Risks in setting up own trust companies

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People setting up trustee companies to oversee their trusts need to be wary of pitfalls, Guardian Trust says.

Tuesday, March 23rd 2004, 10:22PM

by Rob Hosking

The case for setting up a corporate trustee is that it has advantages if trustees die or there are disagreements between them. In such cases, it is a matter of appointing new directors of the trustee company, whereas if the trustees are appointed directly the trust deed has to be amended, with all the costs associated with that.

However there are downsides.

There is a problem of accountability of the trustee company directors, says Guardian Trust’s private financial services relationship manager Mark Cassidy.

“The problem is that if the directors of the company act in a way that is in breach of the terms of the trust, and the beneficiaries wish to pursue an action against the trustees, the company has no assets.”

That is for private individuals and families who set up a company to act as a trustee for their trust.

Statutory trusts – Cassidy says his own company, Guardian Trust, or Public Trust, are good examples – fall outside this as they have other requirements and safeguards put on them by law.

For other trusts, further problems can arise if the company acts as a trustee for more than one trust. This can occasionally happen with family trusts: it is more common though when solicitors and accountants set up trustee companies.

A recent case which went all the way to the Court of Appeal illustrates this problem: the trustee company, Chester Trustee Services, was run with a solicitor as its sole director, and was a trustee of approximately 35 trusts as well as being the registered as the owner of land on 20 certificates of title.

The company had no assets and did not trade.

One of those trusts became bankrupt, after the Inland Revenue Department assessed it as owing thousands of dollars in GST.

The issue then became whether the trustee company should be wound up – which affected the other trusts. Although they had nothing to do with the trust which owed the GST money.

The Court of Appeal overturned an earlier High Court ruling, holding that company law rules she apply, and the presumption of an inability by a company to pay its debts will justify a winding up.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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