Revamp to 60-year old trust law
On 14 November 2016 the Justice Minister, Amy Adams, released draft legislation to update our trust law and improve the administration of trusts. It is important to appreciate that this change will have implications for all trusts; individuals may be most interested in family trusts and trusts established under Wills, but the changes will also affect (in particular) charitable trusts.
The Minister highlighted that:
Trusts play an important role in New Zealand. Between 300,000 and 500,000 trusts are operating today. Every day, ordinary New Zealanders use them to manage their finances, with an estimated 15 per cent of private houses held in a trust. They also form part of the economic backbone of the commercial and social sectors.
Our 60-year old trust law is complex and hard to navigate, partly because it is scattered across the Trustee Act and a variety of decisions made by courts over many years. That’s why in 2009, the Government asked the Law Commission to have a look at how the laws could be modernised and made clearer.
Given their importance to our society and economy, trust law should be simple to understand so that families and businesses can manage their affairs with confidence.
The draft Trusts Bill aims to update and improve upon the Trustee Act 1956. The proposed improvements are intended to:
- Make it easier for people to understand how to use (primarily, family) trusts appropriately to manage their affairs,
- Set out clear mandatory and default trustee duties so people know what their obligations are if they’re involved in governing or managing any type of trust,
- Require trustees to manage and provide information to beneficiaries (not all trusts have specific beneficiaries),
- Give trustees flexible powers and updated rules,
- Reduce risks for trustees and disputes about trusts as well-informed trustees are less likely to act contrary to the law,
- Clarify rules relating to changes to trusts and winding up trusts, and
- Provide more options to remove and appoint trustees without having to go to Court, while also preserving people’s ability to ask the Courts to intervene to resolve disputes.
A final version of the Bill will be introduced to Parliament in 2017, and in the meantime submissions on the draft Trusts Bill can be made – see Ministry of Justice Consultation Hub – closing on 21 December 2016. After the Bill receives its first reading it will be referred to a Parliamentary Select Committee for consideration, which will receive further submissions.
The Law Commission began its review of trust law in 2009, and issued six public consultation papers. The proposed reforms are largely based on recommendations made by the Law Commission in 2013, and reflect advice from a reference group of experts who considered the Law Commission’s recommendations and provided input into refining them. The proposed reforms will have effects on all trusts, not just family trusts, as the Minister pointed out:
We need to ensure [the law] is fit for purpose and that the law suits the needs and realities of everything from family trusts to corporate structures.
With thousands of trusts in New Zealand, many people will benefit from a more practical and useable law.
What’s currently wrong, and how should the proposed new Trusts Act improve things?
Statutes like the Trustee Act 1956 get out of date as society changes, and need periodic updating. The main problems with our current trust law include:
- Relatively few people understand trusts; about what a trust is, and the implications of transferring property ownership into a trust, and how trusts work, and the rights and obligations of trustees and beneficiaries,
- The Trustee Act no longer reflects modern trust practice and is narrow in scope, making it difficult to draft trust deeds (many of which modify or replace the Trustee Act’s default rules),
- Under the present Act, trust administration is complicated and expensive, and making changes to trusts or managing unforeseen circumstances is difficult (sometimes, even dealing with relatively simple administrative issues requires an application to the High Court),
- Legal advice is often required to interpret and apply complex and out-of-date law, and
- These problems unnecessarily increase costs.
The proposed new Trusts Act is intended to:
- Be a practical and useable statute,
- Facilitate the efficient operation of trusts and resolution of trust-related disputes, and
- Enable trustees to make better choices about how trust property is managed (for instance, the new Act will give trustees the power to deal with trust property as if it was their own, unless there are specific provisions in the trust instrument restricting this power).
The Government’s admirable (but possibly unrealistic) intention is that trust users should, themselves, be able to easily read and navigate the legislation.
In summary, the new Trusts Act is proposed to include:
- A description of the key features of a trust, to help people understand their rights and obligations, and what is involved in creating and running trusts,
- Mandatory and default trustee duties (based on established common law principles) to help trustees understand their obligations,
- Requirements for managing trust information and disclosing it to beneficiaries (where appropriate), so they are aware of their position,
- Flexible trustee powers, allowing trustees to manage and invest trust property in the most appropriate way,
- Updated provisions for the appointment of agents, custodians, nominees and delegates,
- Provisions to support cost-effective establishment and administration of trusts (such as clear rules on the variation, resettlement and revocation of trusts)
- Options for removing and appointing trustees out of court, and
- Continuation of court oversight of trusts, when necessary, to ensure trustees can seek help and are held accountable.
Should we be concerned that major changes to trust law are being proposed?
The short answer is “no.” In essence, the new Trusts Act will not change established trust law principles. It will largely restate the existing law (both from the Trustee Act 1956 and common law) but in plainer language. This should clarify aspects of the law that are uncertain or inaccessible to many trust users who don’t have legal backgrounds (for example, it will help trustees by clearly setting out their duties which are not in the current Act).
The Act will make it clear that trustees cannot be exempted from or indemnified for behaviour that is more than merely negligent, and this will help protect beneficiaries’ interests.
In addition, the reforms will enhance and update the current law to reflect modern best practice (for instance, the default rules will allow trustees to use modern investment and accounting approaches).
The proposed Trusts Act does not address relationship property issues. The Law Commission made recommendations to amend the Property (Relationships) Act 1976 and Family Proceedings Act 1980, and these issues will be considered further as part of a broader review of relationship property law which the Law Commission is undertaking.
There should be no need to change existing family trusts as the new Trusts Act will largely restate the existing law. The publication of the draft Trusts Bill may result in the identification of unintended consequences for existing trusts, in which event these issues will be considered as the reform process proceeds.
All New Zealand trusts will be governed by the new Act, but some types of trusts (such as charitable trusts) are governed by specific legislation. Such legislation exists for charitable trusts, unit trusts, trusts used for superannuation schemes, energy trusts and Māori land trusts. The new Act will only apply where it relates to something not covered in the specific legislation for those types of trust.
A brief explanation about trusts
- A “trust” is a legal relationship created by someone (a settlor or testator) giving assets to someone else (a trustee or trustees) to look after those assets for the benefit of a person or people (the beneficiaries) or for a specified purpose (commonly, charitable) permitted in law.
- Trust assets are held by trustees in their names or in the name of the trust (if, as is the case for charities, the trust is incorporated), but those assets are held “on trust” for the beneficiaries. The trustees are legally obliged to deal with the assets as authorised by the trust deed and in accordance with certain fundamental duties.
- In the 2013 Census, 215,280 households reported that their home was owned by a trust (this included estates), but this number is probably under-reported.
- People use trusts in New Zealand for many purposes. A trust offers a way to separate the legal ownership of assets from those who are to benefit from that ownership. Using a trust is also a way of holding property collectively rather than individually.
- Apart from the common family trust, trusts are used in the farming, research and charitable sectors, as well as by listed companies, and there are unit trusts, trusts for superannuation schemes, energy trusts and Māori land trusts.
- Examples of how trusts are used include:
- To provide for family members with special needs, e.g. for a family member with a disability,
- To protect personal assets from business risks,
- To keep a farm within a family for successive generations,
- To hold Māori land and other assets,
- To protect personal assets from relationship property claims,
- In the case of charitable trusts, to advance charitable purposes (such as the relief of poverty, the advancement of education, the advancement of religion, and other purposes beneficial to the community, and
- In the capital markets, both in structured financial transactions and for investment purposes.