Following a lengthy review of the law of Trusts by the New Zealand Law Commission the revised Trusts Bill was introduced to Parliament on 1 August 2017. After gaining Royal Assent in July 2019 this bill, now named the Trusts Act 2019 (“the New Act”), will replace both the Trustee Act (1956) and Perpetuities Act (1964) and will come into force on 30 January 2021.
With the implementation of the New Act, this will be the first time in many years that such dramatic changes have been made to our trust laws. While the New Act will increase the scope of the rights and protections available for beneficiaries and make trusts more transparent for beneficiaries, it will also impose more responsibility and requirements on the trustees of trusts.
We summarise some of the more notable changes under the New Act and discuss what this will mean for trustees and beneficiaries of trusts.
Following a lengthy review of the law of Trusts by the New Zealand Law Commission the revised Trusts Bill was introduced to Parliament on 1 August 2017. After gaining Royal Assent in July 2019 this bill, now named the Trusts Act 2019 (“the New Act”), will replace both the Trustee Act (1956) and Perpetuities Act (1964) and will come into force on 30 January 2021.
With the implementation of the New Act, this will be the first time in many years that such dramatic changes have been made to our trust laws. While the New Act will increase the scope of the rights and protections available for beneficiaries and make trusts more transparent for beneficiaries, it will also impose more responsibility and requirements on the trustees of trusts.
We summarise some of the more notable changes under the New Act and discuss what this will mean for trustees and beneficiaries of trusts.
While there have always been duties imposed on trustees, the New Act sets out specific mandatory and default duties that apply to trustees.
Mandatory duties cannot be avoided by the modifying the terms of the trust. These duties set out the basic obligations of trustees to know the terms of the trust and follow them, act honestly and for the benefit of the beneficiaries and according to a proper purpose.
Default duties which will apply unless they are expressly excluded by the trust deed, are set out below:
• A duty to have a general duty of care
• A duty to invest prudently
• A duty not to exercise power for own benefit
• A duty to consider exercise of power
• A duty not to bind or commit trustees to the future exercise of a discretion
• A duty to avoid any conflict of interest
• A duty of impartiality
• A duty not to profit from the trusteeship of a trust
• A duty to act for no reward, and
• A duty to act unanimously.
You and your fellow trustees will need to consider whether the terms of their trust deed should, where there is the power in the trust deed for them to do so, be varied in order to exclude any of these duties.
Trustees must keep copies of core trust documents for the duration of the lifetime of the trust. Core documents include things such as: 1. Trust deed and variations;
2. Details of trust assets, liabilities and financial statements;
3. Contracts entered into by the trust;
4. Records of trustee decisions;
5. Memorandums of wishes; and
6. And documents necessary for the administration of the trust.
Each trustee must retain the documents listed at 1 above, however only one trustee is required to hold the remainder of the core documents.
The New Act creates a presumption that trustees will advise all beneficiaries of basic Trust information including:
1. The fact that a person is a beneficiary of the trust;
2. The name and contact details of the trustee(s);
3. When there are any changes to the trustees such as appointments or removals; and
4. The right of the beneficiary to request a copy of the terms of the trust or further trust information.
The right to request further trust information includes any information regarding the terms of the trust, the administration of the trust, or the trust property including financial information. This information enables beneficiaries to have adequate information to hold trustees accountable and enforce the trust deed. We note that the New Act specifies in further detail factors that trustees must consider when notifying a beneficiary of the basic trust information and whether to provide any information about the trust to a beneficiary on request.
This is a significant change as previously a beneficiary would not necessarily know they were named as a beneficiary. As such, these new disclosure requirements are likely to be a concern to many settlors and trustees who would not have anticipated that such information would be supplied to the beneficiaries and for trusts that list a wide classes of extended family members and charities as beneficiaries.
Currently, trusts are able to exist for up to 80 years. The New Act repeals the Perpetuities Act 1956 and abolishes the common law rule known as the rule against perpetuities instead specifies a maximum duration of 125 years for Trusts. This applies only to trusts formed after the New Act comes into force in 2021.
The New Act provides that a beneficiary may ask the Court to review any act, omission or decision of a trustee on the basis that this course of action was not reasonably available to the trustee in the circumstances. Further, the Court is also given wide powers to set aside any act or decision, to restrain a trustee from taking a proposed course of action, and to make any other order deemed necessary by the court.
If you are the trustee of a family trust or contemplating becoming one it is that you are fully aware of your personal obligations and responsibilities that come with this role under the current law and under what will be coming into law with the New Act.
Your first essential task as a trustee is to read and understand the trust’s deed. Typically, the trust deed will set out the objects of the trust, investment powers, borrowing powers, period of the trust, and who the settlor, beneficiaries, trustee and appointor (if applicable) are. To effectively manage the trust it is imperative to at least be aware of what is in the trust deed.
The trust itself is not a separate legal entity. Instead, it is you as a trustee, along with your fellow trustees, who are the legal owners of any assets held by the trust for the benefit of the beneficiaries. Therefore, whenever you make any decisions about the trust assets you must consider the beneficiaries’ needs. Please note, this is all the beneficiaries’ needs so it is important you have taken the time to review who the beneficiaries of the trust are.
The same principles that apply to trust assets in trustee names, apply to trust liabilities. Accordingly trust liabilities are not entered into under the name of the trust. For any obligations you enter into as a trustee you may be personally liable as well as jointly and severally liable for any trust debts. Independent trustees should seek to limit their liability where possible by having limitation of liability clauses inserted in documents they are required to sign as trustee. Independent trustees are trustees that cannot benefit from the trust as they are not beneficiaries of the trust. If as a trustee you could benefit from the trust as you are included in the classes of discretionary beneficiaries, it is most likely that you are personally liable for all debts and liabilities of the trust – whether you know about them or not. You should consider this carefully before agreeing to be a trustee of any trust.
Another key obligation you have as a trustee is to have a good knowledge of the assets held by the trust and ensure they are being properly maintained and protected. You must not rely on your co-trustees to do this for you.
To administer a family trust properly, tax returns and financial statements should be prepared on an annual basis. In addition, approval of financial statements, beneficiaries’ distributions and all major transactions must be minuted. It is recommended that an accountant is employed to assist with these tasks.
A common practice at year end, when the financial statements are prepared, is to consider if distributions should be made to beneficiaries. Once minuted, distributions may be made either by immediate cash distribution or via journal entries to beneficiaries’ current accounts. Care must be taken to administer balances owing to beneficiaries prudently. Any distributions unpaid to beneficiaries can be requested by the beneficiaries. These amounts may also be included in the relationship property of a beneficiary. Once a beneficiary turns 20 years of age they are entitled to receive a copy of the financial statements each year.
The memo summarises only a few of the obligations that trustees have in carrying out their fiduciary duty, under the current law and pursuant to the New Act. If you would like to discuss the contents of this memo or the New Act in general, please let us know and we can arrange a time to sit down with you and discuss the same.