Historically, trusts have been an extremely popular asset planning tool in New Zealand. With no register of trusts, the exact number of trusts is unknown, however, conservative estimates are that there are between 300,000 and 500,000 trusts in New Zealand. The changes proposed by the Trusts Bill will therefore impact the lives of many New Zealanders.
Settlement of a trust gives rise to complex legal obligations which are often misunderstood by settlors, trustees and beneficiaries alike. The Justice Select Committee considers that these misunderstandings are largely a result of the current legislative framework being "convoluted and out of date". As well as the governing legislation being more than 60 years old, many key aspects of trust law stem from ancient principles of equity contained in English cases that, in some instances, were decided hundreds of years ago.
Following a lengthy and comprehensive review of the law as it relates to trusts in New Zealand by the Law Commission, a revised Trusts Bill was introduced to Parliament on 1 August 2017. It is intended that the Bill, when brought into law, will replace the Trustee Act 1956 and the Perpetuities Act 1964, as well as bringing together the core principles of case law in one easily accessible piece of legislation.
In October last year, the Select Committee issued its report on the Bill and recommended that it be passed with some minor amendments.
So, what will the Trusts Bill mean for you as a trustee?
The Trusts Bill differentiates between mandatory duties, which are not able to be modified or excluded by the trust deed, and default duties, which will apply unless the trust deed expressly excludes them.
Mandatory duties include: a duty to know the terms of the trust, a duty to act in accordance with those terms, a duty to act honestly and in good faith, a duty to act for the benefit of beneficiaries, and a duty to exercise the trustee's powers for proper purposes.
The default duties, which will apply unless they are expressly excluded by the trust deed, are set out below:
- A duty to have a general duty of care
- A duty to invest prudently
- A duty not to exercise power for own benefit
- A duty to consider exercise of power
- A duty not to bind or commit trustees to the future exercise of a discretion
- A duty to avoid any conflict of interest
- A duty of impartiality
- A duty not to profit from the trusteeship of a trust
- A duty to act for no reward, and
- A duty to act unanimously.
Trustees will need to consider the applicability of each of these to their particular trust and decide whether they should be modified or excluded from applying to ensure that trustees are not unknowingly and unnecessarily in breach of them. Trustees of trusts which are already in existence should consider whether the terms of their trust deed should, where there is the power in the trust deed for them to do so, be varied in order to exclude any of these duties. The Bill also places certain obligations on persons advising on the creation of trusts, to ensure that the settlor of a trust is properly advised of the effect of the modification or exclusion of a default duty.
Obligation to Keep Trust Documents
The Bill clarifies the documents which trustees are required to retain, including the trust deed, any current memorandum of guidance, any deeds of variation of the trust deed or change of trustee, documentation recording the assets and liabilities of the trust and any other documents necessary for the administration of the trust.
Beneficiary's rights to Trust Information
The Bill creates a presumption that Trustees must notify every beneficiary of certain basic trust information, including the fact that they are a beneficiary, the names and contact details of the trustees, when there are any changes to the trustees, and of their rights to request trust information. This presumption is designed to ensure that beneficiaries have adequate information to be able to hold trustees accountable and enforce the terms of the trust deed.
This is a significant change. Previously, a beneficiary would not necessarily be aware that they were named as a beneficiary. These disclosure requirements are likely to be a concern to many settlors and trustees who had not intended, when setting up a trust, that the trustees would be required to provide such information to beneficiaries. This is particularly so in older trusts, where it was common for wide classes of extended family members to be named as beneficiaries, such as grandchildren, siblings, nieces and nephews, along with the spouses or de facto partners of such extended family members.
Courts Powers Widened
The Bill gives the court the power, on an application by a beneficiary, to review any act, omission or decision of a trustee on the grounds that such act, omission or decision was not reasonably available to the trustee in the circumstances. The Bill also gives the court wide powers to set aside any act or decision, to restrain a trustee from taking a proposed course of action, and to make any other order deemed necessary by the court.
It is also proposed to widen the powers of the Family Court to make orders involving trusts. The intention behind this change is to promote efficiencies when trusts are involved in relationship property disputes which are being heard in the Family Court, to prevent litigants having to seek recourse to the High Court.
Length of Trust life to be extended
Currently, trusts are able to exist for a maximum of 80 years. The Bill repeals the Perpetuities Act 1956 and abolishes the common law rule against perpetuities, and states that the duration of a trust may be up to a maximum of 125 years. The Bill specifically states that assets held by one trust and resettled to another trust must be distributed within 125 years of the original settlement of those assets on the first trust.
Looking to the Future
As innocuous as some of these changes may appear, trustees and trust lawyers may need to prepare themselves for a potential onslaught of trust litigation. The combination of mandatory disclosure, codified duties, and wider powers being granted to the Courts work together to create further inroads for aggressive and/or aggrieved beneficiaries who wish to try their luck with the courts.
Once enacted, the Bill will come into force 18 months after it receives Royal Assent. If you would like a "health check" on your trust before the Bill comes into force, please do not hesitate to contact any member of our specialist Trust Law team.