Would-be trustees need to weigh their liabilities
Would-be trustees must carefully weigh the risks versus rewards of accepting a role on a trust.
THOUGH MANY farms are in trusts, Palmerston North Crown prosecutor Ben Vanderkolk believes this creates problems in succession planning.
He says essentially a trust is ‘just a bundle of rights and obligations’ which doesn’t ‘own anything’. The obligation of the trustees is to look after the interests of the ‘beneficiaries’, in most cases siblings.
“A trust has no corporate structure so it doesn’t grow or prosper or manage anything. Trusts are very difficult to unscramble. The key problem is that the trustees are the owner of the whole asset – it is difficult to administer in a way that children can get funds out or have their entitlement distributed to them. And it’s rare that children will challenge the trustees, who are usually the parents alongside the family solicitor and accountant.”
Vanderkolk says from what he’s seen, trusts have a place in protecting assets but are poor vehicles for farming operations and capital holding. And structurally they are difficult to operate. A question worth asking, when considering setting up a trust, is, can you guarantee that you can control it after your death?
“With a company you can have just enough capital needed to run the business, and the rest of the capital generated as dividends, profits and retained earnings is available for investment off the farm or to buy shareholders out. There are advantages in a company structure because equity is reflected by the value of the shares, directors are charged with increasing shareholder value and capital can be managed to successfully fund the operation.”
With a company structure, the children could be encouraged to participate in its governance as opposed to merely being employees on farm. Parents or owners should find out what their children want to do and make sure the entity has sufficient capital for them to pursue off-farm careers if that’s what they want.
“Fundamentally a company director has to protect the value of the company shareholding whereas a trustee has a duty to protect and promote the benefit and maintenance of the beneficiaries, not necessarily grow the wealth of the business. Farmers should be able to concentrate on farming and governance of the farming enterprise rather than worry about the discharge of their fiduciary duty as trustees.”
• For a profile of Ben Vanderkolk turn to pages 10-11
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