Trusts under fire? The review of trust law in NZ

22 August, 2013 | Peter Smith

It was already our advice settlors and to review the state of their individual trusts. This is particularly important in light of any personal, legal or policy changes. The changing treatment of Trusts in New Zealand means that regular legal review is essential.

(edited August 2019 – the review has now been completed and the Trusts Act 2019 obtained Royal assent on 30 July 2019, and will come into force on 30 January 2021. Scroll down to read our review of the  draft act and submission to the Government)

Smith and Partners supports the current review of trust law undertaken by the Law Commission; it was time for a robust review and the recommended changes. The new Act should result in clear guidelines for all who work with and have an interest or role in Trusts, and should reduce the cost of disputes and injustice when trusts are neglected, “go wrong” or are challenged.

The review was begun in 2010 and the Commission will report again later in 2013, with their final recommendations for a whole new Trusts Act, to replace the Trustee Act 1956 and the Perpetuities Act 1964.

Just some of the significant likely changes in the proposed new Act are:

Better definitions and explanations of roles of Trustee and Beneficiary

No trust will exist if the sole beneficiary is the sole trustee.

Formalise Trustee’s duties as to conduct that cannot be excluded including:

• Duty to act honestly and in good faith for the benefit of the beneficiaries
• Duty to exercise such care and skill as is reasonable in the circumstances
• Duty to understand and adhere to the terms of the trust
• Duty to account to the beneficiaries for the trust property
• Duty to exercise the powers of a trustee for proper purpose

A range of other implied duties that can be modified or excluded specifically in the trust deed will also likely be legislated.

Trustees’ duty to inform beneficiaries of trust information (which is widely defined) and their rights as beneficiaries
This has been controversial proposal as the obligation could be onerous or disruptive. For example, it includes the duty to inform all beneficiaries of their status as beneficiaries and disclosure of what were previously confidential documents, such as the Memorandum of Wishes.

Transparency and direct liability for the directors of corporate trustees

For example, Section 25 of the Companies Act 1993 is recommended to change so that a company is required, when acting as a trustee of a trust, to clearly describe its status in communication in the form “X Ltd acting as trustee for Y trust”.

Maximum duration rule for trusts to be 150 years

This will bring New Zealand in line with other trust jurisdictions.  Previously the maximum duration was 80 years after which the property had to be vested upon beneficiaries. The new period will allow for a higher amount of flexibility for trustees to dispose of property as they choose.

Relationship Property

The impact of trusts in relation to relationship property and other family claims has also been considered and recommendations for further focussed review of that particular area have indicated that a number of changes are highly likely in the future. These changes are likely to further reduce the use of Trusts as a shield from claims to what would otherwise be relationship property.

A significant theme is that Trusts should not be used to unfairly defeat entitlements under the Property (Relationships) Act 1976 or the Family Proceedings Act 1960, and that de facto couples should be treated the same in regard to their trust property in the event of a separation. This would require changes to all the relevant legislation.

In most circumstances a Contracting Out Agreement (sometimes referred to as a “prenup”) is the only way to legally clarify both parties’ respective future entitlements, or not, to trust and other property. It is also possible to specifically provide for separation in the Trust Documents themselves.

It is more important than ever that those involved with Trusts take proper and regular advice, and Trusts are formally reviewed with your lawyer, at least on an annual basis.

A New Trust Act? Our Submission on the Draft Bill

2 February, 2017 | Peter Smith

The Government has appointed a Trusts Bill Consultation Team to draft a new Trusts Act that legislates for the administration of Trusts. The draft Bill was published in November and submissions closed before Christmas 2016.

Matters of interest in the Bill are:

1. A proposal to extend the life of a trust from 80 years to 125 years.
2. A proposal to abolish the rule against perpetuities. This means that the life a trust will be able to be extended or renewed beyond 125 years by virtue of a resettlement with the consent of the beneficiaries.
3. A proposal to divide the information to be given by trustees to beneficiaries into two types of information:
4. Basic information means names of beneficiaries, names and contact details of trustees, details of appointment removal and retirement of trustees and the right of a beneficiary to request a copy of the terms of the trust or trust information.
5.  Trust information means information regarding the terms of the trust, the administration of the trust or trust property and information that is reasonably necessary for the beneficiary to have, to enable the trust to be enforced. That information does not include reasons for a trustee’s decision.
6. The Bill proposes that any beneficiary who has a reasonable likelihood of receiving trust property under the terms of the trust be entitled to basic trust information and that all beneficiaries be entitled to trust information if the trustees consider that it is in the interests of the trust that the beneficiary receive that information.
7. Most trusts in New Zealand are discretionary family trusts set up by a married or de facto couple for the benefit of themselves and their children. Usually these discretionary family trusts are run for the benefit of the settlors who have no wish to involve their children in either the administration of the trust or any information concerning the trust while the settlors are alive. We think it most important that the Trusts Act when it is made law include provisions that permit the settlors while they are alive to refuse to give either basic information or general trust information to their children.
8. There is also a proposal under the Bill that by agreement between the various parties to a trust and/or at the direction of the High Court the alternative dispute resolution process as described in the Bill (for example mediation) can be used to facilitate the resolution of disputes involving a trust that do not include a dispute about the validity of all or part of a trust.
9. In other words if there was a dispute about a legal action brought by or against a trustee in relation to the trust or a dispute in relation to the trust between a trustee and a beneficiary or the trustee and a third party that did not involve an argument about the validity of the trust deed or any part of the trust deed then such dispute can be resolved by mediation.
10. This will make resolution of trust disputes much more efficient and cheaper.

