New Zealand Law Society - Whether and what to disclose, these are the questions

Whether and what to disclose, these are the questions

By Rhonda Powell

The Trusts Act 2019 (“Trusts Act”) comes into force on 30 January 2021. Many of the changes to the law of trusts brought about by this Act are aimed at strengthening the ability of beneficiaries to hold trustees to account. To this end, Subpart 3 sets new rules for trustees about keeping trust documentation and disclosing trust information to beneficiaries, to ensure that beneficiaries have sufficient information to enforce the terms of the trust.

Although the new rules about retention of documentation apply to charitable trusts, the new rules about disclosure of information do not. Neither do they apply to other permitted purpose trusts that do not have beneficiaries.

This article describes the requirements to retain and disclose information, together with some ideas about how the new rules are likely to affect legal practice.

What information to retain

Section 45 of the Trusts Act requires trustees to keep core trust documents, including:

  • documents setting out the terms of the trust or varying those terms;
  • records of the trust property, including income and expenses, appropriate to the value and complexity of that property;
  • records of trustee decisions;
  • contracts;
  • accounting and financial statements;
  • appointment, removal and discharge documents;
  • letters of wishes by the settlor; and
  • other documents necessary for the administration of the trust.

One trustee may hold most documents, but each trustee must hold at least a copy of the terms of the trust and any variation to those terms (s 46). The documents must be kept by the trustee for the duration of their trusteeship and must be given to any replacement or continuing trustee when their trusteeship ends (ss 47-48).

Complete record keeping is essential for good trust administration. To the extent that trustees are not currently retaining copies of trust documentation, the Trusts Act should provide a useful wake-up call. Further, trustees are personally liable for their actions and inactions (but in many circumstances, they will be able to rely upon their right of indemnity from the trust fund) and good record keeping will assist them to protect themselves against any allegations.

What information to disclose

The Trusts Act creates a presumption that a trustee must disclose ‘basic trust information’ to every beneficiary and ‘trust information’ to beneficiaries who request it (ss 51-52). In the case of beneficiaries who are minors or who lack capacity, the information must be given to a parent, guardian, attorney or property manager.

‘Basic trust information’ includes (s 51(2)):

  • the fact that a person is a beneficiary;
  • the name and contact details of a trustee;
  • the occurrence of, and details about, any change to the trusteeship; and
  • the right to request a copy of the terms of the trust and trust information.

‘Trust information’ is information about the terms of the trust, the administration of the trust, and the trust property, that is reasonably necessary for the beneficiary to have the trust enforced (s 49).

Before providing either basic trust information or trust information, trustees must consider a range of factors. If the trustee then reasonably considers that the information should not be disclosed, then they may withhold the information.

This creates a new ongoing and active obligation on the trustee. At the same time, there is sufficient flexibility to cater for most circumstances in which trustees might reasonably choose to withhold information. Lawyers will play a critical role in guiding trustees through the routine exercise of balancing considerations before deciding what to disclose.

Factors to consider when deciding whether to disclose

The list of relevant factors (whether for routine disclose of basic trust information or responding to a request for trust information) is set out in s 53 and includes:

  • the nature of the beneficial interests;
  • whether there are any issues of personal or commercial confidentiality;
  • the expectations of the settlor;
  • the age and circumstances of the beneficiary;
  • the nature and context of any request for information;
  • the effect of giving the information, including the effect on relationships within the family and relationships between the trustees and beneficiaries; and
  • the practicality of giving the information or imposing restrictions or safeguards.

It can be expected that the proper interpretation of these factors, the proper weight to be given to them and the effect of general principles of trust law on the factors will form the subject of judicial decisions in 2021 and beyond, as trustee decisions about non-disclosure are challenged.

The trustee does not need to treat every beneficiary the same. The Trusts Act permits the trustee to withhold information from a particular beneficiary or class of beneficiaries if this is reasonable having considered the required factors. It may therefore be permissible for the trustee to disclose more information to beneficiaries with vested interests when compared to discretionary beneficiaries with ‘mere expectancies’.

In some cases, if a particular beneficiary is unusually litigious, if family relationships could be damaged, or if the settlor intended the information to be kept confidential, trustees might reasonably withhold information. In other cases, transparency may be the most astute strategy to prevent disputes arising.

It is expectations that at the time the trust was settled that are relevant to the disclosure decision but if a settlor is alive and fully competent, there appears to be nothing stopping them from now stating the expectations as to disclosure that they had at the time of the settlement. In some cases, the settlor’s expectations as to privacy or disclosure may be ascertained from lawyers’ files. In any case, the settlor’s wishes are only one of the relevant factors for the trustees to consider and should not be treated as determinative.

