The Beneficiaries Want The Money…Help!
You’ve worked hard for what you have and to ensure your assets are protected, you’ve gone to the trouble of putting them in a Family Trust. Now those assets are protected for you and your loved ones – for the Beneficiaries of the Trust.
But what happens when the Beneficiaries want the assets? Can your children or say other Beneficiaries, such as your siblings, get access to those assets? Can they find out what’s in the Trust and what they’re entitled to? Are they entitled to know all about the Trust and its affairs?
Unfortunately, human nature being what it is, this issue comes up more than most people would like. Usually, like all human being issues, feelings of suspicion, distrust and jealousy underline the problem. And just like a lot of issues, responding to the problem in either a confrontational manner or limiting the communication between Trustees and Beneficiaries doesn’t help.
What is helpful is understanding what information Beneficiaries are entitled to and then, having an open dialogue with an aim of improving matters – maybe even improving the relationship which is frequently at stake.
The Courts Decide
Traditionally, what a Beneficiary could and couldn’t see was based on whether they were a Fixed or a Discretionary Beneficiary. Fixed Beneficiaries had an entitlement to the assets of the Trust and so had a right to view all Trust documents, including financial accounts. Discretionary Beneficiaries on the other hand, had only an entitlement to be considered by the Trustees when those Trustees were handing out cash, capital and assets. As such, Discretionary Beneficiaries had no entitlement to view Trust documents.
Thankfully, we moved from that position. Now it doesn’t matter if a person is a Fixed or a Discretionary Beneficiary because now, it is up to the Courts to determine what documents a Beneficiary is entitled to see.
Under the ‘inherent jurisdiction’ approach a Court says it has the ability to supervise and if necessary, to administer a Trust and therefore, a Beneficiary has a right to approach them to seek disclosure of Trust documents. Ultimately this means that it is up to the Court’s to determine what a Beneficiary can and cannot see.
Courts are mindful creatures. They implicitly understand human relationships – after all they deal with human issues every single day. With this understanding, they exercise their discretion and engage in a bit of a balancing exercise. They weigh up the competing interests of different parties (eg: trustees and beneficiaries and third parties) and consider a myriad of issues including personal and commercial confidentiality, parties privacy, consequences of disclosure, etc.
Additionally, they are aware that Trustees do not have to disclose to Beneficiaries their reasons for exercising their discretionary powers. This point is particularly important because it can have an effect on what the Court’s ultimate decision is – what the Court will decide a Beneficiary can and cannot see.
Sometimes, at the end of this balancing exercise, the Courts decide that disclosure should be limited and safeguards should be put in place. Often this is to protect the relationships within the family.
Look What The Beneficiary Found
In the past, the Courts have said the types of information listed below should be disclosed to Beneficiaries. Remember, each case is decided on its own merits so the items noted on this list are not set in concrete.
* Deeds of Trust;
* Deeds of Variation of Trust Deed provisions;
* Deeds of Changing of Trustees;
* Deeds of Resettlement;
* Legal opinions relating to the interpretation of a Trust Deed’s provisions;
* Legal opinions with respect to a Beneficiary’s rights;
* Valuations of assets of the Trust; and
* Financial accounts of the Trust.
Some Secrets are Better Left Just That - Secret
Historically, under case law, Courts have said that Beneficiaries do not have a right to the types of information I have noted below. Read this list with the above Caveat - Courts can decide something different depending upon the facts of the case before them.
* Letters from Settlors to Trustees;
* Notes from Settlors to Trustees;
* Memorandum of Wishes made by Settlors;
* Notes made by Trustees setting out their reasons for the decisions they have made; and
* Statements which show the motives of Trustees.
Raiding the Trust
So the big question is now that the Beneficiaries have the financial accounts in their hands, what can they do with that information? Well, one common tactic is they can apply to the Courts for an Order, which would state that monies due and owing to them are in fact, paid to them. For this reason, it’s important to deal with the allocation of Trust income each and every year.
Any income that has been allocated to a Beneficiary and shown as such in the financial accounts may be called by that Beneficiary to be paid to them upon them becoming adults. A Court Order can also require this. Hence, in my view, only income that is to be spent on a Beneficiary should be allocated to them in the Trust’s financial accounts. Failure to allocate income in this manner may result in a Beneficiary requiring a Trustee to pay them the surplus income that appears as a credit in their Beneficiary account shown in the financial accounts of the Trust.
Summary
Like all human problems throughout time, good dialogue can solve the insurmountable. This is because open communication fosters goodwill and trust between people. If goodwill and trust exists, there is less of an opportunity for secrecy and distrust to creep in.
Trustees and Beneficiaries are human beings and human beings respond positively to people being honest and clear with them. So the order of the day is to seek opportunities to promote positive communication between each other.
In my view, it is really irrelevant whether a Trustee has to legally show a Beneficiary a Trust document or not. If a Beneficiary has had to approach a Court to get an Order to see the Trust documents, the relationship between the Beneficiary and the Trustee is in trouble and that is where the real problem exists.
Being clear and honest with Beneficiaries when they ask about a Trust’s affairs is a sensible thing to do as it preserves the relationship. Failure to do so will simply create suspicion and exacerbate tension. Remember … a Trust, is about relationships and about looking after assets for the future. So in the name of Trust, taking time to care for relationships and teaching Beneficiaries about money, assets and protection will ultimately ensure the future that you are working hard to provide for is kept secure.
Janet Xuccoa, BCom LLB
Professional Trustee Services
Gilligan Rowe + Associates Ltd
Chartered Accountants
Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955
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A Special Message For Trust Lawyers
Dear Trust Lawyer,
If you’re a Family Trust lawyer, I can assume you are at least curious about how you can reduce risk, improve your service and possibly increase your level of business.
