Old Wine in a New Barrel: The Trusts Act 2019 (New Zealand)
Introduction
The Trusts Act 2019 received Royal Assent on 30 July 2019 and will come into force on 30 January 2021. This is the first major trust law reform in New Zealand in 70 years.
The reforms will affect both New Zealand’s foreign and domestic trust industries. New Zealand foreign trusts hold the wealth of international families, and have at least one New Zealand resident trustee. Foreign trusts that comply with compliance and disclosure rules receive a tax exemption for foreign-sourced income.[1]
Trusts also play a central role in New Zealand private client law and charity law, and are used in governance structures for businesses, and to hold Māori land.[2]Nevertheless, it is not uncommon to encounter trustees who have a limited understanding of their duties and settlors who have a limited recollection of the reasons why they settled property on trust in the first place.
Many of the key changes are aimed making trust law more accessible to both lawyers and the public, strengthening the ability of beneficiaries to hold trustees to account. A consequence of this may be that the new legislation increases the potential for dispute between trustees and beneficiaries.
This article explores the Trusts Act and its relationship with existing New Zealand trust law. Many of the changes restate or codify the existing law. Other concepts are new. Now is the time for those with involvement in New Zealand trusts to review their deeds and their practices to ensure they will be fit for purpose when the Trusts Act comes into force.
Application and Guiding Principles
The Trusts Act applies to all express trusts that are governed by New Zealand law,[3]including those created before the commencement of the Act.[4]It also applies to trusts that are created by statute such as the trusts that arise for intestate estates,[5]and when a court deems it to be necessary or appropriate to apply the provisions of the Act to resulting, constructive or other forms of trust recognised at common law or in equity.[6]
The Trusts Act does not purport to be a code or to replace the existing rules of common law and equity.[7]The historic foundations of New Zealand trust law in English equitable principles will therefore continue to support the new legislative regime. Similarly, the inherent jurisdiction of the High Court over the administration of trusts is unaffected.[8]
Section 4 sets out the principles that apply to those exercising powers or performing functions or duties under the Trusts Act (including courts, trustees, and lawyers).[9]A trust should be administered in a way that:
· is consistent with its terms and objectives; and
· avoids unnecessary cost and complexity.
These principles are not new but it is telling that Parliament has seen fit to make them explicit. They could be seen as akin to mandatory relevant considerations in administrative law. The duty is to ‘have regard’ to the principles rather than any more stringent requirement, and so, potentially, a trustee could have regard to the principles but then choose to take an expensive and complex course of action if doing so would be in the best interests of the beneficiaries and most consistent with the terms and objectives of the trust. This is an area in which we might expect some case-law to develop in the future.
Trustees (and others exercising power, duties or functions under the Trusts Act) would be wise to keep records of having considered the section 4 principles, potentially as part of any minutes. Lawyers drafting documents recording trustee decisions may consider adapting their precedents.
Mandatory and Default Trustee Duties
The New Zealand Law Commission has suggested that there is currently confusion in the community about the role of settlors, the rights of beneficiaries and the duties of trustees:[10]
We have seen our role as one of ensuring that trust law is as robust as it can be for 21st century New Zealand…. Part of ensuring that robustness requires the law to be clear as to what is, and what is not, a trust, and the fundamental duties trustees must owe.
There is a tendency to think of a trust as an entity, like a company. Rather, a trust is a fiduciary relationship through which somebody holds property subject to obligationsto administer it for the benefit of another. It is the obligations or duties that are the core of a trust relationship.
The obligations of a trustee may arise:
· expressly through the terms of a will or deed;
· by conveyance of property to trustees for a particular purpose;
· by implication of the circumstances; or
· by construction, when the Court imposes a trust.
This separation of legal and beneficial ownership, and the imposition of duties, is central to the role of trusts as a mechanism for asset protection. If the trustee can do what they like with the property, without the imposition of any enforceable duties, then there is no trust.
