New Zealand Trusts Act 2019 Makes Trust Law More Accessible

The changes to the law are evolutionary rather than revolutionary and reflect a very lengthy consultation process. Common law principles and the rules of equity continue to apply as modified by the Act, and the High Court retains its inherent jurisdiction to supervise and intervene in the administration of any trust. 

The Act sets out five mandatory duties imposed on trustees that cannot be modified or excluded by the trust deed; if the wording of a trust deed purports to do so then that modification or exclusion will be invalid. This is particularly relevant to existing trust deeds which are not modernised to take account of the Act. Whilst there is no immediate or mandatory need for existing trusts to be modified to take account of the Act, best practice would suggest that such modifications would be prudent, so there is no confusion amongst trustees or beneficiaries regarding their rights and obligations. 

The mandatory duties are:

• to know the terms of the trust;
• to act in accordance with the terms of the trust;
• to act honestly and in good faith;
• to act for the benefit of beneficiaries; and
• to exercise powers for a proper purpose.

The Act also imposes 10 default duties that may be modified or excluded by the terms of the trust deed.  These are:

• the general duty of care;
• to invest prudently;
• not to exercise powers for the trustee’s own benefit;
• to actively and regularly consider the exercise of the trustee’s powers;
• not to bind or commit trustees to the future exercise or non-exercise of a discretion;
• to avoid conflict of interest between the trustee and beneficiaries;
• to act impartially in relation to the beneficiaries;
• not to profit;
• to act for no personal reward; and
• to act unanimously.

An important change is the abolition of the rule against perpetuities and the extension of the maximum trust duration period from 80 years to 125 years.  Depending upon the wording of trust deeds, it may be possible for existing trusts to be modified to take advantage of the longer duration.

Another important change is a limitation on the ability of a trust deed to exclude liability except for dishonesty, wilful misconduct or recklessness (relying upon Armitage v Nurse [1997] 3 WLR 1046).  The Act permits the trustee to exclude liability for ordinary negligence, but not gross negligence.  Gross negligence is defined in the Act.

Paid advisors/trustees are also required to alert the settlor to any liability exclusion or indemnity clause and to ensure that the settlor understands the meaning and effect of the clause.  If they do not do this before the creation of the trust the clause will be of no effect.

The Act contains some novel provisions dealing with alternative dispute resolution for trusts. 

One of the more contentious aspects of the Act is a detailed set of provisions concerning provision of information to beneficiaries.  This is an attempt (in the writer’s opinion) at the codification of the principles found in Schmidt v Rosewood Trust Limited [2003] 2 AC 709 and Erceg v Erceg [2017] NZSC 28. 

There is a presumption in these provisions (sections 49-55 of the Act) that all beneficiaries should be provided with “basic trust information” and that upon request the trustees must provide more detailed trust information to beneficiaries.

The basic trust information is:

• the fact that a person is a beneficiary;
• the name and contact details of the trustees;
• details of appointment and removal of trustees as they occur; and
• the right of a beneficiary to request a copy of the terms of the trust deed or “trust information”.

Trust information means any information regarding the terms of the trust, the administration of the trust, or the trust property that is reasonably necessary for the beneficiary to have to enable the trust to be enforced.  It does not extend to documents recording reasons for trustees’ decisions.

In some quarters the inclusion of the statutory provisions has caused concern or even upset, although in the writer’s view this is not justified given the fact that the statutory provisions are in large part an attempt at codification of existing case law, and the presumptions regarding the provision of either basic trust information or “full” trust information are rebuttable.

Section 53 of the Act sets out a detailed list of factors a trustee must consider in making its decisions regarding provision of information and the statute makes it clear that this is a dynamic process for trustees, not one which can be undertaken once only.

Amongst many others, the factors set out in section 53 include a consideration of the expectations and intentions of the settlor at the time of creation of the trust and the effect on the beneficiary of giving the information. 

Consistent with the common law approach that a trust cannot operate in a vacuum and at least some beneficiaries – perhaps only even one – should receive information to ensure that the trustees are discharging their obligations properly, there is an express statutory provision dealing with circumstances where a trustee decides to provide no basic trust information to any beneficiary. 

In these circumstances, section 54 requires the trustee to apply to the court for directions in relation to the trustee’s decision.  The section notes that such a direction will only be given in exceptional circumstances and the court must identify an alternative means by which the trustee can be accountable and the trust can be enforced.  It is important to note that this application to the Court is only necessary if no beneficiary has any trust information. 

What Can Be Done To Minimise The Impact Of These New Provisions?

Having a compact class of beneficiaries with a power to add is obviously a good start, rather than a “scattergun” approach (with remoter family members etc.) which might have been more popular in past decades. 

Consideration can also be given to creating a class of primary beneficiaries and secondary beneficiaries.  In the New Zealand domestic context, for a typical nuclear family, it may be that the parents are specified as primary beneficiaries with children and remoter issue classified as secondary beneficiaries.  The primary beneficiaries would not have any enhanced entitlement or expectation other than recording the settlor’s intention that during the lifetimes of the primary beneficiaries, they should be the only beneficiaries to receive basic trust information or full trust information.  The deed could provide that subsequent to the death or permanent incapacity of all the primary beneficiaries, then the next generation should become the primary beneficiaries, and so on.

There might be wording to the effect that, without limiting the discretion of the trustees, the welfare and maintenance of the primary beneficiaries should be considered first in the exercise of the trustees’ discretion. The wording would need to be carefully crafted to minimise or prevent any risk of external claimants asserting that the primary beneficiaries have some highly enhanced proprietorial status in relation to the trust assets – it should simply make it clear that they are the first ones that the trustees should be thinking about.

It would be best practice for trustees to provide full “trust information” to the primary beneficiaries as a matter of course, rather than on a reactive basis.

This mechanism would appear to be a useful one for overcoming the very common concern of parents that they do not necessarily want their children to know what is in the trust until they are ready to tell them.

This is just one suggestion: no doubt there are many other ways of drafting along these lines to achieve a similar outcome.

Certainly, default beneficiaries (such as remoter relatives) who would normally only receive something if the primary family were completely lost through accident or misadventure (for example), should be recorded as parties not intended to receive any trust information.

Alternatively, there may be a preference not to specify a default class of beneficiaries in this way, but rather to include those persons in a memorandum of wishes, which might suggest to the trustees that these successor beneficiaries be appointed if there is a failure of the primary family group. There is an advantage of privacy in approaching this through the memorandum of wishes, plus the ability to change those wishes from time to time without the need to amend the trust deed or exercise a power of appointment or removal of beneficiaries.

If there is any sensitivity regarding expressions of settlor intention being included in the trust deed, then the best approach would be to include such statements of intention in a memorandum or letter of wishes.

In conclusion, the changes to trust law brought about by the Trusts Act 2019 are generally positive; anxiety regarding the rules concerning provision of information to beneficiaries should be moderated given that the provisions in the Act are in large part an attempt to codify the common law principles, but in a more prescriptive fashion to assist both the trustees and the beneficiaries in determining to their rights and obligations. 

John Hart
John has specialised in tax and trust law since 1984. John provides tax and trust advice to a wide range of New Zealand and offshore corporate and private clients, and not-for-profit organisations. The majority of his work is cross-border/international in nature. John is a frequent presenter at conferences in New Zealand and internationally and has authored numerous publications on tax and trust law issues. He was a part-time Teaching Fellow at the University of Auckland for the Master of Taxation Studies degree. John was Founding Chairman of the New Zealand branch of STEP and has served as a STEP Worldwide Council member.