2 April 2016

Trusts and alienation

Sonnie Bailey

There are many reasons for setting up a trust. Estate and succession planning is one. Privacy is another.

In many cases, people want to set up a trust to protect their assets. Trusts can be an effective vehicle for protecting assets against creditors and relationship property claims. 

The effectiveness of a trust, especially when it comes to asset protection, correlates to the degree to which the people setting up the trust (the settlors) alienate themselves of the assets they give to the trust.

What does this mean?

It means that when you settle assets into a trust, they are no longer yours. But there are different ways of doing this. To varying degrees, it can be possible to retain control of, and benefit from, the assets you’ve given to the trust. And the more control or benefit you allow for yourself, the more vulnerable the trust is likely to be to creditor or relationship property claims.

People who have set up a trust often think of trust assets as if they are still their own. They may have even received advice to this effect. Many professional trustees have acted (and even continue to act) as if this is the case.

But compare two trusts and think about how a court would treat a claim against them:

  • One trust has been set up by mum and dad. Not only are mum and dad the settlors, but they are also the only trustees of the trust, and the only beneficiaries of the trust are the two of them and their young children. Mum and dad have the power to appoint and remove trustees and beneficiaries. Income and capital have so far been used primarily for the benefit of mum and dad.
  • Another trust has been set up by grandma and grandad for their grandchildren and their grandchildren’s children and so on. They have nominated professional trustees to act who have no beneficial interest in the trust, and have likewise nominated an independent company to have the power to add and remove trustees. There is no power to change the beneficiaries of the trusts. Income and assets can only be distributed for very specific purposes, such as education. 

As you can imagine, the assets of the first trust are more vulnerable to a claim, whether the claim relates to the settlors or a beneficiary of each trust. Key to this is that with the second trust, the settlors have alienated their assets much more so than the settlors in the first. 

When setting up a trust, people can be reluctant to give over control. This is understandable. But it is this control that makes the trust vulnerable.

Alienation is not an all-or-nothing thing. There are degrees. So although the examples are illustrative, they indicate different ends of a spectrum.

Mum and dad in the first trust could have taken several steps that would have made the trust more robust. They could, for instance, have appointed a third, independent trustee to act along with them. They could have appointed an independent party to be able to add and remove trustees.

In other words, to better achieve the outcomes they sought, mum and dad could have done more to alienate their interests in the assets they gifted to the trust. It doesn’t mean they necessarily need to lose total control of the assets or are not able to benefit from the assets and income of the trust. But an appropriate and informed balance needs to be reached.

When setting up a trust, or administering an existing trust, it is important to discuss your circumstances and what you are wanting to achieve with a professional who understands these nuances. There are many different factors that influence what is best for any given situation, and strategies for achieving the right balance of control and alienation.


alienation, control, trusts

About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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