One of the aims of the Trusts Act is to clarify the trustee duties. The Trusts Act lists the core trustee duties that were already part of the law. However, it goes further to classify the duties as either ‘mandatory’ or ‘default’.[11]Mandatory duties must be performed by the trustee and may not be modified or excluded by the terms of the trust. Default duties can be modified or excluded, within defined parameters. In exercising both types of duty, a trustee must have regard to the contents and objects of the trust.[12]
The mandatory duties are the duties to:
· know the terms of the trust;
· act in accordance with the terms of the trust;
· act honestly and in good faith;
· act for the benefit of the beneficiaries or to further the permitted purpose of the trust; and
· exercise powers for a proper purpose
None of these duties are new. They include but go further than the ‘irreducible core of obligations’ identified by Millet LJ in Armitage v Nurse.[13]
In the unlikely case that a trust deed, including one that existed prior to the Trusts Act coming into force, purports to exclude any of the mandatory duties, the exclusions would be of no effect. The exclusion of mandatory duties may also be evidence that there was no intention to create a trust in the first place,[14]and thereby undermine the asset protection strategy.
Default duties may be modified or excluded by the terms of the trust, subject to certain limits.[15]The default duties are also well-established as a matter of trust law. Some of default duties are already commonly excluded by trust deeds. This practice will continue to be acceptable (provided that the exclusions fit within the permitted limits) but the Trusts Act imposes a statutory duty on any person advising on or preparing the terms of a trust to take reasonable steps to ensure that the settlor understands the meaning and effect of any modification or exclusion of any default duty.[16]
The statutory duty applies to all ‘advisers’ who are advising on the creation of a New Zealand trust or preparing the terms of a trust. That clearly extends beyond lawyers to accountants, trustee corporations, wealth managers, family offices and others in the trust industry.
It is unclear how this duty should operate in the context of a firm in which several people are involved in drafting. For example, if one staff member is involved with aspects of preparing the deed under supervision, does the statutory duty apply to them too? Can and should they rely on their supervisor to provide the requisite advice? Failure to comply on the part of the adviser does not invalidate the relevant clauses of the trust deed. However, it is at least likely to have repercussions for any claims for negligence or complaints to professional bodies.
Those advising trustees about existing trusts are not caught by the statutory duty. However, it would be prudent to advise trustees about any modification of a default duty contained in an existing trust deed and to consider whether a variation is nevertheless desirable to bring the trust deed into line with the Trusts Act (and if so, whether it is possible).
The default duties are the duties to:[17]
· exercise reasonable care and skill;
· invest prudently;
· not self-benefit;
· actively and irregularly consider exercises of trustee power;
· not bind future trustees or a future exercise or non-exercise of discretion;
· avoid conflicts of interest;
· treat beneficiaries impartially;
· not profit;
· act for no reward (the reimbursement of legitimate expenses is allowed); and
· act unanimously.
Although these duties largely resemble the trustee duties developed under the existing law, the codification is likely to be helpful to lay trustees who are seeking to understand their role. The existing rules of common law and equity will be relevant to interpreting these provisions.
The duty to exercise reasonable care and skill is to be interpreted with regard to the actual specialist knowledge of experience of the trustee or that the trustee holds herself out as having, or that is reasonably expected of a person acting in that sort of business.[18]Professional trustees will therefore continue to have an enhanced duty of care.
Similarly for investments, trustees are required to have the care and skill that “a prudent person of business would exercise in managing the affairs of others”, having regard to any actual specialist knowledge or experience of the trustee or that the trustee holds herself out as having, or that it is reasonable to expect her to have.[19]Existing common law authority on the duty of prudent investment will remain relevant.[20]If a breach of the duty to invest prudently is alleged, a court will take into account whether the trustee complied with any investment strategy and whether investments have been appropriately diversified.[21]It is common to contract out of the duty of prudent investment and it can be expected that this practice will continue.
Another option opened up by the Trusts Act is the ability to appoint a ‘special trust adviser’ who could advise the trustee about investment matters (or other matters).[22]A special trust adviser does not have the power of a trustee and the trustee is not bound to follow their advice.[23]However, the new rules on delegation of certain trustee powers[24]may also enable a trustee to go further and delegate investment decisions to a special trust adviser. Special trust advisers may be remunerated if the trust deed provides for remuneration of trustees (as they nearly always do).
Appointment of investment advisers is currently more common for New Zealand foreign trusts than it is for ‘ordinary’ family trusts but this may change in the future. It may be particularly useful for fixed or life-interest trusts for which investment decisions will affect the balance struck between different classes of beneficiaries.
