New Zealand To Update Trust Law
With the Government of New Zealand having recently announced that it intends to take up the recommendations of a commission set up to review the country’s trusts legislation, this feature takes a look at what this could mean for settlors, beneficiaries and trustees of New Zealand trusts.
Unusually for an ‘onshore’ jurisdiction, New Zealand is one of the world’s major trust jurisdictions and estimates for the number of trusts formed in the country, which according to the Law Commission of New Zealand’s recent report stand anywhere between 300,000 and 500,000, bear testament to this.
It is probably because of, rather than in spite of, its membership of the OECD and its status as a ‘reputable’ and ‘tax cooperative’ jurisdiction that this growth has taken place in the trust sector, with many governments now discouraging taxpayers from setting up offshore investment structures in one form or another. The country’s proximity to a growing reservoir of personal wealth in the Asia-Pacific region has also fuelled demand for New Zealand trusts, while its common law legal framework also appeals to investors in the UK and North America.
However, in 2009, the Law Commission of New Zealand was tasked with reviewing the Trustee Act 1956 and law of trusts generally. The Commission’s aim for the new Act is to ensure the law supporting this central piece of legal infrastructure “is fit for purpose in 21st century New Zealand.”
“Use of the trust form reaches from the modest family home through to high finance,” the Commission observed. “Maori make extensive use of trusts as a mechanism for the holding of Maori land, and as a way to govern and hold assets from the Treaty settlement process. It is clear that trusts form an important part of economic and social life. A new Trusts Act is, therefore, very important.”
The Commission is tackling the review in three stages: Stage 1 examined the Trustee Act 1956, the Perpetuities Act 1964 and trust law generally; Stage 2 will consider the Charitable Trusts Act 1957; and Stage 3 will look at the trustee companies legislation.
The final report with regards to Stage one was tabled in New Zealand’s parliament on September 11, 2013 and recommended the introduction of a Trusts Act to replace the Trustee Act 1956. The new Act would be a comprehensive statute that modernises the law of trusts in a number of areas and addresses key matters that are currently only governed by case law.
The Report contains 51 recommendations addressing a wide range of matters relating to the roles of the different parties involved in a trust and the powers of the courts. The matters addressed by the recommendations include:
- setting out the characteristics of a trust and how a trust is created;
- setting out the duties of trustees;
- modernised trustee powers provisions;
- a modernised, flexible approach to investment;
- improved procedures for the appointment and removal of trustees;
- more comprehensive and useful provisions on the variation and revocation of trusts;
- a refined approach to the power of the courts to review the actions of trustees; and
- the replacement of the rule against perpetuities and Perpetuities Act with a new rule limiting the maximum duration of a trust.
Setting out its case for reform, the Commission states in the introductory passages of the report to parliament that:
“The Trustee Act is important legislation used on a day to day basis by those dealing with trusts. For such an important statute, it has become outdated and convoluted. Not only are some provisions unnecessarily complex and difficult to understand, but some are simply unreadable. Even more importantly, the default settings that the Act establishes, such as the default powers of trustees, no longer line up with how trusts are administered in practice. Many of these reflect practices of an earlier time.”
“We believe a new Trusts Act is essential. It should provide simplified procedures to enable the business of trusts at minimal expense. It is also vital that the default provisions reflect modern realities and expectations rather than legal doctrines whose relevance, importance and justification have long since passed. Our recommendations are aimed at achieving this while balancing the need to preserve the overall integrity of the settlor’s intentions and the rights of the beneficiaries to benefit from the trust, as established by the settlor.”
The main recommendations of the report are summarised in the following section.
The Law Commission’s Recommendations
The report proposes an enlarged statute that, in addition to covering the matters currently dealt with in the Trustee Act, will cover such matters as the duties of trustees and the circumstances in which such duties may be avoided. The new Act would also set out a more comprehensive characterisation of what a trust is. However, under this approach courts will continue to have flexibility to deal with situations that do not fit neatly within the terms of the new statute.
