The Trusts Bill - what does it mean for you as a trustee?
Trusts are a popular asset planning tool in New Zealand. The exact number of trusts is unknown, however, it is estimated 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 legal obligations which are often misunderstood by settlors, trustees and beneficiaries. The Justice Select Committee considers that this is largely a result of the current legislative framework being "convoluted and out of date". As well as that, the governing legislation is over 60 years old.
Following the Law Commission’s review of New Zealand’s trust law, a Trusts Bill was introduced to Parliament on 1 August 2017. It is expected that the Bill will replace the Trustee Act 1956 and the Perpetuities Act 1964, and bring together the core principles of case law in one piece of legislation.
In October last year, the Select Committee recommended that the Bill be passed.
What will the Trusts Bill mean for trustees?
The Trusts Bill distinguishes between mandatory duties (which cannot be modified or excluded by the trust deed), and default duties, which will apply unless the trust deed expressly excludes them.
Mandatory duties include the duty to: know the terms of the trust and act in accordance with those terms, act honestly and in good faith, act for the benefit of beneficiaries, and exercise trustee powers for proper purposes.
Default duties (which will apply unless they are excluded), are: a general duty of care; a duty to invest prudently; not to exercise power for own benefit; to consider the exercise of a power; not to bind or commit trustees to the future exercise of a discretion; avoiding a conflict of interest; acting impartially; not profiting from the trusteeship of a trust; to act for no reward, and act unanimously.
Trustees will need to consider the applicability of each of the duties to their particular trust and decide whether they should be modified or excluded. Trustees should also consider whether the terms of their trust deed should, where there is the power to vary the trust deed, use this power to exclude any of the default duties.
Obligation to Keep Trust Documents
The Bill clarifies which documents trustees are required to retain. This includes the trust deed, documentation recording the assets and liabilities of the trust, deeds of variation and change of trustee, any letter or memorandum of wishes from the settlor 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. This includes the fact they are a beneficiary, the names and contact details of the trustees, when there is a change of trustee, and informing them of their right to request trust information. This presumption is designed to ensure that beneficiaries have adequate information to hold trustees accountable and enforce the terms of the trust.
This is a significant change. Previously, a beneficiary would not necessarily be aware that they were a beneficiary, and these disclosure requirements are likely to be of concern to many settlors and trustees who had not intended, when setting up a trust, that the trustees would be required to provide 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 and de facto partners.
Court Powers Widened
The Bill gives courts the power, on 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 open to the trustee in the circumstances. Courts will be able to set aside any act or decision of a trustee, restrain a trustee from taking a proposed course of action, and make any other order considered necessary.
It is also proposed to widen the powers of the Family Court to make orders in relation to trusts. The intention behind this change is to promote efficiency when trusts are involved in relationship property disputes in the Family Court, to prevent litigants having to seek recourse in the High Court.
Length of Trust life extended
Currently, a trust exists for a maximum of 80 years. The Bill repeals the Perpetuities Act 1956, abolishes the rule against perpetuities and states that the duration of a trust may be up to a maximum of 125 years. The Bill also 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.
As harmless as some of these changes may appear, trustees and trust lawyers need to be prepared for a likely increase in trust litigation. The requirement to disclose information, codified trustee duties and wider powers granted to the courts create opportunities for aggressive and/or aggrieved beneficiaries to get access to a trust, and if need be, seek the assistance of the court.
The Bill will come into force 18 months after it is enacted and receives Royal Assent. If you have a trust, we strongly recommend a "health check" before the Bill comes into force. Please do not hesitate to contact a member of our Private Client team to discuss how the new law may apply to you.
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