If that’s true, please read this entire message. Even if we don’t end up talking, I’m sure you will get some value or ideas from what’s written below.
Risk Management
When it comes to trust work, we understand the pressures and risk that lawyers can face. Getting small but important trust administrative matters completed on time and correctly every time, is expected. And it’s what we as lawyers get paid to do.
On the other hand, failure to act properly as trustees on behalf of our clients can be devastating. It can cost us, our practice and our partners financially, let alone our reputation…
We’ve heard the stories before. Here are a few that I am personally aware of, that had tragic results:
- Failure by a lawyer to recognise that GST is payable on the sale of a property by the Trust that he was a Trustee of.
- A client (unbeknown to the lawyer acting as their trustee) registering the family trust for GST, claiming GST and then failing to repay the GST on the sale of the property.
- Then there’s the story about the employee of a practice who tried to cover their tracks when it came to gifting. They had ‘forgotten’ to complete gifting documents for a number of clients. To remedy this situation they decide to prepare 3 years worth of gifting for each client, get the clients to execute the documents and then present them all at once to the IRD. As you can imagine, the clients were not happy when the IRD demanded their pound of flesh from gifting duty.
- Or what about that life insurance money that paid out to the trust of one of your clients (with you as trustee) that you’ve held on term deposit for the past 4 years, waiting for the main beneficiary to come of age.
Does any of this sound familiar?
Why Does This Happen?
Failure to act properly as trustees on behalf of our clients can occur for a variety of reasons.
Some of those reasons could include inadvertent omissions as a result of an extreme or heavy workload. Mistakes can happen.
For a variety of reasons we become less vigilant with trust work that we delegate to employees who themselves may fail in their duty.
Similarly, we may experience problems because we just don’t have the staff or the right processes in place to catch problems before they arise - or to stop our clients wandering and causing some disaster which we are implicated in!
Whatever the reason, the thing we ALL have in common, is that we all want to avoid these things from ever happening. Right?
If You Are Acting as Trustee, the Buck Stops with You
Whether you are acting as a trustee in your personal name or in the name of a corporate, we all know that at the end of the day, the buck stops with you.
If we cause a loss to a trust as trustee, a beneficiary has the right to feel aggrieved and may seek to recover against us. Ouch.
Judgements from our Courts have shown that time and time again.
We as trustees, we place ourselves at risk when we fail to act as we should. In fact sometimes, we can attract risk because we may not be clear about exactly what needs to be done.
And when that risk crystallises it can it can bring about some nasty results.
It may cause:
- sleepless nights as we go through the litigation process
- worried hushed conversations with our insurers
- financial loss to the Practice as we spend time fighting the claim or worse, losing the action, negative publicity either before or after the judgment has come down,
- loss of reputation whether warranted or not
- loss of income as other clients hear about the issues and leave the practice.
And if these consequences aren’t enough to send most lawyers running for cover, consider the increased scrutiny and negative attention that can result from colleagues and peers.
So, what’s the Solution?
After consultation and use by several practices already, Cornwall Trustees Ltd (through Gilligan Rowe + Associates Ltd) have developed a complete Trust Administration service designed for use by lawyers involved in trustee work.
It’s the provision of essential trust administration services, that you in turn can recommend to your clients.
For a low fee payable by your client, we take care of the small but critical tasks necessary for any trust to withstand any scrutiny. In effect we remove any risk attached to the ongoing administration by managing:
- Preparation of minutes/resolutions
- Deeds of acknowledgement of debt
- Variable interest loan agreements
- Gifting
And more.
What’s in it for you and your practice?
By briefing out trust administration work to us, you receive a variety of benefits including increasing the time you have available to spend on other matters that increase your income production.
Aligning yourself with New Zealand’s Corporate Trustee of The Year (that’s us), can add value to the relationship with your client and enhance your overall offering.
But the biggest benefit to you of working with us is the tangible risk reduction that you will experience and the peace of mind knowing that the small but necessary details are taken care of.
Non Competition
Of course, we respect that the client is your client. So for that reason, we give you our promise that we would not complete any legal work for your clients.
In fact, we’re prohibited from doing that.
Instead, we (where possible) would refer extra business back to you. How? If appropriate, after the analysis of your clients’ financial statements and other material (which is a normal part of our process), we can report any recommendations requiring your attention back to you and your client.
As an example, this work could include putting in powers of attorney for the client or registering a General Security Agreement.
Low Priced, High Value Service to Your Clients
Our processes, systems and attention to detail are second to none. In fact these attributes helped us secure our national award which is judged on procedure, merit, structure, achievement and client satisfaction.
It’s summed up in the following:
A real strength of Cornwall Trustees is the hands-on commitment from the Directors through to clerical staff where their integrity and personal belief in the structure and process provides the client with a high degree of security. Errol Anderson, Registrar NZ Trustees Association.
We believe that these are all the things that your clients deserve.
Can We Work Together?
We’d like to share more detail about how we could add value to your practice - including our pricing.
The first step is to Request A Call. I’ll speak to you personally, answer any questions and email you an outline of our services and our promise.
If you can’t wait, please call (09) 522 7955 and ask for me, Janet Xuccoa.
Thank you for reading this.
Janet Xuccoa BCom, LLB
Professional Trustee Services
Gilligan Rowe + Associates
P.S. We can work with trust lawyers anywhere in NZ.
U.S. Hyper-Inflation Bomb to Detonate in NZ?
Dear Friends
Matthew Gilligan
If two blog posts in one week seems a bit OTT, I’m sorry. But I believe that if you’ll find my message and this information below to to useful as an important follow up to my blog last week about NZ Interest Rates.
