Review of the Law of Trusts
In 2009, the Law Commission of New Zealand was tasked with reviewing the Trustee Act 1956 and law of trusts generally. In particular, the Law Commission is taking a close look at the use of family trusts in New Zealand where it has been estimated that there is one for every 18 people, compared to one for 294 in Britain.
The government suspects that the use of trusts to avoid liabilities in New Zealand has increased considerably in recent years and the Victoria University of Wellington Tax Working Group has estimated that the ability to shelter income in trusts cost the government roughly NZD300m in tax revenue in 2007.
The Commission is tackling the review in 3 stages: Stage 1 examines the Trustee Act 1956, the Perpetuities Act 1964 and trust law generally; Stage 2 considers the Charitable Trusts Act 1957; and Stage 3 looks at the trustee companies legislation.
A series of Issues Papers has been released by the Commission on different aspects of trusts law. This information-gathering and consultation phase of the project is designed to inform the conclusions and recommendations of the Commission in its final report, which is expected in 2012.
While the first issues paper was primarily a background paper, the second issues paper, published by the Law Commission on December 20, 2010 focussed on the uses of family trusts in New Zealand.
“We’re interested in why people set up family trusts, and whether there should be limits on their use,” said Commissioner George Tanner. “New Zealanders seem particularly keen on trusts. Although we have no definite record of numbers of trusts, it seems that at least one in every 18 people in New Zealand has a trust.”
The second paper examines situations in which the law will “look through” the use of a trust, and asks questions about whether some purposes of trusts are more acceptable than others.
“This review is a big project. At this stage, we’re interested in gathering as much information as we can,” said Tanner. “We’d like to hear views from a wide range of New Zealanders – people who set up trusts, trusts practitioners, trustees and beneficiaries.”
The third Issues Paper addresses the rule against perpetuities and the revocation and variation of trusts, and the fourth paper deals with the role of trustees.
Released on June 30, 2011 under the title ‘The Duties, Office and Powers of a Trustee,’ the fourth paper sought views on important issues relating to the nature and day-to-day operation of trusts, with a core focus on the duties that trustees owe to beneficiaries.
Commenting on this Paper, Commissioner Tanner said that “the obligations owed in the trustee/beneficiary relationship are central to the concept of a trust, yet many trustees may not be aware of what the law requires of them. This paper asks whether more clarity is needed regarding what the duties of trustees are. Should the duties be set out in a statute in the same way that company directors’ duties are?”
The Paper notes that many of the duties of trustees that exist in law can be overridden by the terms of a trust deed. This means trustees can avoid being liable for failing to properly carry out such duties.
“We want to know whether the law should go further in holding that there are certain duties that cannot be excluded by these exemption clauses. Which duties are so fundamental to what makes a trust a trust that trustees should always be liable for carrying them out? Should there be limits on what exemption clauses can do?” Mr Tanner asked.
The paper also discusses the rules relating to how trustees are appointed and removed, and whether there should be restrictions on the types of people that may become trustees. The Commission is looking at the powers that a trustee is given under the Trustee Act, such as dealing with trust property, investing, and delegating functions. It asks whether the law is effective in these areas or whether it can be modernised and improved.
The Law Commission’s fifth Issues Paper, published on December 19, 2011, sought views on a range of trusts matters that focus primarily on ways to make it easier for beneficiaries to hold trustees accountable. Entitled ‘Court Jurisdiction, Trading Trusts and Other Issues’ this paper addresses practical issues regarding mechanisms for enforcing trustees’ obligations. The Commission is concerned that the only way of resolving disputes between trustees and beneficiaries is for parties to go to the High Court. The paper asks whether it may be appropriate for the District Courts or Family Courts to exercise more powers under the Trustee Act 1956.
President of the Commission, Sir Grant Hammond, said that the High Court may not be the best place for the resolution of some trust disputes. “High Court cases can be costly, and may exacerbate damage to family relationships. On the other hand trust law issues can be complex and the High Court may continue to be the best option. We are interested in people’s views about whether there would be benefits to expanding the jurisdiction of the District Courts or Family Court to consider trust matters.”
The Commission also looks at whether an approach that takes some of the powers to resolve disputes in trust matters out of the hands of the courts is possible. “A trusts ombudsman or tribunal may have considerable benefits as a lower-level, more accessible decision-maker” said Sir Grant, although the Commission recognises that the costs of such an option may prove prohibitive.
The paper also covers trading trusts, another area where reforms may be needed to enforce trustees’ obligations. Trading trusts are used to operate a business and often the trustee is a limited liability company. Sir Grant said there is scope for the trading trust model to be used to frustrate creditors.
“Creditors may not even be aware that the company they are dealing with is a trustee, a fact which may affect their prospects of recovering their debt,” said Sir Grant. “Also, beneficiaries may be left out of pocket when there is a breach of trust as the corporate trustee may have insufficient funds to compensate the beneficiaries.”
The Commission asks whether reform is required or whether the obligation should remain on creditors to protect themselves.
The Issues Paper has chapters covering:
The High Court’s general supervisory jurisdiction in respect of trusts, including the powers exercised in breach of trust cases and the Court’s intervention where trustees exercise discretionary powers;
A possible expansion of the District Courts’ and Family Courts’ jurisdiction in respect of trusts;
A new mechanism for trust dispute resolution, such as an ombudsman, tribunal or commission;
Facilitating greater use of ADR in trusts;
The interaction of trading trusts, creditors and beneficiaries, and insolvent corporate trustees;
The possibility of a register of trusts; and
Trustee service providers.
The next stage in the Commission’s trusts project will be a paper in 2012 outlining its preferred approach across the range of possible reforms to trust law, based on submissions comments on the Issues Papers, consultation and further research. The paper also will invite submissions.
“Given the wide-ranging, complex nature of this project, we think it is appropriate to provide the public with further opportunity to comment on concrete proposals for reform of the law of trusts before the Commission releases its final report and recommendations.” said Sir Grant.
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