As we slowly return to our day to day routines following the COVID-19 lockdown, it’s a good time to reflect on the lessons learnt from the paired back existence we experienced during these unprecedented times. One of the overwhelming messages to come out of the lockdown, was an even greater appreciation of our families and our desire to protect them.

It is at times like these, that we should take stock of our personal affairs to ensure that in the event that something happens to us, the very people we want to protect are not left behind to sort out our unfinished business. A timely reminder to review your personal affairs and ensure everything is in order. Below are some areas worthy of consideration:

Wills

Memorandum of Wishes

If you have a family trust, putting in place a Memorandum of Wishes is one way that you, as the settlor, or creator of the trust,

If you have already put a Will in place, you should continue to review it and ensure it reflects your current intentions and wishes. Perhaps you have married since you last made a Will, and if so, you should check to ensure it was made in contemplation of marriage otherwise you may find that it’s

can signal to the trustees your intentions. A Memorandum of Wishes is read alongside the trust deed and trustees should have regard to the Memorandum of Wishes in the exercise of their discretionary powers in dealing with the trust assets and making distributions.

Lease Renewals

The compulsory shutdown of many businesses over the lockdown saw a number of leases being considered in greater detail. It is important that you review your lease documents
to ensure that you have current arrangements in place. If
the renewal or review dates have passed and the lease arrangement remains in place, it is likely it will be on a month by month basis with either party having the ability to terminate the lease with one month’s notice. This situation does not provide a great deal of financial certainty moving forward.

In my last article, I summarised some of the key changes to Trust Law arising from the Trusts Act 2019, which comes into force on 30 January 2021. One of the key changes.

The Act aims to make trusts more accessible and to strengthen the ability of beneficiaries to hold trustees to account. In doing this, the Act increases compliance requirements for trustees, which will likely increase the costs to operate and maintain a trust, and increases risks associated with being a trustee of a trust.

Requirement to keep core trust documents

As mentioned in my previous article, Trustees are required to keep core trust documents necessary for the administration of the trust.

Keeping the core trust documents together is clearly prudent and sensible, however at present the documents may not all be held together (e.g. some with trustees and some with advisers, lawyers and accountants). It is permissible for one trustee to hold most of the documents but each trustee must hold the trust deed and any variation of those terms. Where one trustee is to hold most of the documents, they will need to be held in a manner to allow the other trustees to access them easily.

Disclosure of information to beneficiaries

The Act creates a presumption that a trustee must make ‘basic trust information’ available to every beneficiary and ‘trust information’ available to beneficiaries who request it.

Before any information is provided the trustees must consider a range of factors and may choose to withhold the information if the trustees “reasonably consider” that the information should not be disclosed.

In either scenario (disclosure of information or non- disclosure) there will be ongoing requirements to update information previously provided and to review a decision to withhold disclosure of the information.

Review of Trustee decisions

A beneficiary will be able to apply to the court to review “the act, omission or decision” of a trustee “on the ground that the act, omission, or decision was not or is not reasonably open to the trustee in the circumstances.”

We will have to wait to see how this will work in practice, however we may see beneficiaries challenging trustee decisions more frequently particularly in circumstances that could be considered “contentious”.

What I suspect may occur is that trustees will seek professional advice more frequently for decisions for which they would not have previously done so. By way of an example, a trustee may now seek advice from a financial adviser on how to invest funds from the sale of property rather than placing the funds with the trust’s bank as they have done previously – where a court is considering whether a trustee is liable for a breach of the duty “to invest prudently to the applicable standard” the court can consider if the “trust investments have been diversified, so far as is appropriate to the circumstances of the trust” and whether “the investment was made in accordance with any investment strategy”.

Exemption and Liability Clauses

Following on from the increased compliance, is the inability for a trust deed (both new and existing) under the new Act to limit a trustee’s liability for breach of trust arising from dishonesty, willful misconduct or gross negligence (rather than ‘ordinary’ negligence), and does not allow a trustee to be indemnified out of trust property for such breaches. This means that trustees can no longer rely on broad indemnity clauses that purport to protect them against gross negligence.