An inflation time-bomb is ticking in the US. And in my view we may face hyper-inflation. The financial crisis is not over - we all know that.
While it looks like the money supply coming out of Obama’s Govt is stabilising things, its more likely to cause hyper-inflation that may potentially make the early 70’s woes look like a barbeque at John Key’s pad in Hawaii.
Go ahead and watch these videos below; the second video is the best I think. It’s an explanation on hyper-inflation (from the US senate this week). The first video is a it of a commentarty rave highly relevant.
Concern Over US Economic Policy
Hyper-Inflation Explained (US Senate)
Many financial people (including Dr Bollard) are ringing the hyper-inflation bell. America is broke and printing cash, so is Britain.
Hyperinflation = huge interest rates. We could face 20%+ interest rates if the hyperinflation bomb detonates in the USA.
And we must ask ourselves, why will hyper inflation not emerge when the U.S. and Britain are paying their bills printing cash ? I know it seems a long way away from where we are now with historically low interest rates….but its not.
If China pulls America’s $4.5 trillion in funding it has coming up in bonds to roll over this year, or the printing machine devalues their currency pushing up their foreign debt and debt funding costs…….its game on. Buy gold that week…and sell the dow short.
My advice is lock up long and shield yourself from the potential of this - 5 year interest rates are cheap and won’t go down much further. As I said last week long term rates are much more likely go up in the short term than down.
By locking in cheap money now you de-risk yourself from inflation’s effects for 5 years (on debt) and lock in a low rate of around 6.5% ( compared with the 10 year average of 8% in NZ). By the way, we find interest.co.nz is a useful site for getting up-to-the-minute interest rates in New Zealand.
Please note: It’s not my intention to scare anyone or be alarmist, however if these unfolding events are not acted on quickly (where appropriate) then they may have potentially tragic effects on homeowners and investors later on.
I plan NOT to bother you with the ‘chicken little’ story again 
Finally, please help to spread public public awareness on this subject by forwarding this article - especially if you havefriends or family who are homeowners, business owners or investors.
Thank you for reading this.
Matthew Gilligan CA CPP
Director
Gilligan Rowe + Associates Ltd
P.S. Did you like this article? Go ahead and sign up for our free newsletter to get hot up-to-date market commentary.
P.P.S. Have you heard about GRA’s FREE Strategy Interview for Business Owners or Investors (normally $199), contact us now and we’ll explain how it works.
Learn more about Matthew.
___________________________________________________
More Information?
If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview. Otherwise just call Matthew Gilligan, Partner of Gilligan Rowe & Associates Limited. Matthew can be contacted by emailing mg@gra.co.nz or telephoning (09) 522 7955.
Why not join our free Newsletter Group? You’ll get access to free whitepapers, case studies, tips, freebies, discounts, commentaries and family tust information all designed to help you move closer to achieving your financial and personal goals. By the way, we won’t SPAM you or pass your details on to anyone who could.
Disclaimer: © Gilligan Rowe & Associates Ltd This article is intended to provide only a summary of economic issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
Free Strategy Interview (Limited Time)
Matthew Gilligan
For a limited time, GRA is offering investors and business owners a Free Strategy Interview (normally $199) with me and my team at GRA.
After listening to you explain your situation, we could discuss:
- Structures
- Asset planning
- Insolvency
- Family Trusts
- Property Accounting
- Property Investment
- Financing
…in fact anything on your agenda that might help you to protect and grow your net worth in 2009 . We’ll also give options and ideas that may end up making and saving you huge amounts of money.
If you live outside of Auckland…no problem, we can talk over the phone and work by email.
You’ll need to be quick so go ahead and scroll down to contact us because this offer is limited by demand and the time available. We reserve the right to end this promotion at any time.
Matthew Gilligan CA CPP
Director
Gilligan Rowe + Associates Ltd
What the Heck is Happening With Interest Rates? [Practical Expert Advice for Investors & Homeowners]
Attention: This article contains time-sensitive advice and should be read today… It’s not the usual yada yada.
___________________________________________________________
Matthew Gilligan
Dear clients, friends and supporters,
This March 2009 Economic Update is intended to be practical and free advice on interest rates and a snapshot of the current housing market.
Also in this edition I have a bit of a rant about Wall Street and what could happen this year, if financial Armageddon continues.
I hope you find this information useful.
But First…The Plug
Unusual times call for unusual measures. So, for a limited time, I am offering investors and business owners a Free Strategy Interview (normally $199) with me and my team at GRA to discuss strategy, structures, family trust matters and asset planning…in fact anything on your agenda that might help you to protect and grow your net worth in 2009 .
If you live outside of Auckland…no problem, we can talk over the phone and work by email.
You’ll need to be quick so go ahead and contact me.
Finally, if you find value in my message below, I ask you to kindly forward this article to your mailing list
OK, let’s get started…
Interest Rates & The Property Market
I wrote to a few of you last year in September and recommended you break your fixed interest contracts, anticipating an interest rate drop.
The basis of that was the G7 resolved to underwrite interbank lending rates, which is a big part of the cost of funds we borrow ( and represented in the Libor/interbank lending rates published internationally).
I suggested last year that the new government underwriting of institutional lending and deposits ( a reaction to the liquidity crisis on Wall St ) would quickly drop cost of funds and stabilise money markets short term.
As predicted, it happened.
Rates have plummeted world wide since this time. While obvious in hindsight , - the key was working it out early so you could break of fix contracts, before the banks react and you lose the advantage.
Many of you took the advice - one person alone told me she saved $50,000 in avoided break costs with her banks. Others waited, and have reported to me they regret the wait as they have had to pay huge amounts or it is now not economic to break fixed interest contracts.
So listen up again and do it now!
