06 December 2016

NZ Trusts Reform

The New Zealand Government has released A new Trusts Act for New Zealand: Exposure draft of the Trusts Bill as the basis of consultation that is expected to result in new legislation in 2017.

The Trusts Bill reflects the Law Commission’s 2013 report Review of the Law of Trusts: A Trusts Act for New Zealand, accepted by the Government in March 2014 with adoption of 48 of the Commission’s 51 recommendations.

The consultation document states
 Part 1 – preliminary provisions
Part 1 of the Bill sets out preliminary matters such as the purpose and scope of the Bill and definition s of terms used in the Bill . The purpose provision in cl 3 is a key aid to interpretation for the courts. It ’s intended to reflect the overall policy objectives of the trust law reforms and reflect the relationship between the Bill and the existing body of trust common law and equity . The Bill isn’t intended to be an exhaustive code but rather a statement of key principles and administrative rules for trusts to enhance accessibility. The Bill isn’t intended to completely displace the common law or equitable rules on trusts . Clause 3(3) reflects the policy intent that common law and equity will continue to apply unless it’s inconsistent with the provisions of the Bill . Common law and equity will continue to provide context when interpreting the Bill (unless to do so would be clearly inconsistent with the Bill ).
Part 2 – express trusts
Part 2 sets out the core principles governing express trusts covered by the Bill such as the characteristics of an express trust and how they must be created. An express trust under the Act must satisfy the characteristics under cl 9 and be created in accordance with cl 10. Clause 9 provides that a trust under the Act: • must have the fundamental characteristics specified in cl 9(1), or • if it does not have the fundamental characteristics, but does have characteristics recognised at common law as constituting a trust, the Court may determine that the trust has the characteristics for the purposes of the Act (cl 9(2)). Clause 10 sets out how a trust may be created under the Act. It reflects the well-accepted requirements for the creation of a trust – the 3 certainties articulated in Lord Langdale’s judgment in Knight v Knight (1840) 3 Beav 148; (1840) 49 ER 58. These are that the settlor: • indicates an intention to create a trust • identifies the beneficiaries or the permitted purpose, and • identifies the trust property. The 3 certainties are essential components of an express trust and should remain as a requirement in the statutory test. These provisions aren’t intended to exclude common law rules that provide that an express trust may be invalid for other reasons. The intent is that cl 3(3) preserves the common law in this regard without express reference. Trusts created by any means will be covered by the Bill when they meet the criteria in these key provisions. It is intended that the Bill will apply to trusts created through a will or upon intestacy under the Administration Act 1969.
Part 3 – trustees’ duties and information obligations
Subpart 1 – duties of trustee
Subpart 1 of Part 3 contains the mandatory and default duties of a trustee. This gives effect to R2, R3, R13, R14(2) of the Commission’s report. The intention is to improve the clarity and accessibility of a trustee’s duties by summarising and restating the current law while leaving room for the interpretation of these duties by the courts. Mandatory duties As outlined in cl 14, the mandatory duties must be performed and can’t be modified or excluded by the terms of the trust deed. Common law will continue to inform the content and application of those duties ( cl 3(3)). However, while the terms of the trust can’t exclude a mandatory duty, the trust deed can influence how the duty to hold or deal with trust property for the benefit of the beneficiaries or permitted purpose is applied (cl 14 (2)).
Default duties
The default duties are the key common law trustee duties, which can be modified or excluded, expressly or implicitly, by the terms of a trust. An exclusion or modification of a default duty must be consistent with the mandatory duties. Clause 15 (3) clarifies that excluding one of the specified default duties is not inconsistent with the mandatory duties. Again, the common law will continue to inform the content and application of the duties ( cl 3(3) ) . Clause 15 (4) adds to what was proposed by the Commission – it requires paid trust advisers to disclose and explain the exclusion or modification of any default duty. A failure to do so won’t invalidate the terms of the trust (cl 15 (5)), but may give rise to a claim against the adviser in tort or under the advisors’ rules of professional conduct. Standard of care The Commission’s report recommended inserting a standard of care: that when exercising a power of administration, a trustee must exercise such care and skill as is ‘reasonable in the circumstances’, taking account of any special knowledge or experience that the trustee has (R13). This is already part of the common law and can be excluded by the terms of a trust. In giving effect to this recommendation, the Bill frames the standard of care as a general default duty of care, which may be excluded by the terms of the trust deed (cl 22). A separate provision deals with the standard of care that applies to investment and is taken from existing section 13B of the Act (cl 23, giving effect to R1 4 (2)). A trustee must exercise the care and skill that a prudent person of business would exercise in managing the affairs of others. In both cases, a higher standard of care is likely to arise if a person has special knowledge or experience (cls 22(b) and 23 (b)).
