New Zealand Law Society - Appointment and discharge of trustees when the Trusts Act comes into force

Appointment and discharge of trustees when the Trusts Act comes into force

By Rhonda Powell

Some of the most wide-reaching changes to the law brought by the Trusts Act 2019 (in force on 30 January 2021) are the new provisions on appointment and discharge of trustees and vesting of trust property (Part 5: ss 92-120). The new provisions are longer and more prescriptive than the existing provisions in Part 4 of the Trustee Act 1956. Law firms will need to consider their precedents in light of the new rules.

Who has the power to appoint and remove trustees?

Specific provision is made in the Trusts Act for trustee removal, trustee retirement, trustee replacement and when a trustee has died.

In all cases, the first ‘port of call’ is the person nominated in the trust deed. If no one is nominated in the trust deed, or the nominated person is unable or unwilling to act, the remaining trustees have the power of appointment and removal (s 92).

This should account for nearly all circumstances. However, if there is no nominated person or remaining trustee who is able or willing to act, then:

  • the power to remove and replace a trustee may be exercised by: a property manager of a trustee appointed under the Protection of Personal and Property Rights Act 1988 (PPPR Act); the attorney of a trustee who has lost capacity, appointed under an Enduring Power of Attorney; or the liquidator of a corporate trustee;
  • a retiring trustee may appoint a replacement;
  • the executor or administrator of a trustee who has died may appoint a replacement; and
  • if it is difficult or impractical to replace a trustee otherwise, the High Court may appoint a trustee.

These new provisions are long-winded but do appear to cover most instances in which a trustee would need to be appointed or removed, minimising the need for recourse to the court. One instance in which a court application may be desirable is when there are issues about the validity of previous trustee appointments and it is in the interests of the beneficiaries to achieve certainty.

How a trustee retires

A trustee who wishes to retire must be discharged in writing either by the person authorised to remove trustees, or if not by the remaining trustees, or if this cannot be achieved, by the retiring trustee and a replacement trustee together (s 101). A trustee can only unilaterally retire if any minimum number of trustees under the trust deed would be met.

It follows that if the authorised person, or the other trustees are either unable or unwilling to discharge the trustee in writing, the trustee is not discharged until they find a replacement.

It will be interesting to observe how these provisions play out in the context of trusts where the trusteeships are a matter of contention.

How a trustee is removed

A trustee may be removed by the service of notice upon them (s 106). The notice itself will be immediately effective to remove a trustee if they are subject to a property order under ss 31-33 of the PPPR Act. In other cases, the document takes effect 20 working days after the trustee receives the notice, if they have not made an application for the decision to remove them to be reviewed (s 107).

If the trustee cannot be located, then a statutory declaration must be signed recording the decision and the efforts to locate and contact the trustee. The statutory declaration will amount to a document of removal (s 108).

A trustee may apply to the court for an order preventing their removal (s 109). The application must be made within 20 working days of the date the trustee receives the notice of the decision to remove them.

The court may also make an order for removal if it is difficult or impracticable to do so without the assistance of the court (s 112).

Trustee removal will need to be dealt with carefully in order to comply with these rules.

How trustee appointments should be made

Appointments and replacements must be made in writing (s 92).

If the appointment or replacement is taking place under the power in the trust deed, then any limitations specified in the empowering clause must be complied with (s 92(4)). For example, the trust deed may require the consent of a particular person, or certain preconditions to be met, or formalities to be followed.

A person with the power to appoint or remove may apply to the court for directions on exercise of power (s 93). This could prove to be a helpful provision in cases where there is dispute among the family members.

As is already the case with the exercise of powers generally, the exercise of a power to appoint or remove a trustee must be exercised honestly and in good faith and for a proper purpose (s 94). A beneficiary may apply to the court for review of an exercise of the power to appoint and remove a trustee (s 95).

Vesting and divesting of trust property

One of the most helpful features of the new rules for replacement of trustees may be the statutory mechanism for vesting trust property in new trustees.

Currently, if a trustee loses capacity, it is usually possible to replace them using the broad power in s 43 of the Trustee Act 1956. If the trust includes land, it is then necessary to apply to the court for a vesting order. This is to meet the requirements of the Land Transfer Act 2017 for the registration of land.

Under the Trusts Act, the execution of a document of appointment, removal, or discharge divests the trust property from the former trustees and vests it in the new trustees without any conveyance, transfer, or assignment (s 116). In other words, the trustee replacement documents suffice as “vesting by statute” under s 90 of the Land Transfer Act.

A court order appointing or removing a trustee amounts to a vesting order for the purposes of s 89 of the Land Transfer Act. If a court order is made, the statutory declaration is not necessary.

Helpfully, trustees may complete formal requirements necessary for vesting and divesting on behalf of a former trustee who loses capacity (s 118).

The Trusts Act includes a specific limitation of liability for any person who registers, notifies or records the transfer of property in accordance with these provisions, and a requirement for the new trustees to give the departing trustee a copy of documents demonstrating that they have been divested of the trust property. This must take place as soon as possible after the registration is complete (s 120).

This new procedure will be of great practical interest and is likely to save significant inconvenience and expense.

Conclusion

Overall the new provisions are comprehensive and should reduce the need to apply to the High Court in the future for non-contentious replacements. At the same time new mechanisms are put in place for challenging the exercise of powers of appointment and removal, which may provide some interesting case law over the next few years. Lawyers drafting documents to remove, retire, replace or appoint trustees will need to pay careful attention to detailed requirements of the Trusts Act.

Dr Rhonda Powell www.rhondapowell.co.nz is a Christchurch barrister who specialises in trusts and estates.

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