Changing Money Markets
I believe the money markets have changed in the last month, with five year rates on the rise despite an anticipated drop in the OCR due.
You need to be quick to react, if you wish to lock in the longer rates before they rise.
An emerging institutional theme will be - ’someone has to pay for socialising the losses - the taxpayer and interest payer’. Rates will rise accordingly in the near future. I discuss this further below.
Current Advice - Fix Long Now ( 5 Year Rates Are At The Bottom And Rising )
The 10 year average interest rate in NZ for main trading banks to home owners is just over circa 8%.
Current interest rates are well summarised here:
Interest.co.nz is a useful site for monitoring rates and financial news.
You can currently borrow for around 6.5% fixed for 5 years - this is cheap in a NZ context. I do not think it will get much cheaper, and now is a good time to start to grab the cheap rates in my view.
ASB hit 5.95% for a week in Feb, and have now increased their 5 year rate to 6.65%. I think the other banks will start to follow suit. Five year rates are roughly rising 1 basis point a day, of 1% every 100 days.
Think about that.
What are the Implications?
1. Borrowers:
I suggest you call your bank after the Thursday March the 12th OCR announcement, and consider locking in long rates AFTER your bank announces its reaction to the OCR drop. However if the OCR does not drop and NZ follows Aussie in this regard, - fix immediately long as rates may rise that day in those circumstances.
2. Deposit holders:
For those with fixed term deposits, short term rates will fall, long term will rise. You need to take a blend of long and short term deposit rates to remain flexible. Global banking may melt down again, you will want the higher rates if that happens, so don’t fix everything long as a deposit holder.
I have a consultant in the office who can give you a hand with it for free, if you want a hand making decisions. He is a broker for all banks and provides the service as complimentary. Go ahead and Email me for his contact.
Housing Recovery - Good News at Bottom End Of Housing
In case you have missed it, Australasian ‘low end residential’ property is recovering from a massive increase in new home buyers seeking bargains in a low interest environment.
Investors are also out in droves seeking bargains. I have numerous Real Estate agents telling me the lower to middle end is flat out again. Also, numerous mortgage brokers are telling me that applications for new loans are rapidly rising.
This despite the recession and doom and gloom.
Here’s some anecdotal feedback:-
1. Don Ha from Raywhyte in Manukau ( Auckland) told me yesterday he sold 66 properties in February - more than double last Feb’s result for him.
2. I have agents in North South and West Auckland telling me they are having the best months since mid 2007
3. I have similar feedback in Queenstown - multiple offers on houses inside $500k, with a listing shortage. ( Not to be confused with apartments in Queenstown which are crashing and entirely devalued.)
4. In South East Melbourne, my agent told me last Feb he sold 7 properties and this Feb he sold 35. One property he listed last week he expected to sell at $290k, and he got 9 offers on it in 2 days, with the first offer at $345k ! He says it’s as hot as 2007 around Frankston at present.
So it’s not all doom and gloom. A lot of money is made in recession and the low end is reaping rewards at present.
With cost of ownership roughly equal to cost of renting, - it makes sense.
One issue is while there are plenty of people wanting to buy - the banks are declining loans. Only the stronger can borrow at present.
So this is an Australasian wide, ‘bottom end’ residential recovery.
In NZ it’s driven by affordability gains from the crash in values and cost of borrowing.
In Aussie it’s driven by the same affordability factors but additionally stimulated by new home owner grants and big government spending on new housing.
Capital growth assets, apartments and leasehold assets are still crashed.
Quality commercial assets with great tenants are holding up, - marginal commercial asserts have crashed.
Global Banking - Read My Rave Below
I think we are going to see more banking failure this year and more pressure on big governments as the underwriters of failed institutions.
It will happen especially in the USA, but then this will flow on worldwide as the whole world has funded America ( being the reserve currency).
Therefore, if American institutions fail, the rest of the institutions lending come under huge pressure as they write off their losses.
A big spook on Wall St again, will push up interest rates globally - another reason to fix long and reduce risk.
Socialising the Losses
Of course the Western governments have decided to pick up the losses, - as letting the banks fail puts too much pressure on their economies. So the lesser of two evils it seems is ’socialising the losses’ and forcing the debts on the taxpayers.
Socialising the losses (making the masses pay for the titanic losses of failed banks) effectively means that the current working age population (and their children) are required to pay for the losses of the current banks and retiring baby boomers.
Rather than collapse the pension funds that invested in speculative and over valued assets like sub prime mortgages, and ruin baby boomers retirement, its ‘tax the workers time’. (I sound like a communist I know).
I think this is one of the biggest jack-ups of all times. The banks knew exactly what was going on - the credit bubble was paying Wall Street bank management massive bonuses and they let it run. The governments have failed taxpayers globally by not understanding it and allowing it to happen.
The affected taxpayers (of the debt ridden governments taking over the banks) now have to pay for the socialised losses through their taxes. In addition, eventually the cost of money will rise so the banks (owned by governments and private equity) can recoup their current losses.
So whether the losses are recovered through taxes, or high cost of funds over the long term - the burden comes on the next generation.
We (and our children) are going to have to pay for the poor decisions of bankers in the last decade. Does this mean that interest rates will be higher for the next decade? They must in my view - how else does it get paid off ? If the government won’t allow the banks to write off the debt for fear of depression, then the next generation has to pay off the losses through higher taxes, and higher interest rates.
It gets worse. To add insult to injury, - Wall Street banks have been paying out their bonuses for overseeing the biggest banking failure in history. There is only one word for it - they are a pack of ‘sods’ on Wall Street.
