The Trustees Act 1956 (‘The Act’) forms the basis of New Zealand’s trust law. Given the age of the Act, it can be difficult to interpret and apply in today’s environment, which has arguably led to an increase in the number of court disputes.
The Law Commission has been asked to review the Act and trust law in general. The Law Commission has released six issues papers exploring the background and context of trusts in New Zealand. The sixth paper makes a large number of recommendations to New Zealand’s trust regime in order to make it fit for a New Zealand context, while being consistent with overseas trust law. Specifically, new legislation governing trusts has been recommended to make trust law clear, coherent and practical allowing it to be understood by the range of individuals who interact with trusts, not just lawyers. Other key changes are outlined below.
Enhanced Accountability of Trustees
The minimum obligation of a trustee, in order to give a trust substance, is the need to act honestly and in good faith for the benefit of a beneficiary. However, this core duty and other duties identified by the Courts, as established by centuries of trust law, are not encapsulated in the Act. In fact, it is possible to exempt a trustee from certain duties via the terms of the trust deed, thereby avoiding liability to beneficiaries. It is proposed that the common law duties of a trustee and any exemptions from liability are clearly stated in legislation to clarify a trustee’s obligations. It is also proposed that beneficiaries will have the ability to apply to the court to have trustee decisions reviewed.
A common mechanism used to reduce or eliminate trustee liability is the use of a company as a trustee; this is commonly referred to as a corporate trustee. The Law Commission recommends trustee liability is extended to directors of corporate trustees. In addition, the fact that a third party is dealing with a trust and not a company should be disclosed in all communications and contracts. This disclosure will provide creditors with the knowledge that recourse could be limited to a company or its director for the trust’s debts.
The process of appointing and removing trustees is determined by the trust deed. There are situations, however, which may not be catered for (e.g. the death of a trustee). In this situation, the appointment of a replacement trustee must be made by the court. A practical resolution for appointing and removing trustees is proposed where this power is stated in the new legislation, rather than individual deeds. The legislation would cater for:
- clarity around accepting or rejecting a trustee position,
- who can be appointed as a trustee,
- giving a wider range of circumstances where a trustee can be removed (e.g. ineffective or absent trustees, sickness and death),
- giving trustees greater ability to resign, including when they are the sole trustee,
- who may remove a trustee and appoint a replacement, and
- how many trustees a trust should have.
Revoking a Trust
A notable recommendation is that the common law rule, which allows adult beneficiaries who are in
agreement to revoke a trust, should be codified in legislation. This will also allow new powers to be conferred on trustees or a trust to be modified.
Unlike with companies there is no register of trusts. This makes it difficult for the Government to track, monitor and oversee how trusts are being used and whether or not that use is appropriate. The Law Commission, however, considered that establishing a trust register was unnecessary.
On balance the Law Commission’s recommendations are positive. The changes will bring the legislation up to date and resolve some deficiencies in the current law. Whether the final form of the changes results in an increase or decrease in the use of trusts will be interesting to see.
All information in this newsletter is to the best of the authors’ knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.