UPCOMING CHANGES TO THE LAW OF TRUSTS
If you have a trust or are a trustee, it is important you are aware of the upcoming changes to the law of trusts.
The new Trusts Act 2019 will come into effect from 30 January 2021 and will repeal the outdated Trustee Act 1956 and Perpetuities Act 1964.
Why the law change?
The law regarding trusts has been long overdue for an update. New Zealand has one of the highest rates of trusts per capita in the world. It is estimated there are between 300,000 to 500,000 trusts in New Zealand. However, the standards of governance and administration of trusts in New Zealand is well below the standards of international best practice and trust law is generally not well understood or properly applied in New Zealand.
The changes to the law are intended to:
- make the law relating to trusts more accessible to people who are not legally trained;
- make it easier to resolve trust related disputes;
- clarify core trust principles and essential obligations for trustees;
- preserve the flexibility of the law; and
- modernise the outdated language and concepts.
What trusts will this affect and how?
The changes will apply to both existing and future trusts, and will affect all settlors, trustees and beneficiaries. Some of the key changes are summarised below.
Restatement of trustee duties
The Act contains extensive provisions regarding trustees’ duties. While these do not change the current law, they have been set out in the Act in a way which makes them easier to understand.
The Act distinguishes between five ‘mandatory’ trustee duties which trustees must comply with and ten ‘default’ duties which apply unless they are modified or excluded by the terms of the trust.
The ‘mandatory’ trustee duties are:
- a duty to know the terms of a trust;
- a duty to act in accordance with the terms of a trust;
- a duty to act honestly and in good faith;
- a duty to act for the benefit of beneficiaries or to further the permitted purpose of a trust; and
- a duty to exercise powers for a proper purpose.
The ‘default’ trustee duties include:
- a duty to invest prudently;
- a duty not to exercise a power for own benefit;
- a duty to actively and regularly consider the exercise of powers;
- a duty not to bind or commit trustees to future exercise of discretion; and
- a duty to avoid a conflict of interest.
While in theory these default duties can be excluded or modified by the terms of a trust, arguably many of them are manifestations of the mandatory trustee duties which are absolute. For example, in the ordinary course, making prudent investments would be essential to the fulfilment of the duty to act in the best interests and for the benefit of the beneficiaries. It therefore remains to be seen just how effective any modification or exclusion of a default trustee duty to invest prudently might be in practice.
Hence it has never been more important for trustees to receive good investment advice and/or delegate investment management to a Discretionary Investment Management Service provider.
Trustees’ obligations to give information to beneficiaries
The requirement to disclose information about the trust to beneficiaries is arguably the most contentious part of the Act. This is mainly because New Zealand family trusts have been typically governed by trustees who are unqualified, inexperienced and/or conflicted. It is common for New Zealand trustee to prioritise the interests of the settlors and ignore the wider class of the beneficiaries.
Trustees in New Zealand are accustomed to acting without much scrutiny, knowing that beneficiaries either don’t know that a trust exists or if they do, they have a limited understanding of their rights, if any. This is unsatisfactory from a trust law perspective and can lead to family conflicts.
The aim of the Act to raise awareness of the core trust principles is particularly crucial in this context. The Act does this by creating two rebuttable presumptions in relation to the provision of information to beneficiaries.
The first presumption is that a trustee must make available to every beneficiary (or representative of a beneficiary) certain ‘basic trust information’ on an ongoing basis and without them having to request it, namely:
- the fact that the person is a beneficiary of the trust;
- the name and contact details of each trustee;
- the trustee details e.g. appointment, removal, and retirement of a trustee as they occur; and
- the right of the beneficiary to request a copy of the terms of the trust or trust information.
The second presumption is largely a reflection of the current position at common law. It states that a trustee must, within a reasonable period of time, give a beneficiary (or representative of a beneficiary) the ‘trust information’ which that beneficiary has requested. Such ‘trust information’ means any information:
- regarding the terms of the trust, the administration of the trust, or the trust property; and
- that is reasonably necessary for the beneficiary to have to enable the trust to be enforced.
