Many New Zealanders are involved with trusts in some way, whether as trustees or beneficiaries of family trusts or as volunteers with charitable trusts. However, despite the popularity of trusts, the law relating to trusts is often archaic and difficult to follow. Over the past decade, the Law Commission has led a review of the law of trusts intended to modernise the law and make it more accessible. This review ultimately resulted in the enactment of the Trusts Act 2019 (the Act). The Act takes effect on 30 January 2021.
Anyone involved with trusts in New Zealand should familiarise themselves with the Act. Overall, the Act increases the compliance requirements imposed on trustees, improves beneficiary rights to access information and increases the scope for beneficiary claims against trustees and professional advisors. Trustees and their advisors in particular need to ensure that they understand the key features of the Act and consider what they need to do to prepare for the changes that will take effect in 2021.
What is the Act’s purpose?
The purpose of the Act is to restate and reform New Zealand trust law by:
- setting out the core principles of the law relating to express trusts;
- providing for default administrative rules for express trusts;
- providing for mechanisms to resolve trust-related disputes; and
- making the law of trusts more accessible.
It is important to note that the Act applies to all express trusts, that is, trusts created deliberately. That includes private family trusts created by signed trust deeds, trusts created in wills, charitable trusts and large investment trusts. All express trusts, including trusts that currently exist or that are created before the Act takes effect in 2021, will need to comply with the Act once it takes effect.
The Act attempts to make the law of trusts more accessible to everyone by summarising hundreds of years of legal developments into a single piece of legislation. The intention of the Act is that anyone with a question about the law that applies to their trust, should be able to find an answer by reading the Act themselves. As a result, most of the Act does not significantly change the existing law and generally records and reflects current best practice for trust administration and management. However, this process inevitably ‘raises the bar’ for trustees, as the requirements which may previously have been considered best practice become the minimum standards for future trust administration.
It is useful to begin by reviewing how the Act describes the duties of trustees. The Act provides for both mandatory trustee duties and default trustee duties. The mandatory duties are that trustees must:
- know their trust terms;
- act in accordance with those trust terms;
- act honestly and in good faith;
- act for the benefit of beneficiaries or the trust’s purpose; and
- exercise their powers for a proper purpose.
These mandatory duties have traditionally been considered an essential component of a valid trust and are already effectively mandatory duties under common law. The Act simply provides a useful summary for trustees to keep in mind.
In addition to the mandatory duties, the Act creates a range of default duties that will also apply to trustees unless they are specifically excluded by the trust documents. These default duties are that trustees must:
- exercise reasonable skill and care;
- invest prudently;
- not exercise trustee powers for their own benefit;
- consider actively and regularly whether the trustee should be exercising one or more of the trustee’s powers;
- not bind trustees to a future exercise of discretion;
- avoid conflicts of interest;
- act impartially;
- not profit from their position;
- not act for reward; and
- act unanimously.
Many existing trust deeds amend or exclude at least some of these default duties. For example:
- Many trust deeds allow trustees to exercise powers for their own benefit (as many trustees are also beneficiaries) and therefore vary at least two default duties (the duty not to exercise powers for their own benefit and the duty to act impartially).
- Many trust deeds limit the obligation to invest prudently, to allow ownership of residential properties to be occupied rent free by beneficiaries.
- Professional trustees generally require the trust deed to authorise payments to them for their trustee services (particularly for charitable trusts).
Such exclusions or variations of default duties will need to be made specific and explicit in documents creating trusts in the future. Trustees of existing trusts will need to comply with the default duties unless they have been specifically excluded by their trust documents.
Disclosure of trust information
The Act also includes specific rules about the rights of beneficiaries to trust information and how trust information must be managed. These changes will be some of the most practically significant changes made by the Act. Over recent years beneficiaries have become more proactive in holding trustees to account and in seeking information from trustees.
The Act provides that trustees have a duty to hold ‘core documents’. The term ‘core documents’ is defined in the Act to mean the trust deed, variations, trustee minutes, accounts and other important trust documents. These documents need to be held by at least one trustee but all trustees must hold a copy of the trust deed and variations. This is currently best practice but many trustees do not hold such documents, leaving all documents under the control of only one trustee or the trust’s professional advisors.