Core Trust Concepts in the New Act
The report recommends that new legislation include provisions setting out the characteristics and requirements for the creation of an express trust. These provisions would set out the key features of a trust as drawn from traditional trust law and represent the current legal position. They would act as a statutory definition for the purposes of the new Trusts Act. The intention is that these provisions would summarise in one place what makes a trust a trust, but would not override the existing case law.
It is recommended in the report that that the new Trusts Act should state the duties of trustees. Specifically, the new Act should expressly provide for six mandatory duties that are essential to the existence of a trust. These duties must be present in every trust and include:
- to be familiar with the terms of the trust;
- to act in accordance with the terms of the trust;
- to act honestly and in good faith;
- to act for the benefit of the beneficiaries or to further the purpose of the trust, in accordance with the terms of the trust;
- to exercise stewardship over the trust property for the beneficiaries or the purpose of the trust; and
- to exercise powers for a proper purpose.
If a trust deed attempts to exclude the mandatory duties, they will either override the exclusion or provide evidence towards a finding that there was no intention to create a trust. The Commission also recommends including 11 default duties, which are present in a trust unless the terms of the trust indicate otherwise by excluding or modifying them. These include duties to:
- not exercise any power directly or indirectly for the trustee’s own benefit;
- actively and regularly consider the exercise of the trustee’s powers;
- not fetter the future exercise of the trustee’s powers;
- avoid a position of conflict of interest;
- maintain accounts of the trust property that adequately identify the assets, liabilities, income and expenses of the trust and are appropriate to the value and complexity of the trust property;
- not be unfairly partial to some beneficiaries to the detriment of others;
- not make a profit (that has not been permitted by the beneficiaries);
- act without reward except where it has been permitted by the beneficiaries or is in accordance with the trustee’s right to be reimbursed for legitimate expenses and disbursements;
- act unanimously where there is more than one trustee of a trust;
- to manage the trust with reasonable care and skill; and
- invest prudently.
It is recommended that the terms of a trust must not limit a trustee’s liability or grant a trustee an indemnity against the trust property in respect of a breach of trust arising from the trustee’s own dishonesty, wilful misconduct or gross negligence. This limitation is an advance upon the current law by making it clear that such clauses cannot exclude liability for gross negligence.
The report states the types of information that a trustee must retain and that provide a process for how a trustee should manage the disclosure of information to beneficiaries. These recommendations are aimed at aiding the clarity of trust law in this area and should enable trustees to better carry out their role. The list includes:
- the trust deed;
- any variations made to the trust deed or terms of the trust, including variations made to the beneficiaries of the trust;
- a list of all of the assets currently held as trust property and liabilities of the trust;
- any records of trustee resolutions made during that trustee’s trusteeship;
- any written contracts entered into during that trustee’s trusteeship;
- any accounting records and financial statements prepared during that trustee’s trusteeship;
- deeds of appointment and retirement of trustees;
- any expression of the intention or wishes of the settlor; and
- any of the above documents retained by a former trustee during that trustee’s trusteeship and passed on to the current trustee.
Rather than having the current statutory default provisions that restrict and confine the powers of trustees in ways that are now considered undesirable and are seldom followed in trust deeds, powers are proposed by the Commission that broadly empower trustees. It is intended that within the scheme of the new Act, the statements of the duties on trustees and the standard of care for the exercise of powers will guard against the inappropriate use of powers by trustees.
Reform to the age of majority in trusts is also proposed, which would change it from 20 years to 18 years, so that it better accords with the general law.
The duty to invest prudently and the standard of care pertaining to investment remain fundamentally unchanged.
Distinction between Capital and Income
To better facilitate total return investment and allow trustees to invest funds without regard to whether the return is technically “income” or “capital”, it is recommended that trustees should have discretion to determine whether any return is to be treated as income or capital for the purposes of distribution. The aim is that investment decision-making should be separated from distributional issues to allow trustees to adopt a total return investment policy.
The report recommends a new provision enabling trustees to appoint investment managers and give them authority to make investment decisions.
Appointment and Removal of Trustees
The report says that provisions relating to the appointment and removal of trustees are an area where great practical improvement can be made. It recommends the modernisation of the statutory provisions to make them clearer and more comprehensive. They would also provide options that avoid the need to apply to court by empowering other persons to effect a change of trustees.
