Governance and administration

The division of power between the settlor and the trustees

The changing landscape in trust practice has seen a shift towards strengthening beneficiaries’ rights and away from settlor influence while placing increasing demands on trustees.

The fundamental characteristics of a trust include an intention on the part of the settlor to create the trust, evidenced by the settlor passing over the assets to the trustees and relinquishing control to them, coupled with trustee accountability to carry out their duties for the benefit of the beneficiaries, not the settlor.  

Trusts are particularly vulnerable to attack from beneficiaries where settlors do not sufficiently divest the assets into trust, either through a failure by the settlor to recognise or accept that the trust assets are no longer the settlor’s assets to be used at will by the settlor (for example mixing trust assets with personal assets) or by retaining too much control or influence over the trust and the trustees.

While some control or influence is acceptable, too much control or influence can undermine a trust. This is especially so when settlors are also trustees and beneficiaries.

Traditionally trust deeds in New Zealand have incorporated some level of ongoing settlor control or influence through:

• retention by the settlor of some decision making authority in relation to the trust and the trust assets, rather than passing that authority over to the trustees, and/or
• having mechanisms in the trust deed that require trustees to obtain the consent of the settlor to the exercise of some discretions by the trustees.

The cumulative effect of these settlor powers can be sufficient to negate the settlor’s intent in establishing the trust and may ultimately invalidate the trust. In many of the more recent high profile ‘trust busting’ cases the trusts in question have failed on the basis that the settlor exercised far too much control over the trust and its assets.

At Chapman Tripp we have changed our approach in relation to settlor powers and in most circumstances now recommend that these powers be pared back. The exception is that we do consider that a settlor may retain the power of appointment and removal of trustees (subject to some important limitations).

The Act regulates the exercise of these powers. Any person holding the power to appoint or remove a trustee is in a fiduciary position and must exercise the powers honestly and in good faith and for a proper purpose.

Reserving any other powers to a settlor or settlor/trustee in preference to the trustees as a whole must be considered carefully in the context of the trust and all of the provisions of the trust deed.

The role of the trustee

Not only is great care required to ensure that settlors divest themselves of ownership and control of trust assets in theory but this must happen in practice too. This requires the trustees to carry out their duties and perform their trusteeships actively. Having passive trustees, who acquiesce to the directions or views of a settlor/trustee, so that one trustee is in reality making all of the decisions, is problematic. It is particularly so where that settlor/trustee is also a beneficiary.

At Chapman Tripp we are strongly of the view that a further crucial element of a robust trust is the presence of an active independent trustee. An independent trustee can bring both expertise and objectivity to trustee decision making. This is especially the case when a settlor is also one of the trustees, or the settlors are a majority of the trustees. The input of an independent trustee who performs their trusteeship actively, responsively and in a proper manner can be critically important in helping to protect against any possible claims.

Best practice in trust administration

Maintaining proper trust administration can assist the trustees in deflecting attack from a beneficiary by demonstrating that the trustees are fully and properly performing their duties as trustees.

Proper trust administration should encompass all of the following:

• all trustees must be fully acquainted with, and comply with, the terms of the trust deed and their duties and obligations to the beneficiaries
• the trustees must have regard to the interests of all beneficiaries of the trust when exercising their discretions (which will require that the trustees keep up to date with the needs and circumstances of all of the beneficiaries)
• all trustees must be kept fully informed of, and actively participate in, the ongoing governance, administration and management of the trust and trust property
• the trustees should remain in close communication and hold regular trustee meetings with a formal agenda prepared and circulated in advance (how often the trustees should meet will vary depending on the complexity of the trust and extent and value of the trust property)
• all trustees’ decisions must be unanimous
• the trustees must keep a formal written record of trustee decisions, resolutions and meetings and include these in the trust’s records
• the trustees must keep the core trust documents for the duration of their trusteeship (as explained in the third of our Brief Counsels in this series)
• the trustees must regularly and actively consider whether to provide the basic trust information to beneficiaries and must understand their obligations to provide trust information to a beneficiary if that beneficiary requests it (see our second Brief Counsel on disclosure of trust information to beneficiaries)
• the trustees must regularly review the investments of the trust (again the frequency of review will differ depending on the nature, value, extent and type of investments held by the trustees)
• the trustees should take professional advice where appropriate particularly in relation to the trust’s investments where the nature, value, extent and type of investments held by the trustees justifies this
• the trustees must record their investment decisions including the purchase or sale of investments
• the trustees must maintain a separate bank account for all trust transactions and all trustees must have visibility on the trust’s bank account
• the trustees must ensure formal and timely preparation and approval of the trust’s annual financial statements, and
• the trustees must ensure timely preparation and filing of the trust’s tax returns.

The recent trust law reforms are clearly directed towards lifting the standard of trusteeship. If all trustees were to follow these guidelines in the administration of their trusts that goal might be achieved.

For specialist advice on any matter raised in this Brief Counsel please contact a member of our Private Client team.