Trustees must be aware of fishhooks

A solicitor in a provincial town was the independent trustee for a family trust. Mr and Mrs B bought and sold 11 properties over a 12-year period. Ms X, the solicitor, did the conveyancing.

The trust treated these properties as separate residences of the beneficiaries. The tax department alleged the transactions were taxable and charged both GST and income tax, plus penalties.

The trust deed required all trust decisions to be made unanimously. In this case, it would have required Mr and Mrs B and Ms X to have agreed to each purchase and each sale.

However, Mr and Mrs B acted on their own account, buying and selling property and arranging finance, and then getting their solicitor, Ms X, to do the legal work.

It seems regular minutes were not prepared. However, they were prepared retrospectively and signed by all trustees. It seems that even if the minutes had not been completed, Ms X had agreed to the transactions because she would have signed the various documents in her capacity as a trustee and she would have known that all the transactions were occurring.

Ms X was held to be jointly and severally liable for all tax and penalties, along with the other two trustees. This means if they could not or would not pay some or all of the money owing to the IRD, Ms X would have to make up the shortfall.

If you are an independent trustee of a trust, we hope you have read this little story. If it gives you nightmares, resign your trusteeship first thing in the morning.

If you must accept the position of trustee for someone else’s trust, you must know what is going on. If your co-trustee(s) thinks they can act independently, resign. Sometimes this can be a painful process. For solicitors and accountants it can mean the loss of clients. For others it can be the loss of friends. Face up to it, don’t get caught like Ms X.

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