Beneficiaries’ Rights to Information
In contrast to the codification of the existing trustee duties, the Trust Act sets new rules about keeping trust documentation and the provision of information to beneficiaries. The requirements on trustees under the Trust Act are much more stringent than ever before. The starting point is the duty on trustees to keep certain information.
The Trusts Act requires trustees to keep core trust documents, including documents setting out the terms of the trust or varying those terms, records of the trust property appropriate to the value and complexity of that property, records of trustee decisions, contracts, accounting and financial statements, appointment, removal and discharge documents, letters of wishes by the settlor, and other documents necessary for the administration of the trust.[25] It is permissible for one trustee to hold most documents, but each trustee must hold at least a copy of the terms of the trust and any variation to those terms.[26]The documents must be kept for the duration of the trusteeship and provided to a replacement or continuing trustee at the end of the trusteeship.[27]
These rules may appear onerous but they should be seen as routine and essential to good trust administration.
The principled basis of the current approach to disclosure is the inherent jurisdiction of the court to supervise the administration of trusts. In Erceg v Erceg,[28]the New Zealand Supreme Court confirmed that beneficiaries may seek trust information in order to ascertain whether a trustee has acted in accordance with the trust deed. The decision about which information should be disclosed depends on the interests of the proper administration of the trust and the interests of the beneficiaries as a whole, not only the interests of the beneficiary seeking disclosure. The trustee must weigh up a list of competing factors.[29]It would normally be the case that a ‘close beneficiary’ seeking disclosure of core trust documents would be entitled to the documents. The more remote the beneficiary’s interest and the broader the range of documents sought, the less likely they are to obtain disclosure.[30] There is no presumption of disclosure.
The Trusts Act changes this position, creating a presumption that a trustee must make ‘basic trust information’ available to every beneficiary[31]and ‘trust information’ available to beneficiaries who request it. However, before providing the information, trustees must consider a range of factors[32]and if the trustee reasonably considers that the information should not be disclosed, then it may withhold the information.
‘Basic trust information’ includes:
· the fact that a person is a beneficiary;
· the name and contact details of a trustee;
· the occurrence of and details about any change to the trusteeship; and
· the right to request a copy of the terms of the trust or trust information.
‘Trust information’ is information regarding the terms of the trust, the administration of the trust, or the trust property that is reasonably necessary for the beneficiary to have to enable the trust to be enforced.[33]
The trustee has a duty to consider at ‘reasonable intervals’ whether the trustee should be making the basic trust information available. If no beneficiary has any trust information because no beneficiary can be identified or the trustee decides to withhold all information, the trustee is required to apply to the court for directions.[34]
This creates a new ongoing active obligation on the part of the trustee, and the potential a significant increase in disclosure of information about trusts. At the same time, there is sufficient flexibility to cater for most circumstances in which trustees might reasonably choose to withhold information. The list of relevant factors (whether for routine disclose of basic trust information or responding to a request for trust information) includes:[35]
· the nature of the beneficial interests;
· whether there are any issues of personal or commercial confidentiality;
· the expectations of the settlor;
· the age and circumstances of the beneficiary;
· the nature and context of any request for information;
· the effect of giving the information, including the effect on relationships within the family and relationships between the trustees and beneficiaries; and
· the practicality of giving the information or imposing restrictions or safeguards.
Importantly, the reasons for trustee decisions are not required to be disclosed.[36]Presumably this means that trustees reasons for deciding not to disclose information would also not need to be disclosed.
In a circumstance in which a particular beneficiary is unreasonably litigious or in which family relationships could be damaged, or when the settlor intended the information to be kept confidential, trustees might reasonably withhold information. It will be important for trustees to develop robust practices of decision-making around the provision or withholding of trust information and to seek appropriate advice to help them strike the right balance.
The Trusts Act may still lead to an increase in trust litigation both in terms of applications for directions by trustees and applications by beneficiaries to seek access to further information or to enforce the trust. A practice of including clear statements in relation to confidentiality in settlors’ memoranda of wishes, or even in trust deeds may develop.
Appointment and Removal of Beneficiaries
As a consequence of these new provisions on provision of information to beneficiaries, it can be anticipated that in future New Zealand trusts will have more restricted classes of beneficiaries. The strategy of including a wide range of discretionary beneficiaries with no more than ‘mere expectancies’ as a mechanism of asset protection may no longer make sense to those concerned with the privacy of their financial affairs.