And that is putting it politely. Listen to this…One banker spent $1.2m refurbishing his bathroom, the month he applied for a bailout in October. One banker’s wife was quoted as economising, by choosing a cheaper fit out for the new corporate jet for the bank. An unbelievable disconnect from reality it seems has emerged in Wall St Banking management as to remuneration expectation and their worth.
Possibility of Hyperinflation
What happens when governments print money to pay their bills ? Their currency falls to be worthless, the banking system fails, and inflation becomes insane. Look at Zimbabwe and every other currency printer over time, except America.
America it seems, is allowed to pay its massive deficits with a printing machine. It does not have to pay its bills by borrowing the losses, or making goods and services to pay off its bills. It just prints cash.
Think about that.
The world is letting America print cash to pay its bills, without devaluing its currency and without inflation going wild. Watch this space - we could see the USD start to be heavily devalued and inflation go through the roof in the USA this year.
If this happens - its ‘game on’ in financial circles.
Interest rates will skyrocket globally, another reason to lock up long. And bad for exporters in NZ. Wine grower friends of mine should think about that.
Government Underwrites: Can They Pay?
Another thing to think about is that the world is increasingly questioning various governments to make good on their underwrites for failed banking institutions and business. Especially in America where eventually the world must ask the question:
‘Why is America allowed to print money to pay its bills and not suffer hyper inflation?’
The whole concept of the Fiat Currency - governments ability to print cash that is not backed by gold or a tangible asset, is in question at present. What happens if we find that some Western governments are unable to meet obligations?
Last year one of Britain’s members of treasury gaffed, and admitted publicly that Britain’s banking system was 3 hours from total systemic failure, with ATMs shutting down due to illiquidity.
It was only due to last minute emergency meetings literally at 5pm on a Friday that the unthinkable was averted.
Do you remember Britain using anti-terror legislation to lock up $2b in funds on deposit from Iceland at the time? Yes - Iceland is known for its mad military and Islamic population and global role in terrorism - not!
That’s how bad it was - governments were not playing by the rules as they were all in deep trouble. Britain use a terrorist law against Iceland, because it was broke that day. To me this is unbelievable and only happened 130 days ago.
These days are not over - the issues are still there.
In my view, we will see more of these unprecedented events this year in 2009 as the world works through the current turmoil, which is far from over.
AIG was loosing USD$500k a minute according to CNBC over Oct 08 to Jan 09. Do the maths. That’s (USD$30m) an hour , $720m a day, $21b a month. That’s why they have asked for another $60b.
Good work boys ! You Wall St guys deserve another bonus (yeah right).
I do believe the stock market (which is crashing again this week) will continue to crash all year.
A friend of mine is a private banker friend in EFG Bank in Singapore. He believes (and last year predicted) the Dow will free fall to the mid 5000’s, - down from 13,000+ if it fell through 7250. His predictions are right on track as we speak with the Dow at 6850 and falling.
All stock exchanges are going to take a caning this year, - so expect doom and gloom.
Summary and Recommendations
Some of you reading this are investors (some large). Some of you are simply home owners. You may be wondering what the cheapest interest rate will be for you over 5 years.
I would suggest that you consider starting to grab fixed rates for long term money after the next OCR drop this Thursday. Why? Because the 5 year rates will rise from here on out in 2009.
Wait till your bank announces its reaction - to a rate drop in the OCR. Then fix.
If the rate does not drop, fix immediately (Thursday morning before 11am) because the market has priced in an expected OCR drop and rates may instantly rise if the OCR stays at the current rate. You will need to be quick if that happens as it just has in Aussie.
If you want a ‘dollar each way’ and believe floating rates will stay very low due to the recession, - you could consider a floating for half your debt at say 4-5% ( the emerging floating rates) and take 5 year rate for say 6- 6.5%. This means you lock in 50% of your money safely for 5 years and can see what happens over coming months to floating and long term rates. But consider against this that these are uncertain times offshore, and 6.5% is 20% under the 10 year average rate of circa 8% in NZ. Its cheap money, and you will sail through rough times enjoying the low rate if we see a harder landing off shore emerge this year.
To conclude, call you bank in the next 2 weeks as they announce their reaction to the OCR drop, and fix long. We are at or near the bottom of the interest rate cycles.
If you want a hand, send me an email & I will introduce you to my broker on the floor.
Matthew Gilligan
Thank you for reading this.
Matthew Gilligan CA CPP
Director
Gilligan Rowe + Associates
P.S. Did you like this article? Go ahead and sign up for our free newsletter.
P.P.S. To learn more about our FREE Strategy Interview for Business Owners or Investors (normally $199), contact us now and we’ll explain how it works.
Learn more about Matthew.
___________________________________________________
More Information?
If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview. Otherwise just call Matthew Gilligan, Partner of Gilligan Rowe & Associates Limited. Matthew can be contacted by emailing mg@gra.co.nz or telephoning (09) 522 7955.
Free Trust Check-Up
Janet Xuccoa
Got a Family Trust?
Here’s a HOT offer from GRA that will provide you with great peace of mind.
We’ve been helping lots of Kiwis to protect themselves from ‘Sham Trusts’. Sham Trusts are Trusts which may not (when tested) achieve the goal of the Trusts intended purpose which is protection.
You can read more about Sham Trusts on this website to learn how important it is to have your Trust Checked.
For a limited time, we’re offering our Trust Check-Up service (normally $199) for FREE. So, having your Trust tested has never been easier.
We’ll provide you with a written report after we’ve checked the transactions and financial documentation of your Trust. You need to supply a set of financial accounts. There are other minor conditions which we can explain when we talk to you.
All you need to do is scroll down and fill in the form below now or call Janet Xuccoa on 09 522 7955.
