Important changes to trust law
The Trusts Act 2019 came into full force on 30 January 2021 following the 18-month transition period. The purpose of the Trusts Act is to restate and reform New Zealand trust law by—
setting out the core principles of the law relating to express trusts
providing for default administrative rules for express trusts
providing for mechanisms to resolve trust-related disputes, and
making the law of trusts more accessible.
Changes introduced by the Trusts Act include:
the introduction of new mandatory and default duties
new adviser obligations
a definition of trust (referred to in the Trusts Act as an express trust)
a new maximum duration of 125 years
a new presumption that trustees will give basic trust information to every beneficiary
trustee obligations to retain core documents, and
new streamlined trustee appointment and removal provisions.
However, the Trusts Act is not the only thing happening in the trust space. The Taxation (Income Tax Rate and Other Amendments) Act 2020, which was introduced on 2 December 2020 and enacted on 7 December 2020 following Royal Assent introduces new disclosure requirements for trusts for tax purposes. From 1 April 2021 most trustees will be required to provide Inland Revenue with financial accounting information on an ongoing basis. This will include:
profit and loss statements
balance sheet items, and
other information to be specified by the Commissioner (for example any transfers to the trust by associated persons).
The Commissioner can prescribe additional information relevant to trusts which must be provided as part of the return information, such as loans to or by related parties.
Trustees will also be required to provide information on distributions and settlements made during the income year and include that in their return.
For distributions, the information required would include identifying information for beneficiaries such as their name, IRD number and date of birth. This is set out in proposed section 59BA(2)(d) [of the Tax Administration Act 1994].
The information required for distributions is similar to the information Inland Revenue collects about beneficiaries as part of the current tax return process, where there is an allocation of income to the beneficiary.
The Commissioner may require other information relating to distributions to be reported, which could include, for example, the source of the distribution.
The information required for settlements over the year would include identifying information for settlors such as name, IRD number and date of birth, as well as the amount and nature of each settlement. In addition, it is also intended that for the 2021–22 return year, trustees provide names and details of settlors from prior years.
Trustees will also be required to provide information on those with the power under the trust to appoint or dismiss a trustee, to add or remove a beneficiary, or to amend the trust deed.
Requiring this information is necessary as “appointers” or those with power to amend the trust deed would not be disclosed otherwise. The reference to the power arising “under the trust” is intended to ensure this does not capture beneficiaries where they have one of the above powers only if all beneficiaries agree.
This would form part of a trustee’s annual return requirements and therefore existing penalty provisions would apply as appropriate, if the information is not provided or false information is provided. No additional or specific penalty is proposed.” As noted in the Commentary that accompanied the Taxation (Income Tax Rate and Other Amendments) Bill:
Inland Revenue does not currently collect information on subsequent settlements on a trust. This is an information gap which means that Inland Revenue is not capturing information on the true settlor. This is a key piece of information, as New Zealand has a settlor-based trust taxation regime.
Importance of getting accounts in order
Trust accounts will need to be in order for the new tax reporting obligations. However, note that the Trusts Act provides that a trust created in accordance with the Trusts Act does not commence until the trustee holds trust property. This means that trustees of any existing trusts should use the transition period to ensure that the initial trust settlement is under the control of the trustees and referred to in trust accounts.
Trusts can last a long time, so it’s important to get things right
The maximum duration of a trust has been extended from 80 years to 125. However, the terms of a trust may specify or imply a shorter duration. The new maximum duration will not apply automatically to existing trusts and will apply only “if the terms of a trust do not specify or imply a duration or a mechanism for or means of determining the date on which the trust property will be finally distributed.”
Importantly, as is the case now with perpetuity periods, the maximum duration cannot be extended through resettlements.
The maximum duration will not apply to charitable trusts, which can still last indefinitely.
Disclosure
Disclosure has been a big concern for many trustees who may not have fully appreciated the extent of some trust’s beneficiaries. This needs to be addressed as the Trusts Act introduces a new presumption that:
trustees will give basic trust information to every beneficiary, and
other information will be made available on request.
This presumption changes the current position, which is that information is provided at the trustees’ discretion to a positive obligation. This new presumption regarding disclosure may be considered a large step forward in support of beneficiary rights and is grounded in the view that beneficiaries are required to have knowledge of trusts and trust information in order to enforce the due and proper administration of trusts.
Although the motives for the law change are in line with increasing financial transparency globally, the new presumption is of concern to many advisers and trustees. This is because it will require many settlors, trustees and their advisers to re-visit the core facts regarding their understanding of the trustee–beneficiary relationship and how this can be managed and protected under what, for many trusts, will be a significant burden of additional scrutiny. For some trusts, greater disclosure will enable better long-term relationships between trustees and beneficiaries as information and transparency positively colour the roles and relationships. However, for other trusts, trustees may struggle to identify how to meet their obligations over time and how to address the increase in beneficiary communications and requests.
