Major Reform To Trust Law
On 30 January 2021, the Trusts Act 2019 will come into force. The Act is the most significant change to the law relating to trusts since the enactment of the Trustee Act 1956, some 65 years ago.
Amongst its stated objectives, the Act is intended to:
- Set out the core principles relating to express trusts;
- Provide default rules for the administration of trusts;
- Provide mechanisms for the resolution of trust-related disputes; and
- Make the law relating to trusts more accessible.
The Act will apply to all express trusts governed by New Zealand law, including those created before the Act comes into force. Trusts are widely used in New Zealand and as such the Act will have wide-ranging effects on those who are trustees, beneficiaries and those who establish trusts and their professional advisers.
In this article, we provide an overview of some of the key changes introduced by the Act. Subsequent articles will consider in more detail some of the specific changes that are likely to be of particular relevance to clients.
Mandatory and Default Duties for Trustees
The Act specifies the core trustee duties that are already an established part of the law relating to trusts but goes on to introduce the concept of mandatory duties and default duties. In simple terms, mandatory duties will apply to all trusts, regardless of the provisions of the deed governing the trust. Default duties will apply to trusts to the extent that they are not excluded or modified by the trust deed.
Many trust deeds already exclude certain duties and this practice will continue to be acceptable in relation to default duties. However, there is now an obligation on those preparing or advising on the terms of the trust to take reasonable steps to ensure that the settlors establishing the trust are aware of the implications of any modification or exclusion of a default duty.
Retention of Trust Information by Trustees
The Act requires trustees to retain core trust documents, including those setting out or varying the terms of the trust, records of trust property, records of trustee decisions, accounting and financial records, memoranda of guidance by the settlors of the trust, documentation relating to changes in trusteeship and other documents necessary for the administration of the trust. This is likely to require significant changes in the practices of many trustees. It is, however, permissible for one trustee to hold most documents, but each trustee must still hold at least a copy of the trust deed and any variations.
Disclosure of Trust Information to Beneficiaries
One of the key changes is that the Act creates a presumption that a trustee must make ‘basic trust information’ available to every beneficiary and wider ‘trust information’ available to beneficiaries upon request. However, the Act also specifies a range of factors that trustees must consider before making ‘trust information’ available on request, and if having done so the trustee reasonably considers that the information should not be disclosed, it may be withheld.
‘Basic trust information’ includes the fact that a person is a beneficiary, the names and contact details of trustees and details of any changes in trusteeship and the fact that the trustee may request a copy of the trust deed or ‘trust information’.
‘Trust information’ is defined as information that is reasonably necessary for the beneficiary to be able to enforce the trust, but importantly it does not include the reasons for trustees’ decisions. The Act also specifies a procedure that trustees must follow if they decide to withhold information.
Appointment and Removal of Trustees
The Act makes it easier to remove and replace a trustee who lacks capacity by enabling a property manager or the holder of an Enduring Power of Attorney of the person who holds the power to appoint an remove trustees to exercise that power if no one else has the power to do so. Currently, an application to the High Court is required in such circumstances.
The Act also provides that persons exercising the power of appointment or removal must do so in good faith.
Finally, the Act provides a more straightforward way of vesting trust property in new trustees.
Indemnities for Trustees
The Act provides that trustees liability for their own dishonesty, wilful misconduct or gross negligence cannot be limited or excluded by the trust deed. This will mean that trustees are no longer able to rely on broadly worded indemnity clauses in such cases. However, trustees may continue to rely on such clauses in relation to ordinary negligence. There will be an obligation on professional advisers to take reasonable steps to make sure that the settlor is aware of the consequences of such clauses when the trust is being established.
Duration of Trusts
The Act abolishes the rule known as the rule against perpetuities and now specifies that the maximum duration of trusts is now 125 years, although the terms of the trust may specify a shorter period after which the trust will come to an end.
Age of Majority
For trusts, the age of majority will reduce from 20 years to 18 years. This will mean that beneficiaries are entitled to receive distributions from that age and, with the unanimous agreement of all other adult beneficiaries, bring the trust to an end.
The Act represents a new era for the law relating to trusts and will have wide-ranging implications for trustees, beneficiaries and settlors alike. Future articles will expand on these issues. In the meantime, those involved in trusts, whether as settlors, trustees or beneficiaries should consult us for advice about the implications of the Act in terms of their own situation.