Providing Security to Real Kiwis Earns Top Trustee Award
Janet Xuccoa, Professional Trustee Services
Just this week Gilligan Rowe + Associates Ltd, (through our trustee company Cornwall Trustees Ltd) was awarded the prestigious ‘2008 New Zealand Corporate Trustee of the Year’ award by the New Zealand Trustees Association.
Naturally, we’re pleased. But while it may be a big deal in our little world and make us feel pretty good about ourselves for a second or two, it’s only on reflection that the real message behind this story jumps out.
And that message is all about two things: security and procrastination. Let me explain.
According to Errol Anderson, Registrar NZ Trustees Assn, “A real strength of this Corporate Trustee (GRA) is the hands-on commitment from the Directors through to clerical staff where their integrity and personal belief in the structure and process provides the client with a high degree of security.”
It’s this ‘high degree of security’ that I really want to impress upon readers. It seems like we all want it, but in many cases never believe that ‘out-of-the-blue’, negative, life-altering events can ever affect us.
It’s sad. We see it time and time again; New Zealanders who want the protection of a business or family trust after a major financial disaster, relationship split or unexpected life event! And while we can help some people and protect them from future events, most often it’s just too late!
In short, I believe Professional Trustees are not meant to be in the ambulance business. To me, we’re in the protection business.
Procrastination and putting off decisions to set up a Trust can cause pain. Real pain. And it’s not just financial. It can also affect health and relationships. We know because we get to see it all too regularly.
So, rather than tell you train-wreck stories about people who get it wrong (hmmm, maybe a good idea for future articles?), I’ve decided to share a TRUE good news story where our client actually did the right thing, made the decision, and took action.
For privacy reasons, we’ve changed our client’s name in this story…We’ll call him ‘Mike’.
Mike and his business partner had grown their services company to a very large and successful enterprise in NZ. They had a firm with a recognisable brand and a great reputation.
Everything was looking up and looking good. It would have been easy for John to simply believe that they we’re bullet-proof. After all, the company was expanding and making money.
But he didn’t. He knew that in business (and life) things can come out of ‘left field’ which you may have no control over. So three years ago, he contacted our firm and set up a Trust. Full financials were completed and all Trust administration including gifting was concluded.
Along with his business partner, Mike had business dealings in Australia and gave personal guarantees to a creditor. Sadly, the company got into financial difficulties (through no fault of Johns) and John’s partner elected voluntary bankruptcy. This automatically involved Mike and bankruptcy proceedings are presently underway.
Is Mike happy that his business failed through no fault of his own? No. Is Mike relieved that he didn’t procrastinate and took action to establish a Trust to protect his assets? Yes!
The relief came because as Professional Trustees, we understood his situation and we had a strategy. Next, we implemented the strategy and reviewed his situation each year for three years. In this case, our client is protected.
We have an industry in New Zealand that we can be proud of. So, on the outside while some people might view our job as a mystery or even stuffy, we know that as Professional Trustees it’s all about helping people to protect what’s important.
We have a good industry full of good and professional people who care. But while we think we’re good, we’re not good enough to force you take the first step.
That job’s completely over to you.
Janet Xuccoa
Professional Trustee Services
Gilligan Rowe + Associates Ltd
FamilyTrusts.co.nz
(09) 522 7955
janet@FamilyTrusts.co.nz
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More Information?
If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview. Otherwise just call Janet Xuccoa. Janet can be contacted by emailing janet@familytrusts.co.nz or telephoning (09) 522 7955.
© Gilligan Rowe & Associates Ltd. Disclaimer: This answer is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive, nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
Family Trust Property Value Crisis: Your Obligations
Dear Reader,
Recently I received a couple of questions from a Reader who was in a difficult dilemma. This Trustee was faced with the problem of having purchased a property on behalf of the Family Trust a couple of years ago. The property, due to current prevailing economic conditions, had decreased in value.
To make matters worse, the Trustees borrowed money to buy the property and the interest rate on the existing loan was 10.25% p.a. The Trustees wanted to know if they had a legal duty to sell the property.
They also wanted to know if they did decide to keep the property, should they try to refix the existing loan to a new lower loan rate.
I thought I would answer these questions as I think it likely the situation being faced by this particular Trustee Reader, is being considered by many Trustees in the present time.
Family Trusts: Your legal Duty
We need to remember Trustees have a legal duty to protect capital and assets held by a Trust. This duty has far reaching tentacles. For example, Trustees have a duty to ensure they invest and borrow prudently.
When deciding whether to sell a property held by a Trust, this fundamental duty has to be considered by the Trustees. If there is no risk of foreclosure by the Bank and if Trustees can meet the monthly loan repayments, then I believe it would be best to retain the property. I am basing my view on the belief that the property market is not in the best of shapes at present and a sale, whilst being achievable, may not result in the best of sale prices.
On the other hand, if the Trustees cannot afford to meet the loan repayments, then they should take immediate action to either market the property and sell it or look to refinancing the existing loan to a point whether they can afford to meet the loan repayments. Trustees need to do this as one of their main legal duties is to protect the assets of the Trust (eg: the initial deposit put into the property) and losing a property at a mortgagee sale does not demonstrate satisfaction of this duty.
So, whilst Trustees do not have a legal duty to sell a property in a falling property market, they do indeed have a legal duty to weight up the pros and cons of the situation and to make their decision accordingly. Once that decision is made, Resolutions recording the decision should be completed by the Trustees.
On the basis that the Trustees do decide to retain the property, they should then consider if they will stick with the present loan term or will seek to refix the term of the existing loan. Trustees may well want to refix to take advantage of new lower interest rates that are now on offer.
When deciding this question, Trustees must be prudent. This means taking into account a couple of facts such as pre-determining what the cost of refixing the existing loan will be and what quantum of savings will be made as a consequence of moving to the new lower interest loan rate.
