In New Zealand, there are estimated to be around 450,000 trust and when the new Trusts Act 2019 becomes law in January 2021, there will some people finding out they are beneficiaries of a trust and what the net worth of that Trust may be.
Historically, trusts were often set up by parents, with the children and themselves listed as discretionary beneficiaries, with the intention to transfer wealth to beneficiaries with lower income without telling those beneficiaries and thus avoid a potential tax issue. Under this change in the Act, all beneficiaries will have a right to know the overall value of the trust and what their percentage of that wealth could possibly be.
Many of the key changes in the Trust Act 2019 are aimed at making trust law more accessible to the public, strengthening the ability of beneficiaries and to hold trustees to account.
The Trusts Act will apply to all express trusts that are governed by New Zealand law, including those created before the commencement of the Act.
Section 4 of the Trusts Act 2019 sets out the way in which a trust should be administered in terms of;
- It is consistent with its terms and objectives; and
- It avoids unnecessary cost and complexity.
The Trusts Act specifies the core trustee duties that were already part of the law. It then incorporates a new concept by classifying the duties as either ‘mandatory’ (ss 23-27) or ‘default’ (ss 29-38).
In exercising any duty, a trustee must have regard to the contents and objects of the trust (as well as the s 4 principles noted above).
Mandatory duties must be performed by the trustee and may not be modified or excluded by the terms of the trust. Any purported exclusion of a mandatory duty will have no effect.
Default duties may be modified or excluded by the terms of the trust, subject to certain limits as set out in s 5 and Schedule 2. Many default duties are commonly excluded by trust deeds.
This practice will continue to be acceptable.
However, the Act imposes a statutory duty on any person advising on or preparing the terms of a trust to take reasonable steps to ensure that the settlor understands the meaning and effect of any modification or exclusion of any default duty.
Another option opened up by the Act is the ability to appoint a ‘special trust adviser’ to advise the trustee. A special trust adviser will not have the power of a trustee and the trustee will not be bound to follow their advice.
The new rules on exercise of trustee powers by others (ss 67-73) enable a trustee to go further and delegate certain powers or functions to another person.
Appointment of investment advisers may be a growing practice for New Zealand trusts with fluid assets and could be helpful for life-interest trusts for which investment decisions will affect the balance struck between classes of beneficiaries. The Trusts Act gives the trustee power to determine whether return on an investment is to be classified as income or capital (obviously keeping in mind the rules of the Income Tax Act 2007). This is one of the powers that cannot be delegated.
The Act requires trustees to keep core trust documents, including documents setting out the terms of the trust or varying those terms, records of the trust property appropriate to the value and complexity of that property, records of trustee decisions, contracts, accounting and financial statements, appointment, removal and discharge documents, letters of wishes by the settlor, and other documents necessary for the administration of the trust.
This could mean a significant change in practice for some trustees, and the need for chartered accountants who act as professional trustees to check that their paperwork is comprehensive.
It is permissible for one trustee to hold most documents, but each trustee must hold at least a copy of the terms of the trust and any variation to those terms.
These rules may appear onerous but they should be seen as routine and essential to good trust administration.
The Trusts Act creates a presumption that a trustee must make ‘basic trust information’ available to every beneficiary and ‘trust information’ available to beneficiaries who request it. However, before providing the information, trustees must consider a range of factors and if the trustee reasonably considers that the information should not be disclosed, then it may withhold the information.
‘Basic trust information’ includes the fact that a person is a beneficiary, the name and contact details of a trustee, details about any change to the trusteeship, and the fact that a beneficiary may request a copy of the terms of the trust or ‘trust information’.
‘Trust information’ is information that is reasonably necessary for the beneficiary to have to enable the trust to be enforced.
Importantly, the reasons for trustee decisions are not required to be disclosed. Presumably this means that trustees’ reasons for deciding not to disclose information could also not need to be disclosed.
The trustee has an active duty to consider at ‘reasonable intervals’ whether the trustee should be making the basic trust information available. This should become a routine part of trustee meetings.
It will be important for trustees to develop robust practices of decision-making around the provision or withholding of trust information and to seek appropriate advice to help them strike the right balance.
The Act makes it clear that trust deeds must not limit a trustee’s liability or provide an indemnity for dishonesty, willful misconduct or gross negligence. Any terms in a trust deed that purport to limit the liability of the trustee or to indemnify them in breach of these provisions is invalid.
This is means that trustees can no longer rely on broad indemnity clauses that purport to protect them against gross negligence. They may still be protected in relation to ordinary negligence, if this is covered by an appropriately drafted limitation of liability and indemnity clause.
The statutory powers for appointment and removal of trustees have been modernised and broadened to minimise the need to apply to the court.
The Act confirms that a person with a power of appointment or removal of trustees must exercise it honestly and in good faith, and for proper purpose.
Retiring as a trustee is to become slightly more difficult in so far as a discharge must be given in writing.
For a long time, the automatic mode of thought was – You should set up a trust. But why?
Death taxes and superannuation surcharges have been removed, trusts no longer offer protection in property relationship break-ups and residential rest home care subsidy means-testing was adjusted to include gifts to trusts. The new Trusts Act 2019, could well make trusts more expensive to run and could well be the catalyst for many to be closed