The Trusts Act 2019 comes into effect on 30 January 2021. The new Act represents the first major reform of the law of trusts since 1956 and will have a significant impact on the governance and administration of all express trusts in New Zealand. Family trusts, charitable trusts and trusts for the benefit of iwi, hapū and whānau, including those already in existence, will all be affected. The reforms will also affect some commercial trusts in some circumstances.
The Act reflects developments in trust law and practice over the past six decades and provides clarification and modernisation in a number of important areas. With the aim of making the law of trusts more accessible, the Act sets out the core principles of the law relating to trusts and provides default administrative rules for trusts. It also imposes a number of new obligations on trustees.
The Act responds to the following trends:
- a demand for greater transparency on the part of trustees in their administration of trusts
- a demand for greater accountability of trustees to beneficiaries for their actions
- an expectation that trustees should perform to a higher standard than may have been the case in the past including requiring active decision making, rather than passive acquiescence
- a strengthening of the ability of beneficiaries to hold trustees to account
- an increasing willingness for dissatisfied beneficiaries to litigate, and
- an increasing willingness by the courts to scrutinise trustee decisions, actions and inactions and to hold trustees to account.
This Brief Counsel is the first of a limited series of five Brief Counsels in which we will highlight the need-to-know information for settlors, trustees and beneficiaries. Here we introduce the key issues which will be discussed in more depth later in the series.
What is changing?
Duration of trusts
The new maximum duration of a trust will be 125 years from the date of the original settlement. The “perpetuity period” that currently applies to trusts, which is generally 80 years but can also be linked to the life of a person, will be abolished and replaced with the maximum duration rule.
Whether the duration of an existing trust that specifies an 80 year period can be extended to make use of the 125 year period will depend on the terms of the individual trust deed.
One of the most significant changes is in relation to trustees’ obligations to disclose trust information to beneficiaries. The starting point for trustees is a presumption that they will disclose certain basic trust information to all beneficiaries and subsequently disclose further information if and when it is requested by a beneficiary.
The objective of this reform is to ensure beneficiaries are aware that they are beneficiaries and that they have access to enough information about the trust and its assets to enable them to exercise their rights as beneficiaries and hold the trustees to account.
Our second Brief Counsel will explain the new provisions relating to disclosure of information to beneficiaries in more detail.
The Act sets out five mandatory duties that all trustees must comply with, and 10 default duties that trustees must comply with unless the duties are modified or excluded by the terms of the trust deed governing the particular trust. The duties are not in themselves new, but until now they have not been enunciated in statute. All trustees should be familiar with the obligations these duties impose and ensure they comply fully with these obligations for the duration of their trusteeship.
There are also enhanced requirements for trustees to keep core trust documents for the duration of the trust and to ensure that the documents are passed on if there is a change of trustees.
Our third Brief Counsel will explain these duties in more detail.
Trustee accountability, liability and indemnities
Dissatisfied beneficiaries are increasingly willing to litigate their disputes with trustees, evidenced by an upwards trend in the volume of trust-related cases through the courts. The Act will make it easier for beneficiaries to question trustee decisions in court. This is likely to result in more trustees being held liable to beneficiaries for their actions (and inactions) as trustees and is consistent with the stated aims of the trust reform process to make the law of trusts more accessible, to strengthen and clarify beneficiaries’ rights and to lift the standard of trusteeship generally.
New provisions of the Act enable a beneficiary to apply to court to have a trustee’s act, omission or decision (including a proposed act, omission, or decision) reviewed on the ground that the act, omission or decision was not or is not reasonably open to the trustee in the circumstances. The procedures to be followed and the provisions around the burden of proof clearly favour beneficiaries.
The Act largely confirms and restates the existing law on trustee liability, the extent to which trustees may be excused from liability to beneficiaries for trustee breach of trust and trustee indemnification for liability from trust assets.
Trustees continue to be personally liable for all and any expenses, losses or other liabilities incurred by the trust fund. If the expense or liability is incurred reasonably on behalf of the trust, the trustee may be reimbursed from trust property or may pay or discharge the liability directly from trust property.
The trust deed may still exclude or limit trustee liability even for losses incurred through actions or omissions that amount to a breach of trust provided the breaches are not caused by the trustee’s dishonesty or wilful misconduct.
However there is one significant change. The Act now prohibits trust deeds from limiting liability for, and indemnifying trustees against, a new category of breach of trust, termed ‘gross negligence’, other than in very limited circumstances.
Our fourth Brief Counsel will take an in-depth look at the new provisions in the Act that will make it easier for beneficiaries to bring claims against trustees and otherwise hold them to account through the courts, trustee liability and trustee indemnities under the new Act. It also addresses some changes in the law in relation to third party creditor claims.
Governance and administration of trusts – the division of power between the settlor and the trustees and best practice in trust administration
Case law in recent years has demonstrated that there is a trade-off between the effectiveness or robustness of a trust and the level of control retained by a settlor over the trust and its assets. When a high level of settlor control is accompanied by a failure by the trustees to perform their duties to a high standard, the trust may be less likely to withstand attack by a disgruntled beneficiary. The reforms aim to make it easier for trustees to understand and therefore perform their duties as trustees to a much higher standard than may have been the case in the past.
Our fifth Brief Counsel will address the changing landscape in trust governance and administration. In particular, it addresses the division of power between the settlor and trustees, the role of a trustee and best practice in trust administration having regard to the themes of greater trustee accountability, responsibility and transparency, and an ever increasing emphasis on beneficiary’s rights particularly to trust information.
What steps do I need to take?
Trustees will be required to administer their trusts in compliance with the new Act from 30 January 2021. Trustees should be fully familiar with their trustee duties and obligations, particularly around active decision making and provision of beneficiary information.
It may also be the right time for settlors and trustees to review the terms of their trust deed to ensure the trust remains fit for purpose. Questions to be considered will include whether the trust deed complies with the new Act and continues to meet both the settlor’s expectations and the needs of the beneficiaries? Settlors and trustees may also wish to review their trust deeds to ascertain whether the duration of the trust may be extended.
Settlors may want to update their letters of wishes in light of the new Act. The Act recognises the importance of the settlor’s objectives in establishing the trust and the settlor’s wishes in a number of other areas, including in relation to the beneficiary information obligations.
Finally, trustees would be well advised to review their administrative procedures and processes with a view to ensuring they adhere to best practice in trust administration. The trust law reforms are clearly directed towards lifting the standard of trusteeship and holding trustees to account. Even the best run trusts might benefit from such a review.
For specialist advice on any matter raised in this Brief Counsel please contact a member of our Private Client team.