Interest Rates & Trusts
One matter to be aware of is that Reserve Bank has slashed the Official Cash Rate from 8.25% mid 2007 to 3.5% as at 29 January 2009. Big deal you say. Why should Trustees care? Because the OCR is one of several factors that influence the interest rates Banks set, which in turn, determines how much Borrowers will repay in loan payments each month.
Will the OCR decrease further? That’s a million dollar question but some of NZ leading Economists think that the OCR could go as low as 2% by the middle of this year. What that may mean is that interest rates could continue to decrease, maybe even reaching low levels such as 5.5% p.a or lower.
We would all be multi millionaires if we knew when the OCR was going to reach rock bottom. I’d probably consider giving up my day job as well if I could predict when interest rates will reach the bottom of the trough as well. Because unfortunately I don’t possess ESP, I believe Trustees should adopt a prudent approach in the current market, and only fix their loans for a short period of time – say 6 months. That way when the bottom of the loan interest rate barrel is in view, Trustees will only have a small amount of break fee costs to pay to the Bank when they chose to break the short term fixed rate and move to a long term fixed rate contact.
I’m also an advocate of not being too greedy. According, if a new low interest rate, such as 5.5% p.a. was to come on the horizon, I may well take that up rather than wait for the rate to drop to say 5.3% p.a. As a Trustee I would run the numbers. It may not be worth running the chance that the rate would increase. After all, how much would the savings of say 0.2% really amount to on the loan?
With respect to working out what sort of break fee costs Trustees will pay if they do chose to refix an existing loan to a new lower interest rate, advice should be obtained from the Bank. Once this information is to hand, Trustees should compare the quantum of the break fee costs they will have to pay against the savings they will make each month on the loan at the new lower interest rate over the course of the new fixed term.
For example, let us assume Trustees decide to refix an existing original 30 year loan of $500,000 of which has been running for 2 years at an interest rate of 10.25% p.a. which has 3 years left to run, to enjoy a new loan interest rate of 5.99% p.a. Let us further assume that the Trustees decide to lock in this new rate for 5 years.
The old repayments under the loan were $4,531. The new repayments will be $3,072. This means the Trustees are saving $1,459 per month in loan repayments. The break fee costs the Bank is going to charge is set at $50,731. So the comparison is against the expected savings over the term and the break fee costs to be charged.
Based purely on this financial criteria only, I’d expect the Trustees to refix as the savings they will make outweigh the costs they will incur. However, it must be remembered that the break fee costs will need to be paid up front. This of course has to be taken into consideration. Once the decision has been made, Trustees should record it in Resolutions.
As to the question whether the Bank will try to charge the Trustees break fee costs for breaking the existing loan term, I say check your loan contracts. Most of the contracts I have seen spell out very clearly what the Bank is entitled to charge for in the case of an early termination. Solicitors usually go through this particular issue when acting for a Borrower as well. Remember, it is a contract that Trustees sign at the time of borrowing funds. Breaking legal contracts have consequences – usually penalties!!!
At present, there is much talk in the media about whether Banks will be stopped in their tracks from charging break fee costs. We need to understand a couple of things however in this respect.
- First, the sanctity of contact should be upheld. If we all broke the contracts we made simply because a better deal (such as a lower interest rate) came along later on, where would we be? Absolute commercial chaos would reign.
- Secondly, Banks have placed reliance on Borrowers honouring their contracts. In this vein, Banks have gone out and borrowed funds to on lend to their own customers. This means than when a customer breaks their existing loan contract, the Banks will forgo the interest they expected to earn.
- Lastly, if having a fixed contract simply means that the contract can be broken without any break fee costs being incurred by a Borrower, I imagine that Banks will offer only floating contracts rather than fixed contracts. This has implications for all Borrowers eg: no certainty of payments each month.
All this commentary aside, as a Trustee I would still ask the Bank if they would consider wavering or reducing any break fee costs they had decided to charge. After all, you don’t get if you don’t ask. Need more help? Go ahead Request a Call. It’s free to take the first step.
Janet Xuccoa
All the best,
Janet Xuccoa BCom LLB
Professional Trustee Services
FamilyTrusts.co.nz
Gilligan Rowe + Associates Ltd
Learn more about Janet
_________________________________________________
More Information?
If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview. Otherwise just call Janet Xuccoa. Janet can be contacted by emailing janet@familytrusts.co.nz or telephoning (09) 522 7955.
Guess Who’s Coming to Dinner? The Beneficiaries!
So you’ve decided the best thing to do to protect your hard earned assets is to put them in a Trust or Family Trust. This way, asset protection will prevail and the assets will be available for you, your children and other Beneficiaries to enjoy.
But what happens when things turn sour and the Beneficiaries want to know what’s in the Trust and what they’re entitled to. Are they entitled to know all about the Trust and its affairs?
This issue comes up more than most people realize. It especially raises its head when Beneficiaries are fearful and suspicious which can occur if there is limited communication between Trustees and Beneficiaries. The order of the day is thus good dialogue between everyone which tends to foster good will and trust.
In the event however that the Beneficiaries do want to know about the Trust, what information are the entitled to see?
Legal Basis of Beneficiaries’ Rights
Historically, it has been thought that a Beneficiary’s right to information stemmed from whether they were a Fixed or a Discretionary Beneficiary.
Fixed Beneficiaries had an entitlement to Trust assets pursuant to the Trust Deed provisions. Therefore, it was posited, Fixed Beneficiaries had an entitlement to view Trust documents and to receive disclosure of Trust information.
Discretionary beneficiaries on the other hand had no entitled to Trust assets. All they possessed was a right to be considered by the Trustees when the Trustees exercised their discretion with respect to the paying out of capital, income and /or the allocation of assets. Accordingly, it was supposed Discretionary Beneficiaries had no power to demand to see Trust information or to view Trust documents.
