On 30 January 2021, the Trust landscape in New Zealand will experience significant change. That’s because the Trusts Act 2019 (Act) will become operational, replacing the Trustee Act 1956 and the Perpetuities Act 1954. It’s the first time in 50 or so years a complete rethink of trust law has occurred. Many advisors are citing the Act as a ‘game changer’ because it affects trustees and beneficiaries, applying retrospectively and prospectively to existing written and future created family trusts, trading trusts, testamentary trusts and potentially even statutory, constructive and equitable trusts should the Courts deem appropriate.
Parliament’s raison d’être for enacting this legislation lay in its desire to make trust law simpler, providing greater transparency and accessibility to members of the judiciary and the public. This objective has been brought to life by bringing together the mishmash of equitable doctrines, statute and case law that currently exists into one Act. The new legislation goes further however than merely updating, restating and codifying current law – it institutes a number of substantial changes to trustees’ obligations and beneficiaries’ rights which anyone involved in a trust should be aware of. Ultimately, the Act will have a considerable effect on many trustees who will be forced to change their current practices and on beneficiaries who will benefit from their rights being strengthened.
It’s thought New Zealand has somewhere in the vicinity of 300,000 to 500,000 trusts. Because a central trust register does not exist however, the exact number is impossible to quantify.
Many trusts were created to hold homes and businesses, with goals of asset protection and tax forefront in mind. Parents transferred homes, baches and cash to family trusts created for themselves and their children. Business owners, investors and entrepreneurs transferred shares and intellectual property and engaged in commercial transactions through trusts on behalf of themselves and their families.
Irrespective of the purpose of the trust or the assets it held, a commonality dominated … many people who were beneficiaries of a trust were never told of its existence. Therein laid the conundrum. Trustees have always been legally accountable to beneficiaries in discharging their duties (particularly, to keep trust assets safe and to invest in accordance with the terms of the trust) but in reality, often their behaviour went unchecked because a person never knew they were a beneficiary. Lack of a central trust register meant a person had no way to ascertain whether they were a beneficiary, and a trustee was under no legal obligation to advise them of the fact. Consequently, whilst beneficiaries enjoyed specific rights, enforcing those rights was problematic because no one can enforce something they are unaware of. This thorny problem is one the Courts have wrestled with for eons. With a quick strike of the legislative pen however, Parliament has dealt with this Catch-22.
Under the new Act, individuals will have a right to be informed of the fact they are beneficiaries of a trust and trustees will have a positive duty placed on them to make this disclosure. Undoubtedly, one of the effects of this will be to strengthen the ability a beneficiary has to hold a trustee to account with respect to how they have carried out their trusteeship, particularly in the administration and investment arena.
To ensure this right is relatively easy to enforce, Parliament has gone one step further – it’s created a presumption that beneficiaries must be given basic trust information. Accordingly, a person must be advised they are a beneficiary, names and contact details of trustees together with details about changes to trusteeship must be provided and finally, the fact a beneficiary can request a copy of the terms of the trust and basic trust information must be disclosed to them. In this regard, Trustees have an ongoing duty to consider at reasonable intervals whether they should be making basic trust information available to beneficiaries.
In circumstances where a beneficiary makes a request, a trustee must provide sufficient information to enable the trust to be enforced. The extent of what constitutes sufficient information is yet to be judicially determined but it could include the likes of a trust’s financial statements, minutes, resolutions, and other documentation. Be aware this presumption to provide trust information is rebuttable. This means trustees will have some discretion over what they will and will not disclose to a beneficiary. When considering a beneficiary’s request, trustees will need to consider the factors listed in the Act before making a final decision. Remember however Parliament intended to make it easier for beneficiaries to enforce their rights and hold trustees to account. Accordingly, it’s to be expected the Courts will take a long hard look at trustees who refuse to honour a beneficiary’s request for information.