Many but not all trusts include the power to remove beneficiaries. However, care must be taken by those advising and drafting documents to remove beneficiaries about whether it would be a proper exercise of that power.[37]
Exemption and Indemnity Clauses
The Trusts Act makes it clear that trust deeds “must not limit or exclude a trustee’s liability for any breach of trust arising from the trustee’s dishonesty, wilful misconduct, or gross negligence”.[38]Neither may the trust deed grant an indemnity for the same.[39]Any terms in a trust deed that purport to limit the liability of the trustee or to indemnify them in breach of these provisions is invalid.[40]
This is means that trustees can no longer rely on broad indemnity clauses that purport to protect them against gross negligence. They may still be protected in relation to ordinary negligence, if this is covered by an appropriately drafted limitation of liability and indemnity clause.
The Trusts Act details factors that a court must consider in determining whether a trustee has been ‘grossly negligent’. The core test is reminiscent of Wednesburyunreasonableness[41]in administrative law:[42]
whether the trustee’s conduct …. was so unreasonable that no reasonable trustee in that trustee’s position and in the same circumstances would have considered the conduct to be in accordance with the role and duties of a trustee.
A list of relevant factors for a court to consider in determining whether a trustee was grossly negligent is included in the Trusts Act.[43]
As with contracting out of default duties, advisers (those advising on the creation of a trust of preparing the terms of a trust) will have a statutory duty to take reasonable steps to ensure that the settlor understands the meaning and effect of any limitation or indemnity clause contained in the trust deed. If they fail to properly advise, in breach of the statutory duty, then the limitation and indemnity would have no effect in relation to that person if they are appointed as a trustee, but it would not be invalidated in relation to or other trustees (unless it is too broad).[44]As with contracting out of default duties, a failure for a professional adviser to advise about the scope of a trustee indemnity clause could lead to complaints or allegations of professional negligence.
Appointment and Removal of Trustees
The statutory powers for appointment and removal of trustees have been modernised and broadened to minimise the need to apply to the Court.[45]
The Trusts Act confirms and extends the position reached in case law[46]that a person with a power of appointment or removal of trustees must exercise it honestly and in good faith, and for proper purpose.[47]In other words, the power to appoint and remove trustees will always be subject to fiduciary duties. A beneficiary may apply to the court to review a decision to remove or appoint a trustee.[48]
Retiring as a trustee is to become slightly more difficult in so far as a discharge must be given in writing.[49]If a trustee loses capacity, there is a new duty imposed on the person with the power to remove trustees to remove them.[50] Applications to the High Court to vest trust land in new trustees when a trustee loses capacity will no longer be required when the Trusts Act comes into force.
Abolition of the Rules against Perpetuities and Accumulations
The rule against perpetuities and remoteness of vesting is abolished,[51]which will set New Zealand apart from other common law jurisdictions.
Trusts which might otherwise have breached the rule against perpetuities for failing to specify a termination date are instead deemed to terminate after 125 years. If permitted by the trust instrument, trusts already in existence with shorter trust periods may be extended to a maximum duration of 125 years.[52]Trusts which are excluded from the current rule on perpetuities (most obviously charitable trusts and certain superannuation schemes)[53]are unaffected.[54]
This is a welcome change and provides clarity in the law. The former rules on perpetuities were difficult to apply. Care will still need to be taken for resettlements as the 125-year maximum duration applies from the time the property was first settled on trust, not the date of the resettlement.[55]It may be expected that clients seek to vary trusts to take advantage of the longer trust period (currently a maximum of 80 years) so as to have the option to continue the asset protection benefits of the trust for longer.
Other Changes
Other changes include:
· reduction of the age of majority from 20 to 18;[56]
· statutory powers for trustees to appoint delegates and nominees to exercise certain trustee powers;[57]
· codification and extension of the rule in Saunders v Vautier[58]that adult beneficiaries may unanimously bring a trust to an end;[59]
· a trustee power to determine whether return on an investment is to be treated as ‘income’ or ‘capital’ for the purposes of distribution;[60]
· reform of rules about apportionment of receipts and expenses to give trustees discretion;[61]
· changes to the grounds on which the court may review trustee decisions;[62]and
· new alternative dispute resolution procedures.[63]
Trust Reviews
The Trusts Act comes into force in just over a year. Those advising settlors and trustees of New Zealand trusts should consider a comprehensive review of trust deeds and provision of information to clients about the Trusts Act. It is also a good opportunity to review succession plans for New Zealand trusts.
