Becoming an independent trustee of a family trust

People form trusts for various reasons, including estate planning and asset protection.  Conventional wisdom is that it is useful to have, in addition to the settlor(s), an “independent trustee”.  This role has traditionally been filled by accountants or lawyers.  However, many professional firms are veering away from trusteeships, due to the increasing risk of being sued by disgruntled beneficiaries.  This has led settlors to look to friends and family members to fill the position of independent trustee.  So, what should you do if you are approached to be an independent trustee?

Firstly, think long and hard about whether this is a role you really want to undertake.  While it is an honour to be considered, the role comes with significant risks.  As a general rule, trustees are personally liable for the debts incurred by the trust.  This means that your own personal assets can be put at risk by your trusteeship.  Imagine being kind enough to act as a trustee for a friend and being repaid by losing your own home!

In truth, the most prudent approach is not to become a trustee.  However, if you really want to do this favour for a friend or family member, there are some protections you can put in place.

Firstly, the trust deed itself should contain an “indemnity”.  This is a clause which says that the trustee is indemnified by the trust’s assets.  This means that if the trustee is called upon to pay the trust’s debts, the trustee can use the trust’s assets to pay those debts.

Of course, the trust may not have any assets.  You should also, therefore, get a separate indemnity from the settlor(s), and/or from the main adult beneficiaries.  This is an indemnity that recognises that you do not personally benefit from the trust, so you should be protected by those who do benefit.  This means that the indemnifier will use their assets to pay any debts you legitimately incur as a result of your trusteeship.

However, if family finances take a turn for the worst, the indemnifier may also have no assets.

To further protect yourself, you should ensure that every significant liability incurred by the trust contains a limitation of your liability.  For example, if the trust signs a bank loan document, a clause should be added saying that your liability to the bank is limited to the value of the trust’s assets.

This limitation of liability is usually easy enough to negotiate with a bank, if you are truly an independent trustee.  However, there are some liabilities that cannot be contracted out of, such as taxes payable to Inland Revenue.  Your personal assets will be fully exposed to the trust’s liability to Inland Revenue.

For this reason and many others, if you are a trustee, you need to ensure that you are fully aware of all the trust’s rules, activities and liabilities.  You must read and understand the trust deed and all other relevant documents.  You must keep yourself up to date with all the needs and interests of the beneficiaries.  Regular meetings should be held and all trustees’ decisions should be fully discussed and recorded.  You must not simply “rubber-stamp” decisions already made by the settlor(s).

And, if this all becomes too much for you and you decide to retire from the trust, you must let Inland Revenue know.  In relation to GST in particular, Inland Revenue will deem you to still be a trustee until they have been advised otherwise in writing.

The key message is that, while it is an honour to be asked to act as a trustee for a friend or family member, this honour comes with a high degree of personal financial risk.  There are various ways to reduce this risk and you should therefore call your Harkness Henry lawyer to ask for advice.