The two presumptions can be rebutted in certain circumstances. Unless rebutted, the disclosure obligations extend to all beneficiaries of the trust, including discretionary beneficiaries.
Trustees can consider the grounds on which the presumptions of disclosure can be rebutted (these are set out in the Act) and can also consider narrowing down the definition of beneficiaries or resettling the trust onto a new trust with a narrower class of beneficiaries. Whether this will be possible will depend on the wording of the relevant trust deed and a range of other factors. Expert legal advice is essential.
Trustees’ obligations to keep trust information
The Act provides that each trustee must keep a copy of the trust deed and all variations made to it. This is necessary as trustees are subject to mandatory duties to know and act in accordance with the terms of the trust.
At least one trustee must also hold the following documents:
- records of the trust property identifying the assets, liabilities, income and expenses of the trust;
- records of trustee decisions;
- written records entered into by the trustees;
- accounting records and financial statements of the trust;
- documents appointing and removing trustees;
- letters or memoranda of wishes from the settlor; and
- any other documents necessary for the administration of the trust.
Trustee exemption and indemnity clauses
The Act provides that the terms of a trust cannot limit or exclude a trustee’s liability, or provide an indemnity against trust property for liability, or for any breach of trust arising from the trustee’s own ‘dishonesty, wilful misconduct or gross negligence’. The Act will override any provision in a trust deed contrary to this new requirement.
The Act contains no strict definition of ‘gross negligence’ but does contain a list of factors which the courts are to consider when deciding whether a trustee has been grossly negligent. Guidance from other jurisdictions will, at least initially, need to be sought from the courts when interpreting these provisions.
Other changes to the law include:
- an extension of the maximum duration period of a trust from 80 years to 125 years;
- a clearer pathway for beneficiaries making a request to the court to review the decisions and actions of trustees;
- flexible powers for trustees to manage trusts;
- changes to existing practice for delegation by trustees of their powers and functions to others, setting out new notice requirements and other conditions;
- modernisation and broadening of the statutory powers of appointment, removal and retirement of trustees;
- new mechanisms for challenging the exercise of powers of appointment and removal of trustees; new alternative dispute resolution procedure for trustees; and
- change of the default age of majority from 20 years to 18 years.
Things for you to consider:
If you are a trustee, beneficiary or settlor on a trust, we recommend you should familiarise yourself with the changes and speak to a trust law expert about the upcoming changes and how they may affect you and your trust.
In particular, if you are a trustee, you should consider:
- whether you are willing and able to provide ‘basic trust information’ about the trust to all beneficiaries and regularly consider the factors relevant to rebutting the presumption to do so in relation to each beneficiary;
- whether the trust deed adequately deals with the mandatory and default duties set out in the Act;
- whether you can comply with your obligations in relation to holding trust records;
- whether you are aware of your rights, interests, powers and duties under the trust and prepared for greater scrutiny by, and engagement with, beneficiaries;
- whether the trust is still fulfilling the purposes for which it was established and whether it will remain cost-effective bearing in mind the increase in your compliance duties.
If you do make any changes to your trust deed or trust administration practice (in particular if you revise your investment policy), please let us know.
If you are a trustee client with a trust in Managed Portfolio Service or Broking account, you may prefer to have your trust moved to a DIMS account in the future.
What are the benefits of using a DIMS account for trusts?
- simplification of trust administration;
- allowing you as trustees to set parameters and delegate your investment functions to an expert who understands your objectives, and can provide ongoing, highly personalised investment advice and manage investment of your trust funds on your behalf, within the parameters set by the trustees;
- allowing you to feel more comfortable deferring your investment decisions and responsibilities to an investment adviser, especially if you don’t feel confident to make the investment decisions for your trust;
- assisting you with the preservation and enhancement of the value of the trust fund (this being a key objective for most people who set up trusts) and give you a better opportunity to fulfil your trustee duties and objectives of the trust; and
- helping you manage the risk of your personal liability to beneficiaries.
If you have further questions around a DIMS account, please contact your adviser.
Craigs Investment Partners is not a trust law specialist and we recommend you seek advice from a trust law expert.