By Rhonda Powell

The first major reform to trust law in the lifetime of most New Zealand lawyers will occur on 30 January 2021 when the Trusts Act 2019 comes into force. All lawyers will need to come up to speed with the new provisions and LawTalk will assist by providing regular information in the lead-up to January 2021. In this issue we include the first article on the changes in a series by Auckland barrister and trust specialist Rhonda Powell, while professional trustee counsel Henry Stokes looks at some of the impacts on trustees and beneficiaries.

The Trusts Act 2019, which comes into force on 30 January 2021, is the first major trust law reform in New Zealand in 70 years.

Many of the key changes are aimed at making trust law more accessible to both lawyers and the public, strengthening the ability of beneficiaries to hold trustees to account.

This article provides an overview of key provisions of the Act. Subsequent articles will focus in more detail on particular aspects of the Act and the day-to-day considerations for lawyers.

Now is the time for lawyers to review their deeds and their practices to ensure they will be fit for purpose when the Trusts Act 2019 comes into force.

Application and guiding principles

The Trusts Act will apply to all express trusts that are governed by New Zealand law, including those created before the commencement of the Act. It also applies to statutory trusts such as intestate estates, and to other trusts recognised at common law or in equity, if a court deems it appropriate.

The Act is not a complete code. It will co-exist with relevant rules of common law and equity.

Section 4 sets out the principles that apply to those powers or performing functions or duties under the Act (including courts, trustees, and lawyers). A trust should be administered in a way that:

• is consistent with its terms and objectives; and
• avoids unnecessary cost and complexity.

The duty is to ‘have regard’ to these principles. Lawyers drafting documents recording trustee decisions may consider adapting their precedents to incorporate reference to the s 4 principles.

Mandatory and default trustee duties

The Trusts Act specifies the core trustee duties that were already part of the law. It then incorporates a new concept by classifying the duties as either ‘mandatory’ (ss 23-27) or ‘default’ (ss 29-38). In exercising any duty, a trustee must have regard to the contents and objects of the trust (as well as the s 4 principles).

Mandatory duties must be performed by the trustee and may not be modified or excluded by the terms of the trust. Any purported exclusion of a mandatory duty will have no effect.

Arguably, the exclusion of mandatory duties may also be evidence that there was no intention to create a trust in the first place (an argument accepted in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch)) and thereby undermine the asset protection strategy if the trust is ever challenged.

Default duties may be modified or excluded by the terms of the trust, subject to certain limits as set out in s 5 and Schedule 2. Many default duties are commonly excluded by trust deeds. This practice will continue to be acceptable (provided that the exclusions fit within the permitted limits).

However, the Act imposes a statutory duty on any person advising on or preparing the terms of a trust to take reasonable steps to ensure that the settlor understands the meaning and effect of any modification or exclusion of any default duty.

Lawyers drafting trust deeds will need to adapt their practice to ensure that they give specific advice about default duties. Development of client information leaflets that are tailored to the firm’s trust precedents may be a reliable and efficient approach. This can be backed up by verbal advice.

Special trust advisers/delegates and nominees

Another option opened up by the Act is the ability to appoint a ‘special trust adviser’ to advise the trustee. A special trust adviser will not have the power of a trustee and the trustee will not be bound to follow their advice.

The new rules on exercise of trustee powers by others (ss 67-73) enable a trustee to go further and delegate certain powers or functions to another person.

Appointment of investment advisers may be a growing practice for New Zealand trusts with fluid assets and could be helpful for life-interest trusts for which investment decisions will affect the balance struck between classes of beneficiaries. The Trusts Act gives the trustee power to determine whether return on an investment is to be classified as income or capital. This is one of the powers that cannot be delegated.

Retention of information

The 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 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.

This could mean a significant change in practice for some trustees, and the need for lawyers who act as professional trustees to check that their paperwork is comprehensive.

It is permissible for one trustee to hold most documents, but each trustee must hold at least a copy of the terms of the trust and any variation to those terms.

