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16/09/2016 | Matt Neibling beneficiaries, trust deeds, settlor, notional settlor, notional settlor exclusion

When Cheap Isn't Cheerful

The trust deed that ended my morning coffee
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I just about choked on my morning coffee last week after our legal services team showed me a trust deed they were reviewing.

The deed was produced by a widely used online document provider and its cover featured the names of a national law firm and well known advisory firm. There were two very clear, and concerning, problems with the trust:

  1. The settlor was the only named beneficiary - which should have caused a red flag to go up in any system; and
  2. Substantial distributions were then made over many years to that beneficiary/settlor - a problem that should have been picked up in a subsequent review of the deed.

The concern for us is that we've seen more of these issues in the market during the past decade with the emergence of "robotic" document providers.

The race to remove human intervention

The race to remove human involvement in the preparation of certain legal documents has been on in earnest for years, particularly with regard to business and investment structures such as companies, trusts and SMSFs.

The rise of these robotic document systems marketed to time poor, cost conscious professional advisers in the accounting and wealth management space is leading to troubling repercussions.

The systems I'm talking about are based on template legal documents with the client variables being inserted via an interface. They are sold to advisers on the basis that they save time (usually via data integrations) and, therefore, money.

But is cheap necessarily cheerful? Not when something goes wrong...

No red flags, no scrutiny = no surety

Other than common issues with sub-standard legal templates (and a natural reticence or outright inability by online-only providers to subsequently address such matters), we also see numerous troubling errors being made by those operating these systems.

While the source of these errors lies between the individual operator's chair and keyboard, the systems themselves do not include the necessary internal smarts (in terms of data validation or other analytics) to make them any more than brainless automatons. This delivers a simple equation - garbage in = garbage out.

Of course, post document production, if the secondary human checking mechanisms fail at the advisers' end, the errors are enshrined and perpetuated - often to lie dormant in files as ticking bombs until such time as some future event sets them off. In the majority of instances, these events are adversarial - we're talking about tax office audits, partnership problems and marriage breakdowns - so quick fixes aren't on the table.

If you think you're covered, think again

Issues like the one I saw last week are not easily rectified and will often result in significant liability for the affected party. It's hard to escape the fact that such liability lies not with the system that produced the documents, but is likely to rest squarely on the shoulders of the advisers who used those systems and then failed to adequately review the trust deed.

If you have any doubts, check with your PI insurer.

Why shoulder the risk?

The Acis system has been designed and developed to shoulder the risk for you:

System smarts - Our online system includes inbuilt validations that immediately flag up obvious structural issues. In the instance of a settlor being nominated as a beneficiary - as was the case last week – the system would have alerted you immediately

Expert scrutiny - Our team reviews each transaction before it's finalised and will highlight potential issues before they are embedded in the structure; and

Review tools - we have a number of tools readily available to assist you in reviewing structures, such as discretionary trusts.

The bottom line is the importance of understanding if inadequate processes and suppliers are putting your business at risk.