An article in the latest NZ Lawyer Magazine written by the IRD is a stark warning to people of the risks of becoming a trustee of a trust. Although the article is aimed primarily at professional trustees (lawyers and accountants), the risks apply equally to people acting as a trustee in the private capacity for friends or family.
The article outlines the nature of a trust:
The role of trustee encompasses many powers and duties and also obligations and liabilities. As a trust is not a separate legal entity, trustees are the legal owners of trust assets and such assets are held in the individual names of the trustees. If there is more than one trustee, the trustees own the property jointly.
As with trust assets, trust liabilities are also recorded in the name of the trustees. It is the trustees who sign any sale and purchase agreements, mortgage documents, share certificates, income tax and GST returns, and any other documents relating to the trust.
Therefore as trustee, in addition to ‘owning’ the assets of the trust you also ‘own’ the liabilities. This is where one of the risks to being a trustee arises.
The article goes on to say:
Notwithstanding that the liability of a trustee is a personal one, a trustee may rely on a right of indemnity against trust assets to meet obligations incurred. However, if trust liabilities exceed trust assets, the trustees will remain personally liable for the excess.
In general this means that where your liability as trustee exceeds the total assets of the trust, you will need to top up the difference from your personal assets.
When it comes to tax debt specifically, you are liable for all tax arising during the period of your trusteeship (jointly and severally with the other trustees). This liability continues after you cease to be a trustee. Further:
A trustee’s liability for tax continues until the Commissioner is formally advised that the trustee has retired
It is critical that the IRD are informed when you cease to be a trustee of a particular trust. Without advising them, you will continue to be liable for the future taxes of the trust.
This post has only just scratched the surface of a very complicated area, and has only done so in a very general way. Trusts are inherently complicated affairs and before becoming a trustee you need to fully understand the potential risks and have discussed it with your lawyer. If you need to discuss the risks further, give iif Chartered Accountants a call and we can point you in the direction of some great lawyers that can help.