Mr and Mrs Jones have a Business Trust which has held shares and been the recipient of income over the years. The Trustees are Mr and Mrs Jones. The beneficiaries are Mr and Mrs Jones and their three grown up children. The Trustees have allocated income disproportionally to two of the adult beneficiaries in prior years. They have also made a loan to one of the beneficiaries. Under the Act, all children are advised they are beneficiaries. The beneficiary who has not enjoyed income nor had the benefit of a loan makes a request for further trust information. The Trustees consider the provisions of the Act when making their decision to acquiescence to this request. They decide disclosure could lead to considerable disharmony amongst beneficiary family members which outweighs their duty to provide the information requested. Thus, they decline to honour the request. This is not the end of the matter however. Pursuant to the Act, the beneficiary may approach the Courts for their determination. Remember … a thrust of the Act is enabling beneficiaries to hold trustees accountable so a Court may not be so sympathetic to a trustee’s opinion and willing to deny a beneficiary’s information request.
it should be clear from reading so far, trustees have a far greater compliance regime to satisfy than ever before. This will mandate the need for many trustees to bring their knowledge and their management practices up to date to ensure compliance with the Act’s provisions. There is also going to be a greater scrutiny of trustee’s actions with respect to administration and investment activities of the trust under their control. This could result in increased litigation making its way through the Courts as Trustees are ordered to account.
To make the task of compliance somewhat easier, the Act clearly states compulsory trustee duties. These duties must be discharged and cannot be changed. They 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 deal with trust property for the benefit of the beneficiaries; and
- To exercise powers for a proper purpose.
The Act also provides for duties which trustees may choose to modify. These include:
- In administering the trust, exercising reasonable care and skill;
- When investing for the trust, exercising care and skill a prudent businessperson would exercise in managing the affairs of others;
- Refraining from exercising a power directly or indirectly for their own benefit;
- Actively and regularly considering exercising one or more of their powers;
- Not fettering future Trustee’s powers;
- Avoiding conflicts of interest with beneficiaries;
- Treating beneficiaries impartially;
- Acting for no reward; and
- Acting unanimously with other trustees.
Under the Act, the life of a trust has been extended from the current maximum period of 80 years to 125 years unless specified otherwise. This does not automatically apply to trusts established before 30 January 2021 but can be applicable via a deed.
Changing the lifetime of a trust could result in trustees adopting a very different investment philosophy than what is commonly held now. Frequently, in western culture like that operating in New Zealand, trustees think in terms of their existing beneficiaries only and their investment time frames are relatively short. Contrast this to other non-western cultures where the focus is building investment over long time frames for successive generations of family members. If Trustees embrace a change of philosophy, it may mean much more time is spent thinking and investment building for future beneficiaries, resulting in different investment opportunities being taken up than that which would have otherwise been considered.
WHAT TO DO NOW
How the Act impacts you, will depend upon your position in the Trust and what actions you’ve taken so far.
For beneficiaries, the effect of the Act is simple – you’ll enjoy rights automatically to receiving information from 30 January 2021. As such, you should expect to hear from the trustees of the trust you’re a beneficiary of without having to take any action.
If you’re a trustee, the impacts of the Act are vast. You’ll need to be conversant with the provisions of the Act and your obligations under it. To assist you, we’ve listed below some of the matters you should consider:
- Discuss with trust settlors the need and desirability for continuation of the trust;
- Review deeds of trust and trust documentation to determine if circumstances and the Act warrant amendments to beneficiary structures, trustee duties and power, etc;
- Establish your trust management systems are adequate to enable regular communication with all beneficiaries;
- Determine the process you’re going to invoke to notify individuals they are beneficiaries, provide basic trust information, etc;
- Decide appropriateness of remaining a trustee and take action accordingly; and
- Check with your insurer if new insurance criteria must be met.
Some trustees will be acquainted with the requirements of the Act and be well down the track to attending to matters. Others however will only just be starting to apply their grey cells to the new statutory regime. Regardless of your position, if you’re wanting assistance or would like to discuss any aspect of your trust or affairs, please contact your Greenlion advisor. We’re here to help.