The Law Commission's comprehensive review of trust law, begun in 2010, is now entering the decision-making phase with the release last month of what is essentially a directions paper.
The Review of the Law of Trusts: Preferred Approach outlines a series of specific reform proposals which are, in the Commission's own words, "wide-ranging, complex and significant".
Submissions are due by 22 February 2013. The Commission will release a final report in mid-2013 with recommendations for a new Trusts Act.
Why the review?
The existing law – the Trustee Act 1956 and the Perpetuities Act 1964 – has been in place a long time and is in need of updating, especially given the very wide use of trusts in New Zealand. The objectives the Commission has set itself for the review are to:
- modernise and clarify the legislation so that it is accessible to the many New Zealanders without legal training who are involved in trusts as trustees and beneficiaries
- reduce the difficulties and costs associated with trust administration and dispute resolution, and
- create a "fair and fit" law for the New Zealand context which respects people's freedom to deal with their property as they choose while also protecting the rights of those involved in, and interacting with, trusts.
The proposed shape of the new Act
Core principles of trust law
A new Act would include provisions describing a trust's core features and defining "trustee" and "beneficiary" broadly and in a way that explains their roles. Importantly the Commission proposes legislating that although a person may be a trustee and a beneficiary, no trust will exist if the sole beneficiary is also the sole trustee.
No change in the substance of trustees' duties is envisaged, but the new Act would formalise them by defining them in statute.
The Commission has categorised trustee duties as follows:
Conduct duties - these relate to how trustees will exercise their duties, powers and discretions. Specifically trustees:
- will have a duty to act honestly and in good faith for the benefit of beneficiaries, and
- will have to exercise such care and skill as is reasonable in the circumstances, having regard to any special knowledge or experience that the trustee has.
The duty of care and skill will apply to:
- every exercise of a mandatory duty (described below), regardless of the terms of the trust, and
- every other exercise of a duty, power or discretion, only to the extent that it has not been excluded or modified by the terms of the trust.
It is proposed that the trustee's liability for any breach of these duties cannot be excluded by the terms of the trust.
Mandatory content duties - these are duties which the Commission proposes will be implied into every trust, and which cannot be excluded. If a trust deed includes a clause that attempts to exclude any of these duties, that clause will have no effect.
Specifically trustees will have:
- the duty to understand and adhere to the terms of the trust
- the duty to account to the beneficiaries for the trust property, and
- the duty to exercise the powers of a trustee for a proper purpose.
Default content duties - these duties will be implied into every trust but they can be modified or excluded in the trust deed. They are:
- the duty to maintain impartiality between beneficiaries
- the duty not to profit from the trusteeship or to act without reward
- the duty to avoid a conflict of interest
- the duty to actively consider the exercise of the trustee's discretions and to act personally
- the duty to act unanimously
- the duty to manage the trust
- the duty to invest
- the duty to keep trust property separate from the trustee's own property
- the duty to keep and render accounts
- the duty to provide information to beneficiaries, and
- the duty to transfer property only to beneficiaries or other persons legally authorised to receive the property.
Breach of trust and limitation of liability
The Commission proposes to place restrictions on the extent to which trustees can escape the consequences of committing a breach of trust. In particular the provisions of a trust deed must not:
- limit or exclude a trustee's liability for breach of a mandatory duty arising from the trustee's own dishonesty, wilful misconduct, recklessness or negligence
- limit or exclude a trustee's liability for any other breach of trust arising from the trustee's own dishonesty, wilful misconduct or recklessness, or
- grant the trustee any indemnity against the trust property in respect of liability for such breaches.
Professional regulatory bodies relevant to trusts, and other paid trustees or trust advisors seeking to include a limitation of liability clause in the trust deed, would be required to make settlors aware of the meaning and effect of such clause.
The power of the court to relieve a trustee from personal liability for a breach of trust if the trustee has acted honestly and reasonably, and ought fairly to be excused, would be retained.
Duty to provide information
The Commission has taken a bold approach in respect of a trustee's duty to inform beneficiaries, proposing that this include:
- a mandatory obligation to make trust information (which is widely defined) available to beneficiaries upon request as is reasonably necessary to enable the trust to be enforced, and
- a presumption that trust information must be given to a beneficiary upon request, unless there is good reason for withholding the information, for example because of issues of confidentiality or taking into account the impact on all parties involved, especially in family situations.
In addition, it is proposed that trustees are to make reasonable efforts to inform beneficiaries that they are beneficiaries (or parents in the case of minors) and that they are entitled to request trust information, subject to modifications in the trust deed.
The Commission has proceeded on the basis that the current prudent person principle in relation to investment ought to be retained, as it is generally considered to be working well. A new Act would clarify that trustees may, where appropriate to give effect to the objectives or purposes of a trust, purchase or retain property for purposes other than investment. Other proposals include:
- a default provision that better supports trustees adopting a total return investment policy (rather than the current default obligation of selecting investments with regard to their legal category rather than overall return)
- a broad discretion for trustees to apportion receipts and outgoings as income or capital, relying on the underlying trustee duties to maintain a fair balance between the interests of all beneficiaries, and
- express provisions enabling trustees to appoint expert investment managers.
Remoteness of vesting and the duration of trusts
The Commission proposes to replace the current common law and statutory rules on perpetuities with a bright-line maximum duration rule for trusts of 150 years. This is in line with other leading trusts jurisdictions around the world and is a positive step forward.
Substantial changes are proposed with the aim of improving transparency and imposing direct liability on directors of corporate trustees. This is a significant topic in its own right and will be covered in more detail in a Brief Counsel to be published within the next few days.
What is not covered by the review?
The scope of the review is expressly limited to the law of trusts. It does not address related issues, for example under the insolvency legislation. However, the Commission has considered the impact of trusts in the area of relationship property and made some recommendations for further separate review in certain problematic areas.
We support the overall approach taken by the Commission, and agree that the time is right for a robust review and reform of the law of trusts in New Zealand. We endorse many of the Commission's proposals but are reviewing the detail carefully and will be making submissions on the latest paper.
Chapman Tripp has made submissions on each of the previous papers.
If there are any matters you feel require particular focus, or if you wish to discuss the proposed changes, please contact the advisors featured.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.