Key aspects of a Trusts Act trust review are likely to include consideration of:
· whether the trust deed can or should be amended to take advantage of the longer trust period or otherwise to comply with the Trusts Act;
· how the trustee duties in the trust deed align with the mandatory and default duties set out in the Trusts Act;
· what trustees need to do to comply with their duties, including duties of prudent investment, duties to keep copies of core trust documentation, and duties to provide beneficiaries with information;
· whether a special trust adviser or an investment advisor would be beneficial; and
· whether the trust is still appropriate to achieve its purposes.
Conclusion
It is to be expected that there will be an increase in trust litigation after the Trusts Act comes into force. This is inevitable given the new concepts that have been introduced into New Zealand trust law and the likely ‘teething period’ during which trustees and their professional advisers learn new ways of doing things.
Particular concerns are likely to arise about the new rules on disclosure of information to beneficiaries. Professional advisers will play a critical role in guiding trustees through the routine exercise of balancing considerations before deciding what to disclose.
Overall the Trusts Act can be seen as old wine in a new barrel. The core aspects of New Zealand trust law will remain unchanged and clients and their advisers should be reassured that it will be business as usual for the most part. However, just as the barrel can affect the quality and flavour of the wine, the new concepts and practices will no doubt bring about an evolution of aspects of New Zealand trust law over the next decade.
Footnotes
[1]Tax Administration Act 1994 (New Zealand), ss 59B-59D.
[2]Law Commission Te Aka Matua o te Ture, Review of the Law of Trusts: A Trusts Act for New Zealand(Report 130, August 2013) p iv.
[3]Trusts Act 2019 (New Zealand), s 5(1). Express trusts are defined in more detail in ss 12-15.
[4]Sch 1, cl 2.
[5]Administration Act 1969 (New Zealand), ss 75-80.
[6]Section 5(2).
[7]Section 5(8).
[8]Section 8. The jurisdiction of the District Court and Family Court is extended.
[9]Defined in s 74.
[10]Law Commission, above n 1, p iv.
[11]The mandatory duties are set out in ss 23-27 and the default duties are set out in ss 29-38.
[12]Section 21.
[13]Armitage v Nurse[1997] EWCA Civ 1279, [1997] Ch 241.
[14]JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev[2017] EWHC 2426 (Ch); Webb v Webb CA No 7/17 24 November 2017 (Cook Islands Court of Appeal).
[15]As set out in s 5(4) and (5) and Sch 2.
[16]Section 39.
[17]Sections 28-38.
[18]Section 29.
[19]Section 30.
[20]Jones v AMP Perpetual Trustee Company NZ Ltd[1994] 1 NZLR 690 (HC).
[21]Section 128.
[22]Section 74.
[23]Section 75.
[24]Section 67.
[25]Section 45.
[26]Section 46.
[27]Sections 47-48.
[28]Erceg v Erceg[2017] NZSC 28.
[29]ibid at [56]
[30]ibid at [62].
[31]Section 51.
[32]Section 53.
[33]Section 49.
[34]Section 54.
[35]Section 53.
[36]Section 49.
[37]See McLaren v McLaren[2017] NZHC 161 at [63]-[64].
[38]Section 40.
[39]Section 41.
[40]Section 42.
[41]Associated Provincial Picture Houses v Wednesbury Corporation[1948] 1 KB 223.
[42]Section 44(2).
[43]Section 44(3).
[44]Section 43(3) and (4).
[45]Section 92.
[46]McLaren v McLaren, above n 30.
[47]Section 94.
[48]Sections 95, 126 and 127.
[49]Section 101.
[50]Section 104.
[51]Section 16.
[52]Schedule 1, cl 3(1).
[53]Section 16(6).
[54]Schedule 1, cl 3(3).
[55]Section 17.
[56]Section 20.
[57]Sections 67-73.
[58]Saunders v Vautier(1841) 4 Beav 115.
[59]Section 121-122.
[60]Section 60.
[61]Section 61.
[62]Section 126-127.
[63]Section 142-148.