You may consider that this is fair and reasonable, however when determining if a trustee has been grossly negligent, the Courts will consider:

The circumstances, nature and seriousness of the breach;

The trustee’s knowledge and intention relating to the breach;

The trustee’s knowledge and skills and whether the trustee has been paid;

The purpose for which the trustee was appointed;

The type of trust, including the degree to which the trust is part of a commercial arrangement, the assets held by the trust, how the assets are used, and how the trust operates.

While the threshold for gross negligence has been set very high, these changes may result in a trustee’s exposure to liability increasing which some trustees may not wish to carry.

Where professional persons, such as lawyers and accountants, are still happy to act as trustees, we will expect that they will become more involved in the day-to-day affairs of the trust.

We hope that the above gives an idea of how working with trusts may change and importantly how it could mean that the increase in the time and cost of administering some trusts, will result in some trusts no longer being cost-effective.

On 30 July 2019, the Trust Act 2019 received Royal Assent signalling a modernisation of trust legislation that, given the number of trusts in New Zealand, we should all be aware of.

The new Act will replace the Trustee Act 1956 and its purpose is to make the law more accessible to both trustees and beneficiaries of trusts.

Significantly the new Act does not come into force until 30 January 2021 – given the extent of the changes, the new Act provides for an 18-month lead in. While this is a substantial period, time will pass quickly and the new Act will be in force before we know it.

The new Act will apply to existing and new trusts, and therefore we recommend that all existing trusts are reviewed in light of the changes and in some cases varied or wound up.

Some of the key changes being introduced by the new Act are:

Trustee Duties

The new Act identifies and defines mandatory and default duties of trustees.

The five mandatory duties that cannot be avoided or excluded in the trust deed are:

• a duty to know the terms of the trust,
• a duty to act in accordance with thoseterms,
• a duty to act honestly and in good faith,
• a duty to act for the benefit of beneficiaries, and
• a duty to exercise the trustee’s powers for proper purposes.The ten default duties are not compulsory but will apply unless they are expressly excluded in the trust deed. The default duties are:

• Exercise reasonable skill and care in administering the trust, having regard to any special knowledge or expertise that the trustee has, or to any special business or professional knowledge or expertise if the trustee is acting in the course of a business or profession;
• Invest prudently, with the same regard to special knowledge or experience as above;

• Not exercise their power for their own benefit, whether directly or indirectly;

• Regularly and actively consider whether they should be exercising their powers;

• Not bind or commit trustees to the future exercise or non-exercise of their powers;

• Avoid conflicts of interest;

• Act impartially between beneficiaries;

• Not profit financially from being a trustee;

• Not take any reward for being a trustee; and

• Act unanimously with the other trustees. Trust Duration

The length of a Trust’s life has been extended from a maximum of 80 years to a maximum of 125 years.

Duty to hold documents

The new Act requires trustees to retain core documents, so far as it is reasonable. Where there is more than one trustee, each trustee must hold:

The trust deed and any other document that contains terms of the trust;

Any variations made to the trust terms;

And they must be satisfied that at least 1 of the trustees holds the other required documents and that they will be made available to the other trustees on request. The other core documents are:

• Records of trust property identifying the assets, liabilities, income and expenses of the trust;

• Records of trustee decisions made during the trustee’s trusteeship;

• Written contracts entered into during that trustee’s trusteeship;

• Accounting records and financial statements prepared during that trustee’s trusteeship;

• Documents of appointment, removal, and discharge of trustees;

• Any letter or memorandum of wishes from the settlor;

• Any other documents necessary for the administration of the trust;

• Any of the above documents that were kept by a former trustee and passed on to the current trustee.

Disclosure Obligations

The new Act favours keeping beneficiaries informed and clearly outlines the basic trust information that is to be provided to every beneficiary, namely:

• that they are a beneficiary;
• the name and contact details of the

trustees;

• changes to the trustees as they occur; and

• the right of the beneficiary to request a copy of the terms of the trust or trust information.

