Trusts and guarantees.

Dawn and James were a successful couple in their early 60s.

They had done well for themselves, accumulating a small portfolio of commercial properties as well of course, as their own home and also a small bach down at Ohakune – they were keen skiers.

At the insistence of their lawyer, they had established a trust some years ago. It was a well maintained trust. James and Dawn were fastidious at getting things right. They made sure that they had an independent trustee and their trust administration was immaculate. They had read in the papers about the Courts looking at such things if a trust was ever challenged.

Not that Dawn and James ever expected their trust to be challenged. They had two grown up daughters and three small grandchildren. They liked their sons-in-law and could never imagine the trust being challenged. They did acknowledge though that it was hard for young families to get ahead with the price of property being what it was and they were keen to help their daughters if they could.

Their opportunity arose when their youngest daughter, Marie, and her husband, John, approached them to see if Dawn and James would be able to guarantee their borrowings on the new house that they were purchasing. Marie and John had a great income between the two of them, but they hadn’t been able to save a very big deposit due to the amount of rent they were paying. Dawn and James were delighted to help out and of course, said yes.

When the bank documents arrived, Dawn and James went to their lawyer to get them signed up. Their lawyer explained that as Dawn and James’ assets were in the trust it was actually the trust guaranteeing. 

He said it was getting more and more common these days for parents to guarantee their kids and as long as they thought the kids could pay the mortgage it should all be fine.

Unfortunately for Dawn and James it didn’t turn out well. A couple of years after signing the guarantee they got a letter of demand from the bank. It turned out that John had guaranteed his brother’s business and the business had failed. One thing that Dawn and James’ lawyer hadn’t told them was that guarantees chain. Because the trust had guaranteed all the obligations of Marie and John and then they in turn guaranteed John’s brother’s business, in effect Dawn and James’ trust had guaranteed John’s brother’s business.

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