A practitioner’s introduction to a trusts act for New Zealand

Catherine Atchison 101X149                  Most practitioners will be aware that the Law Commission’s review of the Law of Trusts, which commenced in March 2009, has had its conclusions, in the guise of A Trusts Act for New Zealand, presented to Parliament by Justice Minister Judith Collins on 11 September.
  • By Catherine Atchison, Partner, Martelli McKegg and Timothy Orr, ADLS Documents and Precedents Manager

Depending on the view that the Government takes of the Law Commission’s recommendations, it appears certain that at some stage the Trustee Act 1956 will be repealed and a new Trusts Act will become a reality.

In its briefest form, the proposed Act will to some extent codify, and extend upon, current case law. However it will impose upon trustees both mandatory and default duties which will have a significant impact upon the manner in which both the public, and lawyers, approach that role.

It also lays down a very clear presumption that beneficiaries should receive clear and detailed information regarding the trust.

The Commission has recommended the adoption of a definition of a trust that recommends entrenching the “three certainties”, namely: identification of the beneficiaries; identifying the trust property; and indicating an intention to create a trust, as a prerequisite for the development of an express trust.

While this is second nature to lawyers it will provide important clarification for lay persons who may have minimal appreciation of the essential characteristics of a trust.

An area of concern is that the Commission recommends mandatory and default duties which attach to trustees who hold property on behalf of a settlor. The mandatory duties will be implied into every trust without exclusion or modification while there is a list of default duties that apply unless modified (not all may be excluded). All such duties, however, are still subject to the jurisdiction of a court to have regard to the rules of equity to allow the courts to “continue to apply the nuances and exceptions to the duties and exceptions that exist in case law”.

While it is recommended that there be no requirement that beneficiaries be treated equally (provided the terms of the trust are complied with) it is unclear how this dovetails with the default duty “not to be unfairly partial to some beneficiaries to the detriment of others”.

The mandatory duties will be implied into every trust regardless of whether a trust deed attempts to limit or exclude them, and such attempts could have the effect of leading the court to find that no true trust was in existence. Where an existing trust deed does not exclude or modify these default duties, then they will apply. It is therefore of crucial importance to trust lawyers that they should take this opportunity to raise these issues with their clients.

Trustees’ requirements to retain and provide information include a mandatory obligation to “provide sufficient information to sufficient beneficiaries to enable the trust to be enforced”. The Act now clarifies that the trustees will and must notify qualifying beneficiaries of their status and of their right to request a copy of the trust deed and related information.

While the new legislation is unlikely to become law for at least a year, the views of the Law Commission and their determination to raise awareness of beneficiary’s rights to information is likely to lead to closer scrutiny of current trustees actions.

Where a clause of a trust deed purports to introduce any limitation of liability, this may be excluded, and any lawyers advising on the inclusion of such a clause must fully explain to the settlor the meaning and effect of the clause. It appears that attempts to protect trustees, who are guilty of “gross negligence”, will not be permissible.

The writers are pleased to note that the Commission no longer attempts to introduce the unwieldy definition of “conduct” duties upon trustees. Instead they have restated existing trust law, in that trustees must exercise such care and skill as they hold. This is most obviously directed at lawyers and accountants and applies even to a non-professional trustee if he, or she, holds this position in ordinary life.

The Commission, when examining the issue of the trustees’ right to indemnity, takes the approach that it is important to set out “fundamental and well-understood principles” such as that a trustee assumes personal liability for expenses and liabilities incurred and is entitled to be reimbursed from the trust property. While this indemnity cannot be limited or excluded by the terms of the trust deed, the court or the trustees can rank the order in which assets may be used in order to protect creditors. This indemnity is also available to former trustees.

The Commission attempts to clarify the well-known “powers of a natural person” as a broad empowerment provision and includes a helpful, non-exhaustive, schedule of powers that will be of great assistance for trustees when dealing with banks etc.

One major change is the very welcome recommendation to repeal the Perpetuities Act 1964 and extend the perpetuities period to 150 years. This should be a boon for those wanting long term planning and certainty. 