Subpart 2 – exemption and indemnity clauses
Clauses 33 – 36 give effect to R4 of the Commission’s report and set out rules relating to the extent to which trustees can limit or exclude their liability. Two key features of these provisions are : • the terms of a trust can’t exclude a trustee from being liable, or indemnify a trustee, for a breach arising from dishonesty, wilful misconduct or gross negligence (cl s 33 and 34 ) , and • paid advisors must explain the effect of any exclusion or indemnification (cl 3 6 ). 9.
Subpart 3 – trustee’s obligations to keep and give trust information
Documents to be kept by trustee Clauses 37 – 40 set out basic requirements on trustees to keep specified documents, reflecting R5 of the Commission’s report. The p rovisions are drafted in a way that doesn’t require the information to be provided in a particular medium, so trustee s can retain the information in elect ronic form if they wish. Clause 3 7 sets out a list of documents of such significance to all trusts that they must always be kept. Trustees may choose to keep other documents as well. These provisions can’t be excluded or modified by the terms of a trust, although the terms of the trust could require additional information to be kept. Giving information to beneficiaries Clauses 41 – 47 give effect to R6 of the Commission’s report. The Commission intended the general principle in Schmidt v Rosewood Trust [2003] UK PC 26; [2003] 2 AC 709 be codified and clarified to make trustee’s information disclosure obligations clearer. The overall effect is that a trustee must proactively disclose some trust information, so that at least one beneficiary must know about the trust, to enable the trust to be enforced . Clauses 41 – 47 , therefore , replace existing common law rules, preserving the Court’s supervisory role in necessary cases (cl 4 7 ). These provisions can’t be overridden by the terms of a trust, but the terms can influence the decision about giving information to beneficiaries (cl 45 (2)(c)).
Part 4 – trustees’ powers and indemnities
Subpart 1 – powers of trustee
General powers
Subpart 1 of Part 4 sets out the powers of a trustee and is based on R7, R8, R10 – 12, R14 – 17 , R 27 and R28 of the Commission’s report. In line with the Commission’s recommended approach, cl 48 of the Bill confirms that trustees have legal capacity to deal with trust property, and all the powers necessary to carry out the trust. The trustee’s powers under this clause can be limited. The existence and extent of the powers are informed by the terms of the trust as well as by the applicable mandatory and default duties. The terms of the trust may: • specify particular powers , or • specifically, or by implication, exclude other powers.
Specific default powers set out in the Bill
The remainder of subpart 1 in Part 4 of the Bill provides specific default powers, in line with the Commission’s recommendations. It is necessary to provide these powers in statute, despite the breadth of cl 4 8 , because there may be some doubt about their existence if not included in the Bill (for example, the mandatory duties might be seen as precluding the ability for other persons to exercise trustee powers). The powers in these provisions are default so will be read into each trust, but can be modified or excluded expressly or by implication by the terms of the trust. The Bill specifically includes: • powers regarding investment (cls 51 – 5 5 ) • powers regarding the application of trust property for maintenance, education, and advancement (cls 56 – 63) • a power to appoint others to act in relation to the trust (cls 64 – 65) • a power to delegate the trustee’s powers if a person is temporarily unable to perform the role of a trustee for one of a number of specified reasons ( for example, temporary mental incapacity) (cls 66 – 69 ) • a power to appoint a special trust advisor (cls 70 – 72) • a power to distribute trust property without regard to claims of which the trustee doesn’t have notice (cl 75).
Exercise of trustee powers and functions by others
Clauses 64 and 65 reflect R10, R11, R17 and R27 of the Commission’s report, relating to the appointment of agents, nominees and custodians, and investment managers, but in a simplified form. This clarifies the obligations of a trustee and removes any overlap if the different types of 13 appointment are dealt with separately. These provisions are all exceptions to the general principle that a trustee must act personally. Under cls 64 and 65 the ability to appoint others to act in relation to the trusts is default (the terms of a trust can exclude or modify the power), but it’s mandatory for a trustee who does exercise this ability to keep the arrangement under review, and consider whether they need to intervene at any point. The general standard of care will always apply to that obligation. We consider that where a trustee is allowing another party to make trustee decisions or exercise a trustee function, the trustee must retain some oversight of that individual.
Subpart 2 – trustees’ indemnities
Clauses 76–79 replicate the well - understood principles relating to trustees’ liability for expenses, other liabilities, and their right to indemnity in respect of these matters, giving effect to R47 and R 48 of the Commission’s report. These provisions can’t be excluded or modified by the terms of the trust. Clauses 80 – 85 replicate specific provisions from the Act that deal with particular instances of trustee liability or indemnity.
