Overview of ADLS Trust Law Committee’s submissions on the Trusts Bill
The long-awaited Exposure Draft of the Trusts Bill was released for consultation in November 2016, following on from the Law Commission’s comprehensive review of trust law in New Zealand.
The ADLS Trust Law Committee submitted on the Bill. The key points of the Committee’s submissions are summarised below.
Characteristics and creation of an express trust
The definition of an express trust should include a clause clarifying that the settlor gives up personal control of the assets to become the trust property; and the provisions around intention to create an express trust be strengthened.
Duration of a trust
The Committee expressly supported the submissions of Chris Kelly of Greg Kelly Law Limited in respect of the duration of a trust, as follows:
- The Bill would extend the maximum duration of a trust to 125 years (rather than 80 years, as commonly found in existing trusts). The provisions should specify that where any trust property is transferred to a new trust, the maximum duration provisions still apply to that trust property as if it were still subject to the original trust – to ensure that the maximum duration of a trust cannot be easily subverted by moving property into a new trust and starting again with another 125 years;
- In respect of charitable trusts – trustees may retain income for use in a future year, but must give full consideration to the requirement to make a realistic contribution to the permitted purposes of the trust each year (and bearing in mind that building up a large capital sum must not be a dominant purpose of a charitable trust); and
- In recognition of the fact that older trusts may be unable to take advantage of the longer duration that will be permitted, as historical trust deeds often have only limited powers of variation and shorter duration periods, the High Court should have discretion to extend the life of a trust for up to 50 years, and to do so more than once. If the trustees can convince the court the trust still serves a useful purpose and should be allowed to continue, the court should have discretion to so decide.
Given that the key focus of the Bill is to make the administration of trusts easier, and to improve the accessibility of trust law for non-professional trustees, the Committee has submitted that:
- trustee duties as drafted should be expressed in plain English with appropriate explanations; and
- the distinction between mandatory and default duties (i.e those duties which a trustee must perform at all times during the term of the trust, and those duties which may be modified or excluded by the trust deed) be expressed as clearly as possible.
The Bill provides that a trust deed cannot limit a trustee’s liability or indemnify a trustee for a breach of trust arising from the trustee’s own dishonesty, wilful misconduct or gross negligence.
The Committee supports the application of a common law interpretation to “dishonesty, wilful misconduct or gross negligence”, and proposes the inclusion of an explanatory paragraph in the legislation covering the core elements of trustee dishonesty, to provide essential guidance to trustees.
Trustees’ obligations as to trust information
These provisions are intended to codify the general principle in Schmidt v Rosewood.
The overall effect is that a trustee must proactively disclose some trust information, so that at least one beneficiary must know about the trust, to enable the trust to be enforced.
The Committee agrees that a trust must be able to be enforced – however, it submits that the principle that a trustee must proactively disclose some trust information is not in line with current case law, in light of the Court of Appeal decision in Erceg v Erceg (noting that the Supreme Court decision has since been released as at the date of publication of this article).
The Committee has also made detailed submissions requesting further clarity in respect of the trustees’ obligations as to trust information, and as to the definitions used in these provisions.
Appointment and discharge of trustees
One aspect of the law which could be usefully clarified is the situation where the power of appointment and removal under a trust deed is vested in the settlor, and after the settlor’s death, in the administrators or executors of his/ her estate – the question being whether that power survives following the final distribution of the estate.
The Committee submitted that a clause could be included to the effect that “any power of appointment or removal of trustees vested in administrators, executors and/or trustees of an estate comes to an end upon final distribution of the estate”.
Court powers and dispute resolution
The Committee’s view is that this Bill presents a fitting opportunity to streamline court powers and dispute resolution so that people do not need to go to court every time changes to a trust (which could not otherwise be effected) are needed.
The Committee submitted that this will free up court time and judicial resources, and be a source of significant cost savings in the administration of trusts.
The Committee also made submissions in respect of enhancing certainty for trustees’ costs, including the suggestion that courts rule on costs liability at an early stage by giving directions when other directions on this issue are being formulated for the conduct of a case.
Wholesale investment trusts
The Committee has not submitted on the treatment of wholesale investment trusts in the Bill, but understands this has been an area of significant industry consultation with the Ministry of Justice.
Overall, the Committee’s view is that the Bill sets out key principles in a way that can be easily understood and applied by non-lawyers who use trusts, and welcomes the opportunity to contribute to a dialogue with the Ministry of Justice in this always-evolving area of the law.