THE IMPORTANCE OF INVOLVING THE TRUSTEE IN ADDING ASSETS TO YOUR TRUST STRUCTURE
BY MATTHEW SMITH -GENERAL COUNSEL
Southpac has been in business for almost 40 years, and has provided trustee services for thousands of trusts in that time. In doing so, it has come across hundreds of different forms of trust agreement. These can vary enormously and come in all shapes and sizes. Some run to 10 pages while some have over 200; some focus more on asset protection, others on tax and estate planning; they can be revocable or irrevocable; they come with flee provisions, compulsion provisions, duress provisions, sprinkling provisions, QTIP provisions – the list is endless. They all have one thing in common, however, as the following samples from some of our regularly used trust agreements demonstrate:
The Settlor and any other person shall have the right at any time to add to the Trust Fund, by will, inter vivos gift, or otherwise, other money or property … provided such is acceptable to the Trustee. Such additional money or property, on its receipt and acceptance by the Trustee shall become a part of the Trust Fund.
‘Trust Fund’ includes all property transferred to and accepted by the Trustee as additions to the Trust Fund.
The Trustee may accept from any person and add to the Trust Fund any property or interest in property.
With the consent of the Trustee, the Settlor and any other persons may … increase the corpus of the Trust … by contributing thereto insurance policies, cash, securities or other property.
The Trustee may, in the Trustee’s sole and absolute discretion, accept, disclaim, or refuse … additional property … to be added to and to be held, managed, administered and distributed as part of the Trust Estate.
Whenever property is contributed to any trust by a trust settlor or other person, it is essential that the trustee accept that property into the trust. This is also the case where property is added to a company owned by the trust. In those situations, in order for the property to be correctly recorded as forming part of the trust fund, the trustee must first accept it in to the trust before transferring it to that underlying company by way of capital contribution.
The risks of failing to follow this procedure are clear: if the trustee has not accepted property into the trust, that property does not form part of the trust fund. Accordingly, it has not left the settlor’s possession. It cannot be subject to the protections afforded by Cook Islands or Nevis asset protection trust legislation. Crucially, it still remains the settlor’s property and forms part of their taxable estate. It follows that a failure to inform the trustee of a transfer of assets to the trust could be an extremely costly oversight.
While many banks will notify the trustee when an additional contribution is made by a settlor to an account held in the name of a trust, this is not the case across the board, so it is vital that settlors do not make the mistake of assuming that banks or investment managers will notify the trustee of every additional contribution – it is incumbent on trust settlors to do this themselves. This is especially the case where an asset is added to an underlying company: such assets are frequently accepted by banks (or by the settlor where they themselves manage the company) without any notification going to the trustee. It is therefore, all too easy for assets to be added to a trust structure without the trustee’s knowledge. But just because it can be easily done does not mean it should be.
For example, a settlor who has placed their assets into an asset protection trust without notifying the trustee may believe those assets are protected form any future creditor. And if they form part of the trust fund and have been placed into the trust before a cause of action against the settlor accrues, then they will be. However, if a creditor subsequently makes a claim to those assets, it could be open to them to apply to court for a ruling that those assets were never accepted into the trust by the trustee and therefore never left the settlor’s ownership. The assets would therefore be available to the creditor.
Similarly, if a settlor has failed to inform the trustee of a substantial settlement which has been made to a trust in order to take advantage of the settlor’s lifetime gifting exemption or some other form of tax relief, then that transfer could be deemed never to have been made. This would, of course, have drastic consequences as far as estate tax is concerned.
In order to properly evidence the acceptance of property from a settlor (or other person) into a trust, we recommend that the trustee enter into a Deed of Gift with the contributor. This is a document executed by both the contributor and the trustee which identifies the contributed property and confirms that the trustee has accepted that property into the trust fund on a given date. It provides incontrovertible evidence, if ever it is needed, that property has been gifted to a trust and is subject to the protections of the trust.
However, with certain types of property, evidencing the intention of the settlor to transfer the property and the intention of the trustee to accept it is not in and of itself sufficient – if there are any laws in the jurisdiction in which the property is domiciled which apply to the transfer of such property, these must also be observed and adhered to in order to ensure the transfer is effective. The 19th century legal maxim ‘equity will not perfect an imperfect gift’ still holds true today. It means that if a transfer of property to a trustee is not in accordance with the legal requirements which apply to the transfer of that type of property where it is domiciled, then its transfer to the trustee is ineffective, regardless of the intentions of the donor and recipient of the property.
It is also important for the trustee to know when the settlor wishes to contribute trust assets so that the trustee can make enquiries as to the origins of those assets and be satisfied that it does not derive from illegal or unlawful conduct. This requirement is imposed on trustees by AML/CFT legislation in pretty much every jurisdiction that has a trust industry, and certainly in the Cook Islands, Nevis and New Zealand. It is essential that settlors inform the trustee of any new contributions so that the trustee can ensure it remains in compliance with its legal obligations.
If you have contributed property to a trust or an underlying company without the trustee’s consent then it may not be too late – if full details of historic contributions are provided and the trustee receives sufficient information to enable it to carry out the necessary source of funds checks, then it may be possible for the trustee to accept the property with effect from the date on which it was contributed. If you are concerned you may need to perfect a previous transfer of assets to a trust, please make contact with your regular Southpac point of contact as soon as possible. Given the changes to US estate tax laws that Congress are predicted to pass during October 2021, time is of the essence and US settlors should take steps immediately to ensure that all previous contributions to a trust or underlying company have been safely accepted by the trustee.
So to summarise and finalise, here are our top tips for getting it right:
• Do not assume the bank or your investment advisor will tell the trustee you have added funds to an account within the trust structure – always notify the trustee of this yourself.
• Do not be offended when the trustee asks you for supporting information to show that the property comes from a legitimate source. The trustee is not doing this because it thinks you are a criminal, but because it is legally required to make such enquiries as are objectively required for the trustee to be satisfied the source of funds is legitimate.
• Don’t use unilateral assignments or deeds to transfer ownership of property to the trustee without the trustee’s knowledge – any documentation effecting a transfer of ownership of property should be executed by the trustee in its capacity as the recipient of that property.
• Ensure that any property transfers comply with the property transfer laws of the jurisdiction in which that property is domiciled.
• If you have any doubts as to whether previously contributed property has been accepted into trust by the trustee, please check this with your regular point of contact.