Mandatory duties
But that isn’t all the Trusts Act will do. The Trusts Act includes mandatory duties that cannot be avoided or contracted out of. These are duties to:
know the terms of trust
act in accordance with terms of trust
act honestly and in good faith
act for benefit of beneficiaries or to further permitted purpose of trust
exercise powers for proper purposes
The scope and rationale of the mandatory duties are self-explanatory and go in large part to the core essence of the trust relationship.
Default duties
In addition to the five mandatory duties, a number of default duties are set out in the Trusts Act that must be performed by trustees unless modified or excluded by the trust deed. These are duties to:
exert care and skill
invest prudently
not exercise powers of the trustee’s benefit
regularly and actively consider exercise of power
not bind the trustee to future exercise of discretion
avoid conflict
act impartially
not profit from the trusteeship
act for no reward
act unanimously
Care will be required to consider when and how the default duties should be modified and how the terms of current trusts will be interpreted by reference to the mandatory and default duties.
Core trust documents
The Trusts Act also sets out core trust documents that must be held and who must hold these. The core trust documents are:
the trust deed and any other document that contains terms of the Trust
any variations made to the trust deed
records of the Trust property that identify the assets, liabilities, income, and expenses of the Trust and that are appropriate to the value and complexity of the Trust property
any records of Trustee decisions made during the Trustee’s trusteeship
any written contracts entered into during that Trustee’s trusteeship
any accounting records and financial statements prepared during that Trustee’s trusteeship
documents of appointment, removal, and discharge of Trustees (including any court orders appointing or removing Trustees)
any letter or memorandum of wishes from the Settlors
any other documents necessary for the administration of the Trust, and
any documents referred to in paragraphs (a) to (i) that were kept by a former Trustee during that person’s trusteeship and passed on to the current Trustee or Trustees.
At least one trustee must hold the core trust documents and all trustees must hold the trust deed and any variations of trust. Moving forward consideration will be needed regarding the identification, retention, storage, transfer on change of trustee and accessibility of core documents. The trustee responsible for retention of the core documents must be clearly determined.
Appointment and removal of trustees
The Trust Act provides for a simpler mechanism for the vesting of trust assets where existing trustees are replaced, or new trustees appointed.
When a decision is made to remove a trustee under s 103, the trustee must be given notice of the decision (see s 106). With some specified exceptions, if a trustee receives a notice made under s 106, the notice is “the document of removal” for the purposes of s 116 (divesting and vesting of trust property). The trustee’s removal will be effective 20 working days after the trustee receives the notice unless the trustee makes an application to prevent removal (s 109) within 20 working days of receipt of the decision to remove the trustee.
Section 118 introduces new requirements on a retiring, continuing or new trustee to assist with the transfer of trust property.
Alternative Dispute Resolution
A new alternative dispute resolution (ADR) process is outlined in sections 143 to 148 that will apply when there is no provision in the trust deed that requires or empowers trustees to refer a matter to ADR.
The ADR provisions provide (in relevant circumstances) an alternative to court for the resolution of trust disputes and will allow trustees to pursue ADR to resolve internal matters or third party (external) matters. Where arbitration is the ADR process, the terms of the Arbitration Act 1996 will apply.
Limitation of Liability
Prior to the introduction of the Trusts Act, gross negligence has not typically been included in limitation of liability and indemnity clauses. Importantly, once the Trusts Act comes into full force and effect any clause in a trust deed will be invalid to the extent that it purports to do either of these.
Also, an adviser who is paid to advise on the creation of a trust or prepares the terms of a trust must alert the settlor to liability exclusion or indemnity clauses if the adviser recommends that the settlor should, or causes the settlor to, include a liability exclusion or indemnity clause in the terms of the trust.
The Trusts Ace also requires advisers to take reasonable steps to ensure that the settlor is aware of the meaning and effect of the clause before the creation of the trust.
Failure to comply with the adviser obligations does not of itself invalidate the clauses but does mean that the exclusion or indemnity clause will have no effect with respect to an adviser who is or becomes a trustee of the trust.
For these purposes liability exclusion or indemnity clause means a clause that has the effect of—
limiting or excluding the liability of a trustee for breach of trust; or
granting a trustee an indemnity against the trust property for the trustee’s liability for breach of trust.
The prescriptive nature and regulatory style of the clauses around adviser obligations need to be considered, including how the required advice is drafted and recorded, whether this should form part of the terms of the trust, and how such requirements will be monitored. Additionally, how such clauses and requirements are reflected in third party documents (such as bank documents) may require careful consideration as to when an adviser can or should act as a trustee.
Trust review
If you have not done so already, we recommend that you review the terms of your family trust or trusts as soon as possible and that if necessary, the terms of any trusts that you are a settlor or trustee of are varied as necessary in light of the Trusts Act. If you require assistance with this, we can help you arrange a trust review.