What Is A Grand Trust? Protecting Assets for Future Generations

1 May, 2019 | Peter Smith

A grand trust is a variation of a traditional discretionary family trust that provides extra protection for the assets of a family trust. A grand trust provides peace of mind for settlors who wish for the assets of the trust to continue to provide benefit for future generations after their death.

A grand trust is particularly suited to settlors who are concerned about preventing the sales and break-up of a family business or farm, or who wish a bach to stay in the family for future generations, or where the trust has significant assets that provide income to the trust.

Traditional Family Trusts

One of the fundamental problems with the form of trust deeds for discretionary family trusts, which have been prevalent in New Zealand for many years, is the access to the property of those trusts that those trust deeds provide.

There are two forms of distributions that can be made from discretionary family trusts (trusts):

• Distributions of income received by the trustees of a trust in any particular year.
• Distributions from the assets of a trust.

Family Trust Disputes

It is the access to the assets or property of a trust that is at the root of disputes over trusts.

These disputes manifest themselves in terms of arguments between separating husbands and wives over the breaking up of a trust and the distribution of its assets, and arguments between children who, once their parents (the settlors) have died, view the trust as something to be dismantled and the property of the trust distributed.

Trusts as wealth creation instruments for future generations

Trusts are wealth creation instruments. In other words, over the lifetime of a trust which covers several generations of a family, the concept of a trust is that the assets settled on the trust are nurtured and increased so that successive generations of a family can benefit from the income generated by those assets.

By providing that those assets can be distributed among beneficiaries leads to a tendency whereby on the death of the settlors the trust is broken up and distributed and the wealth creation aspect of the trust is lost forever.

The Grand Trust provides the answer

The concept of the Grand Trust provides the answer for settlors who wish to retain asset wealth for future generations by preventing the breakup and distribution of the assets of the original trust.

The main features of the Grand Trust are:

• The only persons entitled to distribution of the property and assets of the trust are the original settlors while they are alive. Once the original settlors die then there is no right or expectation that a child beneficiary will automatically be entitled to any asset of the trust.
• There is no right to wind up the trust early to bring the distribution date forward.
• The only distributions that will be made from the trust will be distributions from the income of the trust. The trust deed of a Grand Trust should be drafted in such a way that it is the beneficiaries that formally apply for grants of income, and it is the trustees of the trust that make the decisions as to whether to make those grants.
• The settlors may also choose to stipulate that the main reason for any grant of income will be to encourage the self-reliance of a beneficiary. By way of example, a grant of income may only be made for a deposit on a house or farm, or the purchase of a business or the education or health of a beneficiary.
• Grants of income may not necessarily be made by way of a gift. A grant of income can be made by way of a loan to a beneficiary on specific terms.
• It is intended that the term of the trust must be the maximum term prescribed by law. The maximum period is 80 years currently. Parliament is however considering passing the new Trust Act which will increase the term of the trust to 125 years.
• If the trust, by law is able to be renewed at the end of its term then the trustees are mandated in the trust deed to renew the trust deed.

Responsibilities of trustees

Because the life of a Grand Trust is expected to be for a very long period the trustees must expect to be accountable for developing proper strategies and policies for the management of the trust assets and the distribution of the trust income and that accountability comes about by virtue of the trust deed calling for an annual general meeting of the trustees and the final beneficiaries (the children and grandchildren etc. of the settlors). At an annual general meeting a motion can be proposed to remove trustees and appoint new trustees. Such a motion must be passed by a vote of 75% of the final beneficiaries.

Communication with beneficiaries

Once the settlors have died, it is important that the final beneficiaries have some say as to the direction of the trust and their voices will be heard at the annual general meeting. It will be important that the trustees quickly establish a culture of transparency with the beneficiaries and develop policies known to all of the beneficiaries in terms of how distributions and grants of income from the trust fund are to be made and how the investments and business of the trust are to be properly managed. The trustees will also have to show that they have governed the Trust properly.

Disadvantages of the Grand Trust In this writer’s view, the only disadvantage of the trust will be that perceived by those beneficiaries who want to get their hands on the assets or property of the trust and will be unable to do so by virtue of the wording of the trust deed. Once the original settlors have both died, the trust is irrevocable so that no final beneficiary will be entitled to receive any asset or property from the trust unless by law the trust comes to an end of its term which at this stage is likely to be a minimum of 125 years. On the other hand, if the trustees develop a culture among the beneficiaries that the trust is governed properly and will last in perpetuity, then, in theory, the trustees should have no problem in getting the beneficiaries to vote for the renewal of the trust period at the end of the 125 years.

Farmers attracted to the idea of a Grand Trust

Many farmers are attracted to the concept of the family farm remaining in the family forever. The concept of a grand trust fulfills this vision.

Principle among the reasons why family farms do not remain in a family for generations to come is that property – especially land, in New Zealand has a ready market and is able to be sold and converted into money and distributed among the children and grandchildren of the original farm owners.

Putting the family farm into a Grand Trust whereby the children and grandchildren have no access to the proceeds of the sale of the family farm is an answer to the destruction of wealth brought about by the break up of the family farm among those children and grandchildren.

Do you need to replace the wording of your family trust?

Clients with discretionary family trusts may consider replacing the wording of their trust deed with the wording of a Grand Trust. Most modern trust deeds are able to be amended so that a discretionary family trust can be converted into a Grand Trust.

If you wish to discuss whether your situation suits varying your trust to Grand Trust or setting up a grand trust, contact experienced family trust lawyer, Peter Smith by phone at 09 837 6882 or email peter.smith@smithpartners.co.nz.