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The role of an independent trustee

The role of an independent trustee

Published in September 2019

Trusts can be a useful tool to safeguard assets from potential claims (family, relationship, business or otherwise), but serious consideration needs to be given to the structure of the trust, and in particular the role of an independent trustee.

What is an independent trustee?

An independent trustee is a trustee who does not benefit from the assets of the trust (i.e. they are not a beneficiary of the trust). Typically, the independent trustee is a lawyer, an accountant, or close family friend.

There is no legal requirement for a New Zealand trust to have an independent trustee. However, an independent trustee increases the chances that the trust is robust enough to withstand potential claims. In particular, the existence of an independent trustee can:

- mitigate the argument that the trust is a sham and that the trustees (perhaps only “Mum & Dad”) are using trust assets as their own

- ensure better management of the trust. This is particularly true when the independent trustee is a solicitor or an accountant. Annual trustee minutes, meetings and financials should be insisted upon by the independent professional trustee; and

 - ensure that the core principles of independence and impartiality are upheld. “Mum & Dad” might find it difficult to think of all of the trust’s beneficiaries when deciding to sell the family home to invest all of the trust fund in a banana plantation in Cuba. The independent trustee will stop and insist that the other beneficiaries’ needs are seriously considered before agreeing to such an action.

Are there risks being an independent trustee?

Absolutely. Trustees have an unlimited and personal liability.

An independent trustee is liable to the beneficiaries of the trust to ensure that the trust fund is being managed and invested in their best interests. An independent trustee cannot simply trust their co-trustees to make prudent decisions. An independent trustee must actively engage in each and every trustee decision and must not just “sign off” on directions from the other trustees. Doing so, would put the independent trustee’s personal assets at serious risk from a claim by disgruntled beneficiaries.

How can an independent trustee mitigate risk?

Before accepting a role of an independent trustee, you should stop and consider the following questions:

  • Do I have the time to commit to the role? You will need to be available, at the very least, once a year for a trustee meeting. In addition, you may be called upon out of the blue to sign documents (even if you are overseas on holiday).
  • Do I have the strength to say no to my co-trustees if necessary? You must ensure that you are carefully considering each trustee decision and that you are not merely “rubber stamping” the co-trustee’s decisions.
  • Do you have knowledge/experience in asset management? Although not a requirement, having some knowledge and experience in reading trust financials, signing legal documents and understanding the trust administration language would be a strong benefit.

If you have answered positively to the above, you can consider accepting the role of being an independent trustee. However, keep the following rules in mind during your position as trustee:

  1. Ask for the settlors of the trust (often “Mum & Dad”) to provide you with a deed of indemnity whereby they indemnify you against all liability from or arising out of any matters undertaken by you as a trustee.

  2. When signing anything in your position as trustee, ensure that the document contains a limitation of your liability whereby your liability is limited to the assets of the trust (thereby protecting your personal assets from attack).

  3. Be active and robust in your position. Do not simply rubber stamp.

  4. Do not be afraid to seek independent legal advice on your role as independent trustee and ensure your costs are covered by the trust assets, or the settlors (by virtue of the deed of indemnity).

And remember, if despite all your efforts to be independent, your co-trustees’ pressure to “fall in line” is taking its toll, it may be best to resign.

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