Custodian and Advisory Trusts
It is recommended that these provisions be updated to be modern and comprehensive. In order to avoid confusion, it is proposed in the report that advisory trustees are renamed “special trust advisers” because they are not actually trustees at law.
Court Powers and Jurisdiction
Proposals in this area aim to bring greater clarity and certainty to the existing law, and give the courts some further flexibility when it is called upon to approve a variation. In particular, the Commission recommends that the new Trusts Act include:
- statutory provisions restating (and clarifying the breadth of) the rule in Saunders v Vautier regarding revocation and variation by beneficiaries;
- a power of the court, following consideration of specified factors, to waive the requirement for consent of any person and approve a revocation, variation or resettlement or change to the scope or nature of trustees’ powers; and
- a power of the court to make amendments to the non-distributive administrative provisions of any trust deed where necessary to enable the trustees to efficiently manage trust property.
Extending the courts’ power of review of actions and decisions made under the trust instrument, as well as those made under the Act, is also recommended in the report.
The proposed reform broadens the ability to have trustees’ decisions reviewed, although this is subject to a threshold of evidence that is needed before an application is considered by the courts. To strike a balance between the interests of trustees and beneficiaries, a two stage process is recommended under which the applicant beneficiary is first required to put some evidence before the court that raises a genuine and substantial dispute as to whether the trustees have acted properly in the exercise of their powers (first stage). If the court is satisfied that the applicant has raised a genuine and substantial dispute, the trustee should be required to appear before the court and put forward evidence that their action or decision was a proper one in the circumstances (second stage).
Jurisdiction of the Court
It is recommended that the District Court should have all the tools that are necessary to effectively exercise its equitable jurisdiction in respect of trusts and thus should have concurrent jurisdiction with the High Court for matters under a new Trusts Act. This is consistent with the District Court now being a court of general civil jurisdiction.
The report also proposes that the Family Court should have jurisdiction to exercise powers and make orders under new trusts legislation to provide a remedy where a matter is already within its jurisdiction.
Resolving Disputes Outside of Court
It is recommended that the new Trusts Act include provisions relating to the use of alternative dispute resolution in trust disputes.
The Public Trust
It is recommended that the new Trusts Act makes it clear that the Public Trust should not act in situations where there is an element of dispute or contention, or where there is significant complexity. The report also recommends that the Public Trust be accountable to the Government for the exercise of its roles under the new Act and that the Public Trust should be able to charge a reasonable fee for carrying out its roles.
The recommendations in the report would see the Public Trust:
- having the power to make decisions on behalf of a trustee where the trustee is temporarily unavailable and cannot be contacted for any reason and no delegation is in place;
- overseeing the removal and/or replacement of a trustee in the following situations where there is no one with the power to do so:
- a sole trustee on the ground of incapacity or similar;
- a sole trustee who dies while in office;
- a sole trustee who wishes to retire; and
- providing a vesting certificate to confirm that assets are vested in a named new trustee where a former trustee has not and cannot now transfer the trust assets.
General Trust Issues
Various proposals made in the Preferred Approach Paper have been deferred in order to consider them in the Commission’s later corporate trustee review. These include proposals relating to:
- the liability of directors of companies acting as trustees to creditors and beneficiaries;
- disclosure that a company is acting as a trustee; and
- a liquidator of a trust and other areas concerning the insolvency of corporate trustees.
The Commission believes that more consideration is needed of the wider implications of proposals in these areas and the interaction of companies acting as trustees with company and insolvency law.
Recommendations in this chapter are intended to clarify and modernise the law, and make certain features of trust law more accessible. Well-understood principles relating to the trustee’s indemnity are to be set out in legislation, including the personal liability of the trustee, the trustee’s entitlement to be reimbursed or pay directly out of the trust property, and that the indemnity cannot be limited or excluded by the terms of the trust.
It is also recommended that a provision be included for the trust deed to rank the order in which the trust property may be used to meet the trustee’s expenses through the indemnity. This mechanism should provide some level of protection for specific property if for some reason it is inappropriate that the trustee or creditors could potentially acquire an interest in the trust assets through recourse to the indemnity.