Other rationalisation includes the simplification of the powers of maintenance and advancement of beneficiaries through the use of a “reasonableness” test, and a change to the age of majority from 20 to 18 years. Investment and the distinction between capital and income have seen practical changes to reduce much of the administration and frustration that commonly attends this area.

Both the process for granting, and the use of, powers of attorney have been the subject of recommended change, however significant legislative amendment may be necessary.

The ability of beneficiaries to call for a trust to be wound up, and the process laid out under Saunders v Vautier, has now been subject to welcome clarification. The proposal is that legally capable beneficiaries may consent to a resettlement of a trust, as well as a revocation or verification subject to the agreement of trustees where the original trust continues.

Trustees are also now authorised to appoint investment managers and give them authority to make investment decisions subject to certain safeguards.

The process for appointment and rejection of trusteeship is now much clearer.  Mandatory and default grounds for removal now exist, providing a way for the removal of incapacitated trustees and divesting of trust property. The review makes proposals for the Public Trustee’s role in dealing with incapacitated trustees and sole trustees and also provides a process to permit the transfer and vesting of assets.

Where a trustee does nothing to accept or reject a trusteeship within three months of receiving notice of the appointment, the trustee will be deemed to have rejected the trusteeship. Interestingly, the Law Commission has not legislated for a minimum number of trustees.

The courts will continue to have an oversight role to enable them to review the actions, omissions or decisions of a trustee. The proposals recommend a two-stage process requiring applicants, being a fixed or discretionary beneficiary, to provide evidence which raises a genuine and substantial dispute. Secondly, when the court has been satisfied that the applicant has established a real and genuine dispute, the trustee must be given the opportunity to respond. The writers have concerns about how this process will work as a prudent trustee may wish to oppose allegations as they are presented.

The Law Commission has recommended that the District Court have concurrent jurisdiction with the High Court on all matters up to $200,000 (or $350,000 as it may become) and the ability to determine any proceedings or applications that do not involve a claim for money or property.

Their report also provided that the applicant may elect as to whether the matter is heard by the High Court or District Court with limited rights to permit a matter to be transferred.

The jurisdiction of the Family Courts was a sensitive topic during the review, which recommends the Court be given the ability, in areas where it has jurisdiction under s11 of the Family Courts Act 1980, to “make any order or give any direction available under the new Trusts Act to (a) protect or preserve any property or interest until the proceedings before the court can be resolved (b) or to give proper effect to any determination of the proceedings before the court”.

Where the parties consent, the Family Court would also be able to make orders to resolve any closely related dispute or issue between the parties. The Family Courts jurisdiction is explicitly not to be subject to any financial limits.

This will be of great interest to those acting in the area of relationship property and will no doubt be one proposal which will elicit a variety of views from the profession.

As submitters were firmly opposed to the introduction of personal liability for directors of Trustee Companies to creditors and beneficiaries, the Law Commission has decided to defer consideration of the position of directors at the present time.

The disclosure of corporate trustees status is also being deferred, as is the proposal that shares held on trust be identified on the Companies Register.

The Law Commission also recommends that the Insolvency Act 2006 be amended to overturn the case of Official Assignee v Wilson (2007) to provide that the Official Assignee has standing to apply to the court to challenge the validity of a trust regardless of whether the bankrupt could have done so prior to the bankruptcy.

The High Court will have express jurisdiction to appoint a receiver on very specific grounds and powers.

The commission concludes by recommending limited reform of sections 44C(2)(c) and 44C(3)(b)(i) of the Property Relationships Act 1976 to provide relief to a disadvantaged spouse or partner when property has been transferred to a trust.

This is being viewed as an attack on trusts but at this stage is limited to relationship property only.

The commission also recommended that s182 of the Family Proceedings Act 1980 be amended to cover both de facto relationships and marriages to bring it in line with the Property (Relationships) Act 1976.

We believe the Law Commission has listened and taken note of submissions, including those of ADLS, and has produced an extensive range of 51 proposals while still preserving the fundamentals of trust law.  

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