UPCOMING CHANGES TO THE LAW OF TRUSTS
By Henry Brandts-Giesen and Silvia McPherson of Dentons Kensington Swan
Some long awaited changes to the law of trusts have been enacted in the form of the Trusts Act 2019 (the ‘Act’). The Act comes into force on 30 January 2021 and will be the primary source of law relating to trusts.
As noted below within the context of two key aspects of the Act - trustee duties and obligations to provide information to beneficiaries, the Act represents more of an evolution rather than a revolution in the law of trusts.
Some commentators suggest the Act imposes more onerous duties on trustees than currently exist under the law. For the most part this is misconceived and the basic duties and powers contemplated by the Act are already provided for in the Trustee Act 1956 and/or common law.
The problem is that they are not well known or properly applied in New Zealand. This is particularly acute in relation to family trusts which are far more abundant in New Zealand than in comparable overseas jurisdictions. It is these family trusts that the Act is targeted towards.
The Act distinguishes between “mandatory” duties which trustees must comply with and “default” duties which apply unless they are modified or excluded by the terms of the trust deed.
The mandatory duties are:
- A duty to know the terms of the trust;
- A duty to act in accordance with the terms of the trust;
- A duty to act honestly and in good faith;
- A duty to act for the benefit of the beneficiaries (in the case of a family trust) or to further the purpose of the trust (in the case of a charitable trust); and
- A duty to exercise powers for a proper purpose.
Default trustee duties include:
- A general duty of care;
- A duty to invest prudently;
- A duty not to exercise a power for a trustee’s own benefit; and
- A duty to avoid a conflict of interest.
The default duty to invest prudently is often modified but seldom excluded in family trust deeds. It is therefore critical that trustees have a well-considered investment strategy which is appropriate to the circumstances of the beneficiaries. Trustees are generally not experts in investment management and may need to procure investment advice from a qualified professional in order to fulfil their investment related duties or, alternatively, delegate their investment management functions to a Discretionary Investment Management Service provider.
Trustee obligations to give information to beneficiaries
The most controversial aspect of the Act is the presumptive obligation to make available “basic trust information” to beneficiaries, this includes:
- The fact that a person is a beneficiary;
- The name and contact details of the trustees;
- The occurrence of, and details of, each appointment, removal, and retirement of a trustee as it occurs; and
- The right of the beneficiary to request a copy of the terms of the trust or trust information.
As a general principle, the Act requires there to be at least a basic level of reporting to all the adult beneficiaries and to the parents/guardians of all the minor beneficiaries. However, the presumption of disclosure is rebuttable and information could be withheld if the circumstances so require. In determining whether the presumptions can be rebutted, trustees must consider a range of factors including:
- The nature of the interests in the trust held by the beneficiary and the other beneficiaries of the trust, including the degree and extent of a beneficiary’s interest in the trust and the likelihood of the beneficiary receiving trust property in the future;
- The expectations and intentions of the settlor at the time of the creation of the trust;
- The age and circumstances of the beneficiary; and
- The effect on the beneficiary, the remaining beneficiaries, trustees and third parties of giving the information to the beneficiary.
Many family trusts are governed by lay trustees and/or lawyers and accountants who are not well versed in the law and best practice relating to governance of trusts. As a consequence they are often governed by the trustees who see the interests of the beneficiaries as being subordinate to the interests of the settlors or do not understand that they cannot use their powers for their own purposes. This is plainly unsatisfactory and can lead to a breach of the mandatory trustee duty to act in the best interests of beneficiaries. In turn this can lead to personal liability for trustees and their actions being countermanded. The Act is intended to restore the balance of power between beneficiaries and trustees and ensure that trustees to not neglect their duties.
Trustees, settlors, beneficiaries and their advisors ought to ensure their trusts are compliant and optimised as soon as possible. In some situations this may require changes to the terms of trusts (if possible) and/or the current modus operandi for governance and administration.
We recommend you seek advice from a trust law specialist if you have a trust or are a trustee so that you are ready to comply with the Act.
Silvia McPherson is a Senior Associate and Henry Brandts-Giesen is a Partner, Head of Private Wealth, at Dentons Kensington Swan. The Private Wealth practice encompasses family trusts, family business succession planning, foreign trusts, residency by investment, estate planning, relationship property agreements, superannuation, energy trusts, employee share schemes, fiduciary risk management, FATCA/CRS, and AML/CFT. The practice is also frequently involved in applications to court and disputes concerning trusts.
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