In future, settlors may choose to express their wishes about disclosure of information in letters of wishes, or law firms may incorporate provisions about disclosure into their trust deed precedents. However, Subpart 3 is not included in the list of provisions which may be excluded by the trust deed (Schedule 2) and so the requirements for trustees to retain and disclose information in the Trusts Act will prevail over anything contrary in the trust deed.

How disclosure should take place

It will sometimes be appropriate for disclosure to take place via the trustees’ lawyers. However, the Trusts Act does not require this, or even that information be disclosed in writing, and it may sometimes be appropriate to keep disclosure low-key. Either way, trustees should keep a written record of the fact that they have considered the relevant factors and of the decision reached. Some trust deeds require trustee decisions to be recorded in a particular form.

In general, the reasons for trustee decisions are not required to be disclosed. It follows that trustee reasons for deciding not to disclose trust information also do not need to be disclosed.

The reasonable cost of responding to beneficiary requests for trust information under s 52 may be passed onto the beneficiary (s 55), although one would assume that in most cases documents will be stored electronically and can be passed on for little or no cost. If the trustee incurs legal costs in seeking advice about their disclosure obligations, this expense is recoverable from the trust fund.

When to disclose

The trustee has a duty to consider at ‘reasonable intervals’ whether the trustee should be making basic trust information available. ‘Reasonable intervals’ is not defined and is likely to be context dependent. For a straightforward family trust with little activity, consideration at an annual trustee meeting should be sufficient.

In many cases, if basic trust information has already been made available, and there has been no change in circumstances, then this exercise should be straightforward and nothing further should be required. However, the trustee has a duty to consider disclosure and to make a decision.

If there is a change of trustee, then beneficiaries must be notified ‘as it occurs’. One would expect the trustees to make basic trust information available to any new beneficiary at the time they are nominated.

Court supervision

The trustee retains significant discretion under the new provisions. However, whether the trustee’s decision was ‘reasonably open in the circumstances’ may be challenged by any beneficiary in the High Court (s 126).

Further, if no beneficiary has any trust information (information reasonably necessary for the beneficiary to have to enable the trust to be enforced) then an obligation arises for the trustee to apply to the High Court for directions (s 54). This obligation applies if no beneficiary can be identified, if the trustee has decided not to disclose basic trust information to any beneficiary, or if the trustee has declined a request for information.

The application for directions need not be made if the period during which no beneficiary has any trust information is less than a year.

Practical implications

In 2020, it will be important for trustees to develop robust decision-making practices around the provision or withholding of trust information and if necessary, to seek advice to help them strike the right balance.

If they haven’t already, lawyers who act as professional trustees need to review their files and their ongoing practices to ensure they hold the information required by the Trusts Act and are in a position to comply with their duties.

Law firms should be turning their minds to the following factors:

  • how they will go about advising their trustee clients of their new obligations;
  • whether to contact settlor clients about the changes to the law;
  • whether trustee clients hold the required information and if not, how the gaps may be filled;
  • what systems would be appropriate if not all trustees are to hold all information;
  • whether there is any record of the settlor’s wishes about disclosure or privacy;
  • the development of precedent letters for disclosing basic trust information; and
  • the development of precedent material to aid trustee decision-making about disclosure.

Law firms which act for both trustees and beneficiaries of particular trusts need to consider the requirements of the Rules of Conduct and Client Care for Lawyers if the trustees decide not to disclose certain information to beneficiaries.

Some clients may wish to consider whether beneficiaries may be removed, particularly if there are wide classes of beneficiaries. Unfortunately, this is not a quick fix. Care must be taken to ensure that this is documented correctly in accordance with the trust deed and that the action is taken by the power holder (who will not necessarily be the trustee). Consideration should also be given to whether the power is personal or fiduciary in nature, and if fiduciary, whether it may be validly exercised in the circumstances.

The requirements to disclose information may lead to some clients questioning the ongoing strategic purposes of the trust. Similar considerations will apply to any decision to distribute the trust assets and/or vest the trust. For a ‘standard’ uncontentious family trust, full distribution is likely to be achievable. When advising their clients, lawyers should consider the terms of the trust deed, the nature of the powers, the existence and requirements of any fiduciary duties that apply, and whether any beneficiary or protector consents are required.

Conclusion

The new rules on retention and disclosure of information will bring about greater transparency and encourage better administrative practices for trusts. At the same time, they will expose matters which have been historically kept private, sometimes for good reason. For complex or contentious trusts, the new rules provide a framework for information to be requested, and for review by the High Court if necessary. An increase in trust litigation is a likely consequence of these changes. In considering how to address their new duties of disclosure, trustees should be mindful of the purpose of the new provisions, to ensure that they can be held to account by the beneficiaries.

Dr Rhonda Powell TEP is a Christchurch barrister who specialises in trusts and estates law.

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