Review of your Trust Deed
 The proposed Bill, highlights the need for everyone who has a family trust to review their trust deed. Smith & Partners will be producing a draft of a sample Deed of Variation for the Trusts looked after by Smith & Partners once the consultation period for the Bill is over and we have received feedback from the Trusts Bill Consultation Team.

If you are not already a client of Smith & Partners we will also be happy to review your Trust Deed with you once we have a better idea of the final form of the legislation.

Submission on the Draft Trust Bill (2016)

2 February, 2017 | Peter Smith

The below submission was written by Peter Smith and submitted in December 2016 to The Trusts Bill Consultation Team at the Ministry of Justice in response to a draft Bill on trusts that was published in November 2016. Further commentary on the draft bill and its possible effects on Family Trusts in New Zealand can be found by reading “A New Trust Act? Our Submission on the Draft Bill”. 

SUBMISSIONS CONSULTATION DOCUMENT AND DRAFT TRUST BILL

1. The majority of Trusts in New Zealand are discretionary family trusts. These trusts have been set up in the main by couples who are married or in a de facto relationship, for the benefit of themselves and for their children and grandchildren. They are usually operated on a generational basis with the first generation of beneficiaries being the settlors, the second generation being their children and the third generation being grandchildren and so on. Each generation generally administers the Trust for their benefit on the assumption that the succeeding generations will receive the benefit of what’s left after the income and capital distributions made to the previous generations.
2.  In practice, the settlors of the above described discretionary family trusts are very sensitive to the issues of involving their children in:
3. The administration of the trust; and
4. The right to receive distributions from the Trust.
5. In this writer’s experience children have a habit, if they are appointed trustees during the lives of their parents, of attempting to assume too much control and this leads to disputes that were unintended and not envisaged by the settlors when the trust was established. Accordingly it is the writer’s firm belief that while the settlors are alive, that if they are the principal beneficiaries of the trust then the discretions of the trusts should be able to be applied in their favour without the requirement of children beneficiaries looking over the shoulder of the trustees and criticising the distributions that have been made.
6. The writer does not think that the Trust Bill addresses the above described trusts in sufficient detail.

COMMENT ON THE BILL

General

1. The writer is of the view that while the settlors (who after all are the architects of the trust) are alive that their children discretionary beneficiaries should not be entitled to receive either the trust information as defined in section 41 of the Bill or basic trust information as defined in section 43 of the Bill and that the Bill should be amended accordingly.
2. The writer applauds the extension of the duration of a trust to 125 years and the abolition of the ruling against perpetuities. It is only by encouraging the long duration of trusts that we will assist to changing the culture in New Zealand to a culture that encourages the appreciation of accruing wealth through each generation of a family.
3. Many trust deeds have a rule prohibiting the extension of the term of a trust. The new legislation should address this.

Suggested Amendments

Section 11 – Maximum duration of Trust
This section should have a clause along the lines of:

“Notwithstanding anything in the terms of a trust to the contrary, the terms of every trust that existed before the commencement of this Act, shall permit the duration of the trust to be extended to 125 years.”

Abolition of rule against perpetuities
Presumably it is the thinking of the Team that the life of a trust will be able to be extended beyond 125 years, by virtue of a resettlement completed with the consent of all beneficiaries and if necessary the Court pursuant to sections 109 and 111. The writer is of the view that the Bill should make this clear by adding a section 8(c) that reads:

“Will prevent the duration of a trust being extended by virtue of a resettlement completed with the consent of the beneficiaries and if required the Court in accordance with sections 109 and 111.”

Information to beneficiaries
Definition of qualifying beneficiaries

The writer is of the view that this definition should be amended to read:

“Qualifying beneficiary means a beneficiary who has a reasonable likelihood of receiving trust property under the terms of a trust. Nothing in this definition will prohibit the terms of a trust which exclude a discretionary beneficiary from being a qualifying beneficiary.”

Subsection 44(2)
This subsection should have the words added to it:

“Or the terms of the trust permit that the information should not be given.”

Section 45(1)
This section should have an additional subsection 45(1)(c) that reads as follows:

“The terms of the trust deed or any other document containing the terms of the trust.”

Section 45(2)
This section should have a further subsection (l) that reads:

“The terms of the trust deed or document containing the terms of the trust and whether such terms permit or prohibit the making available or giving information to a discretionary beneficiary.”

The writer thanks the Trust Bill Consultation Team for their work and looks forward to the results of the consultation round.

Yours faithfully
SMITH AND PARTNERS
Peter Smith
PARTNER

Smith and Partners are recognised experts in family trust law.  To review your family trust or for advice on your responsibilities and liabilities contact Peter Smith by phone on 09 837 6882 or email peter.smith@smithpartners.co.nz