The Act also provides that trustees have a duty to actively consider what information they will give to beneficiaries. Trustees retain discretion about what information they provide but there will be two important statutory presumptions. Those are:
- all beneficiaries should be told that they are beneficiaries, be given trustee contact details (updated as trustees change) and be advised that they have rights to request information; and
- trustees should provide other trust information to beneficiaries on request.
Trustees will not have an absolute obligation to disclose information to beneficiaries when asked to do so; trustees will retain some discretion about what to disclose. However, when exercising this discretion trustees must consider the 13 factors specifically listed in the Act before making their final decision. Those factors include considerations such as the nature of beneficiary interests, beneficiary ages, any confidentiality obligations and the effect the release of information could have on family relations.
These requirements have significant implications in practice. Most trusts in New Zealand are private family trusts established by parents for the benefit of themselves and their children. The trustees of such trusts often do not advise the children (or grandchildren or other potential beneficiaries) that they are beneficiaries and that they can request information and nor do they regularly consider what information should be provided. Furthermore, some trusts have allocated income to beneficiaries over many years (to take advantage of beneficiary tax rates) without paying such income to those beneficiaries, creating current account debts payable to those beneficiaries upon demand. Disclosing the existence of those debts to entitled beneficiaries could lead to repayment demands by those beneficiaries.
Overall, the Act will require greater disclosure of trust information to beneficiaries and will support the existing trend for beneficiaries to seek and receive more information. This increased disclosure could lead to more litigation about the performance of trustees, demands for payment of current account debts and more disputes between trustees and beneficiaries. More positively, increased disclosure requirements may also improve trustee performance as trustees will become subject to greater scrutiny and oversight when performing their duties.
Other changes introduced by the Act
The Act also makes a number of other adjustments to how trusts operate in practice. In particular:
- The age of majority for trust purposes is set at 18 (rather than the current age of 20).
- The maximum term of a trust is extended from 80 to 125 years (although this extension is not automatic for existing trusts).
- A trustee who wants to retire must seek a discharge in writing from the person with the power to remove trustees. A trustee is not discharged from liability simply by notifying the other trustees of their retirement.
- The Act includes a range of procedures to simplify the process for removing a trustee who becomes incapable of acting as a trustee.
- The Act includes a specific power for the courts to review trustee decisions on the application of a beneficiary who claims that the trustee’s decision was ‘not reasonably open to the trustee in the circumstances’. If the beneficiary can establish a ‘genuine and substantial dispute’, the onus will be on the trustee to establish that the trustee’s decision was reasonably open to the trustee in the circumstances.
- The Act provides some protection for trustees who invest in accordance with a diversified investment strategy.
- The Act authorises trustees to use alternative dispute resolution procedures (which are set out in the Act) even if not specifically authorised by the trust documents.
- The Act extends the ability of trustees to appoint delegates to act on their behalf.
What does all of this mean for us today?
It is tempting to dismiss the Trusts Act 2019 given that it will not take effect until 2021. However, many of the changes that will be required to comply with the Act simply reflect what is current best practice and the changes required to comply with the Act may take some time to be implemented. Trustees and their advisors should therefore take steps to ensure that they will be able to comply with the Act’s requirements when they take effect in 2021. In particular, trustees should:
- review the terms of their trust documents to ensure they will comply with the requirements of the Act (particularly in relation to default and mandatory trustee duties);
- ensure that all trustees keep the required trust records;
- actively consider what information should be supplied to beneficiaries and whether any beneficiaries need to be excluded (if possible);
- ensure that trustees have an investment strategy where appropriate; and
- ensure trustees have regular meetings to ‘actively and regularly’ consider the exercise of their powers.
Overall, the Act is a good attempt at setting out the core principles of trust law and making the law of trusts more accessible. In doing so, it increases the responsibilities of trustees, not only by creating explicit trustee duties, but by increasing the scope for beneficiaries to access trust information and hold trustees to account for their performance. Hopefully, this increased scrutiny will lead to improved trust governance and better outcomes for beneficiaries. If you have any questions about how the Act could affect any trust you are involved with, contact your lawyer.