Part 5 – appointment and discharge of trustees
Part 5 sets out the provisions related to the appointment and removal of trustees, and transfer of trust property to new trustees. These provisions are based on R18 – R 26 of the Commission’s report, as well as certain sections of the Act not considered by the Commission. The aim of the policy is to provide a clear and comprehensive statutory framework for appointing and removing trustees and transferring trust property. Part 5 updates and clarifies provisions from the Act, ensuring there’s clear guidance about when and how a trustee can be removed. The provisions incorporate aspects of the common law, such as the duties that apply to people exercising the power to appoint and remove trustees. Part 5 alters the current position in some areas to provide further clarity and to ensure the process is simple, flexible and doesn’t require recourse to the courts in non - contentious cases. For example, the provisions provide a mechanism for transferring registered trust property when the departing trustee doesn’t, or can’t, complete the transfer documentation, which doesn’t require recourse to the court. The Bill includes some minor departures from the Commission’s recommendations.
Clauses 96 and 97 allow the trustee who is being removed to apply to the court and object to the removal, which will ensure the power of removal is only used in appropriate cases. Clause s 102 – 106 don’t adopt the Commission’s re commendations in relation to supervision by the Public Trust over the removal and replacement of trustees in certain situations and over the transfer of registered trust property. This oversight would create extra work and costs for trustees without a clear benefit in risk reduction. The oversight of the courts will be retained in appropriate cases.
Clause 88(1) sets out the people who may remove a trustee – should this include the receiver of a company in receivership?
Part 6 – revocation and variation of trusts
The clauses in Part 6 of the Bill give effect to R29, 30 and 31 of the Commission’s report. Clauses 108 – 110 are intended to reflect and replace the rule in Saunders v Vautier (1841) Cr & Ph 240, (1841) 41 ER 482 (Ch) which provides that, if the beneficiaries of the trust are all adults with full legal competence and they’re in agreement, they can require the trustees to terminate or vary the trust. The provisions also replace sections 64 and 64A of the Act, as explained by the Commission. The provisions also provide for certain powers of the court in relation to revocation and variation. Under the Bill, the court can: • approve a revocation, variation, or resettlement under clauses 108 or 109 on behalf of a minor, incapacitated or unborn beneficiary (under the current law, the rule in Saunders v Vautier can’t be used in this situation) (cl 111) • waive the requirement for consent of beneficiaries (cl 112), and • vary or extend the powers of trustees in relation to property transactions in certain circumstances (cl 113).
Part 7 – court powers and dispute resolution
Part 7 of the Bill sets out certain powers of the court in relation to trusts, including jurisdiction of the Family Court and facilitating the use of alternative dispute r esolution. It implements R4(3), R14 (in part), R32 – R36, R41, R42 and R46 of the Commission’s report. Court powers aren’t intended to replace the High Court’s inherent supervisory jurisdiction, but set out certain specific powers of the court. For example, cls 114 and 115 set out a new procedure for the court to review a trustee’s act, omission or decision, on application of a beneficiary, replacing section 68 of the Act. Clauses 132–138 implement R 42 of the Commission’s report and aim to facilitate the use of alternative dispute resolution when there are disputes involving trusts .
Part 8 – miscellaneous provisions
Part 8 sets out a number of miscellaneous provisions including : • provisions relating to the transfer of certain trust property to the Crown (which implements R37 of the Commission’s report ) • provisions about the audit of accounts of trust property ( R44 of the Commission’s report ) • a provision giving a life tenant the powers of a trustee (re - enacting section 88 of the Act). Part 8 also has provisions about transitional matters (dealt with in schedule 1, see below), consequential amendments and repeals.
Schedule 2 – wholesale investment trusts
Capital markets use trusts to structure the large scale raising of capital. Trusts are a key wholesale (that is, not public or retail) market mechanism banks and corporations use to borrow money and structure their debt. Wholesale investment trusts are structured in a way that is different to typical family trusts. For example, in wholesale finance trusts it is creditors or investors and not beneficiaries that are the main focus. Such trusts are used as part of highly negotiated transactions, involving participants with a high degree of knowledge about the nature of the arrangement. Schedule 2 of the draft Bill modifies how certain provisions of the Bill will apply to wholesale investment trusts. The modifications are intended to remove obligations that are not relevant to the context in which wholesale investment trusts operate. The definition of wholesale investment trust has been developed to align with the Financial Markets Conduct Act 2013. We’re aware that there may be other interface issues between the Bill and that Act. We will work to ensure that both Acts operate together in a way that minimises compliance costs for trusts governed by both pieces of legislation. In considering any modifications required, the objective has been to maintain coherent and principled trust law that applies to all trusts in New Zealand where possible, while allowing some modifications in its application to trusts used in wholesale investment where appropriate