Trustees may only refuse to provide information to beneficiaries after considering both their general obligation to provide information and a series of factors as to the nature of the information and the practicalities of restricting that information.

The implications of this are clear, particularly in circumstances where it has always been considered appropriate for a person’s interest in a trust not to be disclosed to them.

These are only some of the changes however in general terms, the new Act, increases the rights and protections for beneficiaries while also imposing more responsibility and prescriptive requirements on the trustees. The changes are likely to make trusts more transparent for beneficiaries but also more intensive to administer for trustees and could lead to changes both to trust documentation and administration.

If you are a trustee of a trust, then we recommend that you speak to the trust’s lawyer in the coming months to consider the changes as they relate to the trust in question.

It is common that an aspect of a business owner’s retirement plan is to sell the business and to use the proceeds to fund their retirement. It is important that thought and planning be given to the “exit strategy” so that when it comes time to sell the business, it is in the best shape.

This is particularly important in instances where “you” are the business and there is a question as to whether the business can continue without you and therefore what value there is in the business if you are not involved.

Business owners are often unaware of the time that it can take to prepare a business for sale. The process is often complex and will require assistance from specialists. For example, the way that you have operated the accounts of the business may well have be set up to suit your personal circumstances, but does it show an accurate picture of the performance of the business and if not, what can be done to ensure that a prospective purchaser can see the true value in the business.

Considerations

Depending on the nature of the transaction – sale to a third party or a transfer to a family member, there may be different considerations. Some matters you should consider in all transactions are:

• How to maximise value;
• Reliance on a customer;
• Managing customer expectations;
• Availability of premises;
• Maintaining support of employees; • Taxation.In a family context, there will be other considerations:

• management succession – is the younger generation ready to take over and do they have the skills and commitment to run the business;
• estate planning;
• maintaining family unity.

Maximising value

Clearly it is vital to be able to maximise the value of your business so that you can achieve the best possible price. This brings in various elements as a business’s value can be dependent on several factors.

Of primary importance, is understanding what your business is potentially worth. Most business owners will not know what their business is worth or how they can improve this.

If “you” are the business, then special consideration will need to be given as to the business’s worth (both with and without you) and how to maintain its value despite your exit from the business. For example, you may need to bring in a “successor” to work with you first before handing over the reins.

Reliance on a customer and managing customer expectations
If most of your income comes from one customer (or a small number) then it goes without saying that maintaining these customer relationships is crucial to the ongoing success of the business.

How you deal with your customers will inevitably depend on the nature of your business, however when considering your “exit strategy” you will need to consider the contractual arrangements you have in place and if the sale of the business provides them with an opportunity to terminate the contract.

I also note that, for small businesses, there may not be a contract at all. While this may currently work, you will need to consider this from the perspective of a buyer as the ability for a main customer to simply walk away may impact on what they believe that the business is worth.

It will also be important to consider how much you wish to be involved – a new purchaser may want you to be involved for a period to ensure the effective transfer of control and to help maintain customer relationships. You will need to consider this from your personal perspective as well as from the new owners (is there value in you staying involved) and from the customers.

Premises and employees

Both of these are likely to be crucial to the ongoing success of the business and if you lease your business premises then it will be important to ensure that it is available to a new owner for a reasonable amount of time as, again, the value they may attach to the

business may reduce if there is a risk that they will need to find new premises not long after purchase.

Key employees will need to be considered early in the process and possibly be included in the discussions with the prospective purchaser.

Communication

Communication is key throughout this process – deciding who to work with on your exit strategy and choosing when and how to discuss with your employees and customers. Poor communication could result in customers and/or employees leaving the business, which may in turn impact on its value.

Be prepared to adapt

The hardest part will be creating a plan. The challenge is to ensure that the plan remains effective and does not become outdated – you need to be prepared to adapt your plans.

An outdated and ineffective plan may cause as many difficulties as no plan at all.

Seek Advice Early

It is hoped that the above has provoked thought and will encourage action, however I want to highlight the importance of seeking advice from your professional advisors early in the process. The key is careful, well informed consideration of all the issues, and effective and early communication with your professional advisers will help achieve this.