The Commission also proposes to give a creditor a limited claim to satisfy a liability through the trustee’s indemnity, even where the indemnity is impaired and the trustee would not be entitled to rely on it. This would only be available if the creditor has acted in good faith and given value, and the trust property retains the benefit. This prevents beneficiaries from receiving a windfall, based on an unjust enrichment approach.
Standing of the Official Assignee
A further recommendation provides for the Official Assignee to have standing to challenge the validity of a trust, which will require an amendment to the Insolvency Act 2006. This provision would clarify and provide more certainty about the position of the Official Assignee in proceedings that involve challenging a trust.
The High Court’s ability to appoint a receiver will be confirmed in legislation. The court currently has this ability under its inherent jurisdiction but this is rarely exercised. The Commission considers that it will be useful to set out this jurisdiction in the Trusts Act to make this feature more accessible and modern. The statutory provision would specify some key elements of the process including:
- the grounds on which a receiver may be appointed;
- who may act as a receiver;
- the powers and duties of a receiver;
- priorities of those involved;
- a process for terminating the receivership; and
- provision for the receiver’s fees to be paid out of the trust property.
The Rule Against Perpetuities and the Maximum Duration of a Trust
Reform to simplify and modernise the law in this area is recommended to make it better understood and to prevent situations where legitimate dispositions may be invalidated.
Extending the maximum duration of trusts is considered more appropriate than permitting trusts to continue indefinitely. It is recommended that the current judge-made rules and the Perpetuities Act 1964 be replaced with a clear, simple maximum duration rule for trusts of 150 years. The rule against accumulations and the Property Law Act 2007 would also be updated to reflect the abolition of the rule against perpetuities and remoteness of vesting.
As a result of these recommendations, trusts that are subject to existing statutory exemptions to the perpetuities rules will need consequently to be exempted from the rule limiting the duration of trusts, including those exempted in the Perpetuities Act, and trusts exempted in their own legislation.
Existing trusts will continue to operate according to their own terms. They will not automatically gain the benefit of the 150 year period, and must abide by the period set out in their trust deed unless that period can be validly changed.
Relationship Property and Trusts
Two reforms have been included in the report to address problems at the interface between relationship property and trusts, because of the potential for injustice under the current law.
The first is that Section 44C of the Property (Relationships) Act 1976 be amended because the Commission says it does not currently strike the right balance between the interests of a partner whose rights have been defeated by a transfer of relationship property to a trust and those beneficially interested in the trust. It is proposed that courts be given the power to make an order requiring the trustees to pay a specified sum or transfer property of the trust to compensate the partner whose rights were defeated by the disposition of relationship property to the trust. That power to order compensation would only be available where it was not possible to otherwise compensate the defeated partner and would be restricted to the current value of the relationship property that was transferred to the trust.
The second recommendation in this area is that Section 182 of the Family Proceedings Act 1980 be amended so that it applies to de facto partners as well as married and civil union partners. Under this legislation, the court may vary the terms of ante- and post-nuptial settlements, including trusts, when the marriage or civil union of the parties comes to an end. However, it applies only to married and civil union couples and does not apply to de facto relationships.
The Government Response
On March 11, 2014, Justice Minister Judith Collins tabled the Government's response to the Law Commission's review of trust law in Parliament and said that the law governing private trusts in New Zealand will be updated and made more accessible.
“The Government agrees with the Commission’s core recommendation to replace the Trustee Act 1956 with a new Trusts Act,” Collins said. “Introducing a new Trusts Act will make the law clearer and more accessible. This is a sensible and practical move, especially given that the current Act is more than 50 years old, and the importance of ensuring trust law meets the needs of those involved.”
The Government will undertake a more detailed analysis of the potential scope of the new Act, as well as the Commission’s 50 other recommendations, before developing new legislation.
The Government has not however, provided a timetable for the introduction of any trust law reforms, and with two stages of the Law Commission’s review still to be completed, it can be assumed that new legislation is still some way off.