I was having a couple of quiet ones with my mate down the pub the other Friday. As I came back from the bar I noticed a rather smug grin had permeated his usually serious expression. Thinking I’d just bought a round out of turn I asked why he was looking so pleased with himself. “Well, I’ve just completed transferring all my personal assets into my family trust”, he declared, “and they’re now safe”. “Safe from what?” I asked. “From creditors should my business go down the gurgler” he crowed. “Is that imminent?” I ventured somewhat startled. “Oh no, but you never know. Were another GFC to hit and who knows what would happen. Now I know that the family home is protected – and that certainly gets me plenty of brownie points at home”.
Having a family trust is certainly popular – in 2016 there were about 250,000 trusts that filed a return to the IRD. And although it is not possible to get figures around the principal reasons each of these trusts were formed, asset protection is high on the list of reasons generally. And that certainly seems sensible – if you’re working hard trying to make your business successful you don’t need the added stress that one mistake, or some external factors outside of your control, could happen and take away everything you have worked for your whole life. But I suddenly had a thought:
“Well what about your creditors? Surely they will just insist on alternative forms of security? You don’t get something for nothing in this life”.
“But that’s the beauty of it – they don’t know. And if I open up credit accounts with my suppliers they never ask. When they get me to sign the personal guarantee they assume all my assets are mine.”
And he’s probably right. There isn’t a central register of family trusts and, assuming it’s a bona fide trust that has been properly set up, assets are protected. So creditors seem to be operating in the dark, or worse still, operating under the false assumption that the liable party has some asset backing.
So, is there anything creditors can do?
The first thing is to be alert to the fact that trusts exist and are quite extensively used. So ask the question of debtors as to whether any claimed personal assets are subject to a trust. In my experience people are usually quite open to affirming the existence of a trust – although many continue to claim, innocently but erroneously, that trust assets, such as the family home, are still under their ownership.
The lack of any register certainly makes it difficult to check assets status independently, but a certificate of title on real estate may give some clues. If the property is in a trust the proprietors will be the trustees – and the existence of a third name, a non-family member, may point to a professional trustee such as an accountant or solicitor.
Of course whether you need to go to these lengths to check whether a trust exists is very much dependent on the outcome of your credit risk assessment, i.e. does your exposure and entity risk assessment suggest that the assets in question should be required as security? There may be other ways that you can mitigate risk, for instance requesting and analysing the financial statements of your customer’s business.
But if your assessment suggests that the assets under question are needed as security then care is required. Perhaps it is best to leave the final word to my mate when I asked him whether he thought is fair that he could protect his assets when he was the one running the business whereas creditors, who have no view or input into the way he operates his business, could be potentially out of pocket if his business fails.
“But that’s business isn’t it? If you’re going to extend credit you need to do your homework – no-one is forcing them to extend credit to me”.