external factors which will inevitably occur. Similarly, the trust arrangements must be designed to be in the best interests of the client’s overall needs and not overly influenced by what may be the current political issue: it may not prove to be relevant. Ensure that the structures are properly monitored and administered so that the trust is achieving the client’s objectives in the most efficient way possible. Except in the most straightforward of situations, this requires a high level of expertise in a variety of disciplines. Provided that the client is aware of the reasoning behind the advice and that there is clearly risk in any arrangement, then it is possible to tailor a solution to satisfy the client now and allow for a further restructuring in the future if it proves necessary to meet changing circumstances.

Mark Cassidy is a business development manager with New Zealand Guardian Trust. He can be contacted by e-mail at
New Zealand Guardian Trust Company Limited has a website at

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