Recent case law has now clarified the basis on which a Discretionary Beneficiary may seek disclosure of Trust documents and this has nothing whatsoever to do with whether they are a Fixed or a Discretionary Beneficiary. Rather, the approach has been to apply to the Court’s on the basis that the Court has an inherent jurisdiction to administer Trusts.
Using this approach, the Courts have said that they possess inherent jurisdiction to supervise and if necessary, to administer Trusts. Beneficiaries of both classes have a right to approach the Courts to seek discourse of a Trust’s documents and it will be for the Courts to determine whether they will exercise their inherent jurisdiction or not. This of course means that the right of a Beneficiary to view Trust documents is at the discretion of the Courts.
The Courts have said that when they are considering exercising their discretion they will be mindful that they are engaging in a balancing exercise, balancing the competing interests of different parties (eg: trustees and beneficiaries and third parties) and will take into account various issues including personal and commercial confidentiality, parties privacy, consequences of disclosure, etc.
The Courts have also noted that they will be mindful that Trustees are not obliged to disclose to Beneficiaries their reasons for exercising their discretionary powers. This is important as it could have an impact on what documentation is released to a Beneficiary to view.
In some circumstances the Courts have pronounced, disclosure may be limited and safeguards may have to be put into place.
What Information are Beneficiaries Entitled to View?
Types of information that Courts have approved for disclosure include:
- Deeds of Trust;
- Deeds of Variation of Trust Deed provisions;
- Deeds of Changing of Trustees;
- Deeds of Resettlement;
- Legal opinions relating to the interpretation of a Trust Deed’s provisions;
- Legal opinions with respect to a Beneficiary’s rights;
- Valuations of assets of the Trust;
- Financial accounts of the Trust.
Some information Beneficiaries are not entitled to see. For example, the Courts have ruled beneficiaries are not entitled to view letters and notes from Settlors, Memorandum of Wishes, Trustees reasons for decisions made and motives of Trustees.
Beneficiaries Rights to Demand & Receive Payments
Because the Trust’s financial statements may be viewed by a Beneficiary under a Court Order, it is important to deal with allocation of income each and every year. Any income that has been allocated to a Beneficiary and shown as such in the financial statements, may be called by that Beneficiary to be paid to them upon them becoming adults.
Accordingly, only income that is to be spent on them should indeed be allocated to them in the financial accounts. Failure to allocate income in this manner may result in a Beneficiary requiring a Trustee to pay them the surplus income that appears as a credit in their Beneficiary account shown in the financial accounts of the Trust.
Summary
I believe that one of the best ways of avoiding any type of disagreement is communication. If full communication is made with a Beneficiary, whether they are a Fixed or a Discretionary Beneficiary, then there will be no mystery or reason for distrust to arise.
Whilst Trustees are not legally required to show Beneficiaries all Trust documents, it is in my view, sensible to be clear and honest with Beneficiaries when they ask about a Trust’s affairs. Failure to do so will simply create suspicion and exacerbate tension.
Janet Xuccoa
Janet Xuccoa BCom LLB
Professional Trustee Services
FamilyTrusts.co.nz
Gilligan Rowe + Associates Ltd
Learn more about Janet
_________________________________________________
More Information?
If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview. Otherwise just call Janet Xuccoa . Janet can be contacted by emailing janet@familytrusts.co.nz or telephoning (09) 522 7955.
Financial Statements & Family Trusts
Here’s a question from Mr Warren H. from Christchurch:
“Am I required to have financial statements completed for all
Trusts or just for Business Trusts”?Thanks Warren T.
Janet Xuccoa
ANSWER: Warren, the Inland Revenue Department places a duty on Trustees to prepare financial statements and file tax returns if the Family Trust or other Trust earns income. Trustees may also have to prepare and file GST returns.
Trustees need to remember that they are personally liable for the affairs of the Trust and this includes paying any taxes that are due to the Inland Revenue Department.
Good record keeping, including having bank statements evidencing transactions the Trust has engaged in, is crucial to preparing accurate financial statements from which the Trust’s tax returns can be compiled and the Trustees can be made aware of their taxation responsibilities.
Even if a Trust does not produce any income and simply holds passive assets such as a family home, I still recommend financial statements be prepared for the Trust. These type of financial statement will note advances made by the Settlors to the Trust, loans the Trust may have made to other entities, the gifting position, the assets the Trust holds and the liabilities the Trust has incurred. Again, such financial statements help the Trustees satisfy their duty when accounting to the Beneficiaries of the Trust. Reduced accounting fees may well apply for the preparation of these types of financial statements.
Properly prepared financial statements are a great tool that Professional Trustees use to ensure the Trust is being administered correctly and that all Trust documentation is up to date and in place. Without financial statements, this task is severely hampered. Correspondingly, poorly prepared financial statements will be a hindrance to Trustees and in some situations can be very dangerous. For these reasons, it is important to choose a qualified accountant who is familiar with accounting for Trusts, such as GRA.
For readers of this blog, GRA offer free accounting services for the first year for Trusts and Companies. There are however a couple of conditions which will be disclosed to Readers on enquiry.
All the best,
Janet Xuccoa BCom LLB
Professional Trustee Services
FamilyTrusts.co.nz
Gilligan Rowe + Associates Ltd
Learn more about Janet
_________________________________________________
More Information?
If you have any questions or queries relating to asset protection or family trusts you can Request-A-Call for a no-risk chat or to set up an interview. Otherwise just call Janet Xuccoa. Janet can be contacted by emailing janet@familytrusts.co.nz or telephoning (09) 522 7955.
