I Am My Trust — Or Am I?
If you are a trustee — are you familiar with your obligations when dealing with Trust assets? If you treat your Family Trust’s assets as an extension of your own assets, you run the risk of being found to have committed a breach of trust, and could be personally liable for the repercussions of that breach.
Trust Bank Accounts
Trustees need to ensure that the Trust has a separate bank account at all times. It is important that only Trust transactions are conducted through the Trust bank account.
If you are an independent trustee, you need to ensure that the Trust’s bank accounts are used appropriately. Often independent trustees are kept in the dark about the trust bank account, and have no idea if it is being used correctly.
It is not uncommon for some trustees to use a Trust bank account as their own for their day to day transactions. Using the Trust eftpos card to buy groceries or to pay for your night out is risky.
Use of Trust Assets
As a trustee, you must ensure that the Trust assets are always recognised as belonging to the Trust and are not used for personal use. If you are an independent trustee, you must ensure that the other trustees adhere to their obligations as trustees and do not use Trust assets for personal use, or enter into transactions involving Trust assets without your prior approval.
The ownership of Trust assets needs to be correctly documented in the names of the trustees (as joint tenants), to ensure that there is no opportunity for improper use of those Trust assets by the trustee in whose name they lie. If you fail to ensure this, you could be liable for breaching your duty as a trustee.
In the High Court case of ASB Bank Limited v Davidson & Others, a trustee was found to have breached the above ‘golden rules’. Mr Davidson was held personally liable for a debt incurred pursuant to a guarantee given by his Family Trust. This was because he did not obtain the unanimous approval of the trustees prior to committing the Trust to guarantee further bank advances. He signed the new documentation in his capacity as trustee of the Trust, without arranging for the other trustees to sign.
The Judge held that “Mr Davidson is yet another example of a person who, having arranged the formation of a Family Trust to protect assets and gain income tax advantages, thereafter chose to ignore the legal implications of his trusteeship and simply regarded the assets of the Trust as part of his overall assets which were available to him to do as he wished. He was able to do so because it is quite obvious that his co-trustees failed to exercise their responsibilities as trustees”.
Mr Davidson was held personally liable to pay the $200,000 claimed, together with interest and solicitor/client costs.
If you are a trustee, play it safe when dealing with the Trust’s assets, and make sure the activities of your fellow trustees are not putting you at risk.
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