As you may be aware, the Trusts Act 2019 (“the new Act”) will come into effect on 30 January 2021. The new Act is a major update to trust law in New Zealand and may have a material effect on the administration of your trust as well as introducing new obligations with which trustees must comply.
Many trusts in New Zealand are effectively passive asset holding vehicles (formed for a variety of reasons). Historically, these trusts have involved relatively minimal management or involvement from the trustees, except where the trust is carrying out transactions. However, under the new Act, trustees (including independent trustees) are required to take a far more active and ongoing role in the administration of their trusts.
The new Act sets out trustee duties under two headings. Some duties are “mandatory” duties and apply to every trust. Other duties are “default” duties and those will apply unless there is something in the trust deed that says otherwise. Therefore it is timely to look at your trust and decide if there is anything that needs to be reviewed.
There are also additional obligations under the new Act that will apply to every trust that will change the way trusts are managed. Two of these obligations relate to the keeping of trust records and disclosure of information.
Under the new Act:
- Each trustee must retain copies of trust records. These can be paper records, or it is possible to use an electronic service to ensure that up-to-date trust records are available electronically to all trustees. Trustees will also need to ensure they have and maintain all of the trust’s records and the trust’s financial statements if the trust earns income.
- There is a proactive obligation on trustees to provide certain basic information to all beneficiaries (and beneficiary representatives where the beneficiary is a minor or lacks legal capacity).
This basic information includes:
- The existence of the trust (and the fact that they are beneficiaries);
- The names and details of trustees (and any changes); and
- the beneficiary’s right to request a copy of the trust deed or trust information.
The trust information which beneficiaries or representatives can request includes details of trust assets, together with information regarding what distributions or loans have been made (and to whom). This disclosure obligation may create concerns where settlors have not previously had a practice of disclosing the trust to their children or where the trust has wide classes of beneficiaries which can include multiple generations and their spouses and sometimes past spouses.
The requirement to keep beneficiaries and beneficiary representatives informed creates regular ongoing disclosure obligations on trustees.
Reviewing your Trust
Family trust deeds are usually reflective of what was considered appropriate at the time that they were created, and trusts do need to be reviewed from time to time to make sure that they keep pace with the law and remain both compliant and relevant. We suggest that now is a relevant time for clients to review their trust deeds in anticipation of the new Act coming in to force to ensure that the trust is ready to be managed appropriately once the new law applies.
We have identified the following areas as the most likely areas for consideration, although individual deeds may have other areas that need review as well.
- The purpose of the trust should be reviewed to ensure that the trust itself remains fit for its intended purpose (and if the trust is no longer necessary or relevant, to bring it to an end). This involves consideration of what benefits or purpose the trust was set up for and making sure that the trust is still able to provide that benefit and is the most appropriate way to do that.
- The trust’s documentation needs to be reviewed to ensure all trust documents and records are available. This will require beneficiary and asset information to be updated in many cases.
- The terms of the trust deed need to be reviewed in light of the trustees’ duties going forward to make sure that appropriate changes are put in place before January.
Some common areas that we suggest be reviewed are as follows:
- The beneficiaries: How wide are the beneficiary classes? Do the numbers of beneficiary need to be narrowed or altered?
- Priority among beneficiaries: There is a default duty of impartiality which can give rise to issues when not all beneficiaries are routinely considered for distributions. Often, the trustees who set up a trust expect their interests as the elder generation to be preferred over their children during their lifetimes. The intention to provide priority to one generation over another, or for different treatment as between other beneficiaries, is often set out in a non-binding Memorandum of Wishes. Those intentions need to be reviewed and consideration given to whether the preferences or priorities would now be more appropriately inserted into the trust deed itself so that the trustees are to be able to rely on those provisions.
- Prudent Investment: There is a default duty to invest prudently, and where the trust has few assets that are not held in a diversified fashion, it may be appropriate to direct in the trust deed that the assets be held in a non-diversified manner. Some trust deeds already provide for an exemption from investment rules. Trusts need to be checked to make sure the exclusions and indemnities are appropriate under the new law.
- Fettering further directions: Trustees have a standard obligation not to bind or commit trustees to a future exercise or non-exercise of discretion. This is now a “default” duty under the new Act which means the trust deed can be varied to alter that position. That can be helpful where the settlors may want to adopt long term strategies in respect of assets or family members that they wish to implement for the future.
- Conflict: The new Act provides a default duty for trustees not to exercise a trust power for their own benefit. Some existing trusts expressly allow a trustee to act in their own benefit as beneficiary. Some trusts have clauses allowing the remaining trustees to make decisions to benefit another trustee in circumstances where a trustee is to benefit. Other deeds are silent on this point. We think that all trust deeds where a trustee is also a beneficiary need to be checked to ensure decision making in favour of those trustees can occur safely.
Trustee Duties under the Trusts Act 2019
Set out below are mandatory and default duties under the Trusts Act 2019. Mandatory duties are ones that trustees have to comply with. Default duties are duties with which trustees will have to comply unless those duties are modified or excluded under the trust’s Trust Deed.
These are duties which trustees must comply with, and which cannot be modified or excluded by the terms of the trust’s Trust Deed.
- Know the terms of the trust;
- Act in accordance with the terms of the trust;
- Act honestly and in good faith;
- Act for the benefit of the beneficiaries, and hold or deal with trust property for their benefit; and
- Exercise the trustee’s powers for a proper purpose.
These are duties which trustees must comply with unless they are modified or expressly excluded in the trust’s Trust Deed.
- Exercise reasonable skill and care in administering the trust, having regard to any special knowledge or expertise that the trustee has, or to any special business or professional knowledge or expertise if the trustee is acting in the course of a business or profession;
- Invest prudently, with the same regard to special knowledge or experience as above;
- Not exercise their power for their own benefit, whether directly or indirectly;
- Regularly and actively consider whether they should be exercising their powers;
- Not bind or commit trustees to the future exercise or non-exercise of their powers;
- Avoid conflicts of interest;
- Act impartially between beneficiaries;
- Not make a profit from being a trustee;
- Not take any reward for being a trustee (this doesn’t prevent reimbursement for legitimate expenses and disbursements); and
- Act unanimously with the other trustees.
At Morrison Kent, we have expertise in relation to all aspects of trusts, estate planning and asset protection. If you would like to discuss your trust affairs and schedule a trust review please call Helen Nathan on 07 349 7486 or email firstname.lastname@example.org.