These rules may appear onerous but they should be seen as routine and essential to good trust administration.

Disclosure of information

The Trusts Act creates a presumption that a trustee must make ‘basic trust information’ available to every beneficiary and ‘trust information’ available to beneficiaries who request it. However, before providing the information, trustees must consider a range of factors and if the trustee reasonably considers that the information should not be disclosed, then it may withhold the information.

‘Basic trust information’ includes the fact that a person is a beneficiary, the name and contact details of a trustee, details about any change to the trusteeship, and the fact that a beneficiary may request a copy of the terms of the trust or ‘trust information’.

‘Trust information’ is information that is reasonably necessary for the beneficiary to have to enable the trust to be enforced.

Importantly, the reasons for trustee decisions are not required to be disclosed. Presumably this means that trustees' reasons for deciding not to disclose information would also not need to be disclosed.

The trustee has an active duty to consider at ‘reasonable intervals’ whether the trustee should be making the basic trust information available. This should become a routine part of trustee meetings.

It will be important for trustees to develop robust practices of decision-making around the provision or withholding of trust information and to seek appropriate advice to help them strike the right balance. Lawyers should be prepared to offer specific advice on disclosure to every trustee-client.

Exemption and indemnity clauses

The Act makes it clear that trust deeds must not limit a trustee’s liability or provide an indemnity for dishonesty, wilful misconduct or gross negligence. Any terms in a trust deed that purport to limit the liability of the trustee or to indemnify them in breach of these provisions is invalid.

This is means that trustees can no longer rely on broad indemnity clauses that purport to protect them against gross negligence. They may still be protected in relation to ordinary negligence, if this is covered by an appropriately drafted limitation of liability and indemnity clause.

As with contracting out of default duties, lawyers will have a statutory duty to take reasonable steps to ensure that the settlor understands the meaning and effect of any limitation or indemnity clause contained in the trust deed. Explanation of limitations and indemnities should be part of standard advice when establishing a trust, and should be provided both verbally and in writing.

Appointment and removal of trustees

The statutory powers for appointment and removal of trustees have been modernised and broadened to minimise the need to apply to the court.

The Act confirms that a person with a power of appointment or removal of trustees must exercise it honestly and in good faith, and for proper purpose.

Retiring as a trustee is to become slightly more difficult in so far as a discharge must be given in writing. Lawyers will need to review their firm precedents in light of the new provisions.

Abolition of the rules against perpetuities and accumulations

The rule against perpetuities and remoteness of vesting is abolished. Trusts which might otherwise have breached the rule against perpetuities for failing to specify a termination date are deemed to terminate after 125 years. If permitted by the trust instrument, trusts already in existence with shorter trust periods may be extended up to 125 years.

Lawyers should consider advising clients about whether it is possible under the terms of the deed to vary a trust to take advantage of the longer trust period (currently a maximum of 80 years) so as to have the option to continue the asset protection benefits of the trust for longer.

Other changes

Other changes include:

• reduction of the age of majority from 20 to 18;
• codification and extension of the rule in Saunders v Vautier (1841) 4 Beav 115 that adult beneficiaries may unanimously bring a trust to an end;
• changes to the grounds on which the court may review trustee decisions; and
• new alternative dispute resolution procedures.

Conclusion

The Trusts Act 2019 comes into force in just over a year. Those advising settlors and trustees of New Zealand trusts should consider a comprehensive review of trust deeds and provision of information to clients. It is also a good opportunity to review succession plans for trusts, and to reconsider whether each particular trust is really necessary.

Whether or not they choose to act as independent trustees, lawyers will play a critical role in guiding trustees through understanding and applying their duties, including the routine exercise of balancing considerations before deciding what to disclose. If the Act’s provisions are complied with, we can expect significant improvements in trust practice.

Dr Rhonda Powell www.athene.co.nz is a barrister, and principal of Athene Trust Law. She specialises in all aspects of trusts and estates law, and acts in both advisory and advocacy capacities.