BY VIBHA VALLABH
The law governing trusts in New Zealand has been amended in its entirety with the Trusts Act 2019, which will come into force 30 January 2021.
The new law applies to express trusts and in reading the Act, the changes are for the better. Although not an exhaustive code, it explicitly makes the trustee more accountable by setting out the trustee’s fundamental obligations when managing and administering a trust. These are often unknown to the non-professional trustee which has led to some interesting case law as a result.
The Act is consumer friendly with less of the traditional legalese that one would traditionally find with a piece of legislation. With domestic trusts being so prolific in New Zealand, it’s obvious the intended user and reader is the mum and dad trustee. Mostly it confirms principals from case law and provides for how a trustee should act.
The Act has extended the maximum duration of a trust that is not charitable from 80 to 125 years, and where a trustee is an individual he or she cannot be the sole beneficiary.
Mandatory and Default Duties
The mandatory duties must be performed by the trustee and cannot be contracted out of. They require the trustee to know the terms of the trust; to act in accordance with the terms of trust; act honestly and in good faith; and to act for the benefit of the beneficiaries or to further the permitted purpose of the trust.
Although the default duties are numerous, they must also be performed by the trustee, and can be excluded or modified by the trust agreement.
A trustee is limited to the degree to which it can be held accountable for certain misconduct. It cannot indemnify itself against dishonesty, wilful misconduct or gross negligence. Such a clause will be invalid. Also, the settlor must be made aware of any liability exclusion or indemnity clause.
The Act lists core documents and records that a trustee must keep including any accounting records and financial statements prepared during the trustee’s trusteeship.
Disclosure to Beneficiary
Where privacy is a concern for the settlor then provisions relating to the required disclosure of information to beneficiaries may understandably cause some unease. It requires the trustee to inform the person that they are a beneficiary of the trust; provide the name and contact details of the trustee; and notification when there has been an appointment and removal of trustee. The beneficiary also has the right to request a copy of the trust document.
Such disclosure provides a check on trustees to ensure that it does not abuse its position and indeed acts in the best interest of the beneficiaries. However, the presumption of disclosure will not apply if one of the criteria are meet under Section 53 of the Act. If an exclusion applies, it’s important that other protective measures are put in place instead which should be discussed with a professional trustee.
Rule of Saunders v Vautier
Provision of this rule is now in the Act and provides that a trustee must terminate the trust and distribute trust property if all the beneficiaries agree.
Further, if all the beneficiaries hold beneficial interest in the trust property, they may vary the terms of the trust or consent to its resettlement if every beneficiary consents. This will particularly be useful in situations where the trust agreement does not provide for these situations to occur, otherwise ordinarily an application would need to be made to the court for its permission.
Some protection has been afforded to the trustee.
Where a trustee incurs expense or a liability when acting on behalf of the trust, it should expect either to be reimbursed out of the trust fund or discharge its liability from the trust fund itself. Also, for any breach of trust caused as a result of taking action at the instigation, or request, or written consent of a beneficiary, the court may make an order indemnifying the trustee out of the beneficiary’s interest in the trust property.
Trusts are as old as the crusades and have never stopped developing. Whilst New Zealand’s Trust Act 2019 is modern, it is no way exhaustive as to how a trust should be managed and administered. Common law principals will still apply, but it is a good starting place. With all changes that are currently occurring in the industry worldwide, New Zealand foreign trusts still remain a highly desirable product for wealth planning and its current evolution with the times is a testament to this.