Mitigating Risk: The "Two Trust Structure"
By Tammy McLeod
Amy and Henry were a young couple who were going places. They had bought their family home early in their relationship, and as the Auckland house market increased in value, and they paid down their debt, they had a sizeable chunk of equity in the property. They had transferred the property to a trust on the advice of their lawyer a number of years ago at the same time as they had set up their business. The business was a small engineering company which manufactured a niche product for the boat building industry. Over the years their reputation had grown and the business was expanding. The shares in the company were also owned by their family trust.
As the business expanded, so did the need for more space for their business, so Amy and Henry signed an agreement to lease larger premises not far from where they were already based. They rang their accountant to go through the numbers to see if the business could sustain a greater rent and were just about to call their lawyer, when their accountant said that this might be a good time to talk to a more specialist lawyer about the structure of all of their affairs. Their current lawyer was lovely, but was more of a general practitioner than a specialist. Their accountant made a recommendation and they made an appointment to see the new lawyer.
The first thing the lawyer noticed was that while the company would be leasing the new premises, the agreement to lease was prepared on the basis that Amy and Henry’s trust would be the guarantors of the lease. The lawyer pointed out that because the trust which owned the shares in the company also owned the family home, the family home was effectively guaranteeing the lease of the premises. The lawyer suggested that one way of mitigating risk such as this would be to have the family home in a separate trust to the business. The lawyer explained that this kind of “two trust structure” worked really well for people in business, as for a lot of people separating risk from lifestyle assets is important.
Amy and Henry took that advice and ended up with a much more robust structure. They learned a good lesson, that it is important as your business and life changes and evolves, you may need to adapt your structuring to make it more robust and able to withstand challenge if that “worst case scenario” eventuates.