Family trusts are a practical structure for holding assets, particularly in New Zealand where there are approximately 300,000 to 500,000 trusts operating today. Currently, the Trustee Act 1956 and the Perpetuities Act 1964 contain provisions which need to be read in conjunction with case law regarding their operation, and do not keep up with present-day trust practices. Therefore, the updates regarding trust law under the current Trusts Bill (“Bill”) are long overdue, being the first significant reform for at least 60 years. The Bill will replace these Acts, clarify core trust concepts and create more practical trust legislation.
Overview of proposed changes
The underlying principles of the Bill are largely derived from the Law Commission’s views in 2013 which recommended that the existing law should be more comprehensible rather than introducing substantial changes. The Bill aims to facilitate the progression of trust law through the courts while also providing:
- A description of the rights and obligations under an express trust e.g. family trusts;
- Clarity regarding compulsory and default trustee duties (derived from existing legal principles) and the exercise of flexible trustee powers (including trustee agents and delegates) when managing trust property;
- Requirements for managing trust information and disclosing information to beneficiaries (where applicable) so they are aware of their position;
- Transparency around establishing, varying and terminating trusts to achieve cost-effective administration of trusts;
- Alternative dispute resolution mechanisms to pragmatically resolve internal and external trust-related disputes;
- A description of some of the court’s powers and avenues available for court assistance; and
- The circumstances in which trustees must or may be removed or appointed outside of court.
Trusts subject to the Bill
The Bill will apply to all (including existing) express trusts; however, it can also apply to trusts that are created under an enactment that is consistent with the Bill or as the courts direct.
Trust duration and distribution
Currently, the vesting date for trust property of 80 years is provided under the complex Perpetuities Act 1964 and case law. The Bill proposes to remove the existing rule against perpetuities and provides that an express trust can exist for a maximum of 125 years or a shorter duration as specified in the trust deed. This is aimed to provide certainty in trust dealing, avoid indefinite trusts and allow settlors to distribute property as they choose.
Upon expiry of a trust, all property must be distributed in accordance with the trust deed or, if the deed is silent about how property is to be distributed, in a way that is consistent with the objectives of the trust. Where there are surviving beneficiaries and it is not possible to determine how to distribute property in accordance with the trust deed, the property must be distributed to the beneficiaries in equal shares.
Trustees’ duties and powers
The Bill provides for five mandatory trustee duties that cannot be excluded from a trust deed. These include the duty to act in accordance with the terms of the trust and to act in good faith. The 10 remaining default duties, including the duty to act impartially, can be amended or excluded by the terms of the trust deed.
There is a presumption that trustees must provide basic information to the beneficiaries such as notifying beneficiaries of their position and the right for beneficiaries to request trust information and the contact details of the trustees. Trustees must consider certain factors, such as the age and circumstances of the beneficiary or the effect on those involved with giving the requested information, before deciding whether this presumption applies. If the trustees reasonably consider that information should not be given after reviewing the mandatory factors; the trustees may refuse the information request. The Bill sets out the procedure for trustees when deciding to withhold information.
The Bill is currently in its first reading. Once enacted, there will be an 18-month transition period to allow anyone involved in trusts to consider the application of the Bill to their trust. This long-awaited Bill aims to be a flexible tool to accommodate the wide use and effective management of trusts for the benefit of our society’s future asset planning.