What does the new Trusts Act mean for you?

Friday 11 September 2020

What does the new Trusts Act mean for you?

The Trusts Act 2019 will come into force on 30 January 2021. From that date onwards a new set of rules will apply to all Trusts and Estates.

The following are some of the implications which may affect you.

Rights of Information to Beneficiaries

One of the most significant changes is that the Act will give beneficiaries certain rights to information. The basic principle is that Trustees must be accountable to beneficiaries. Beneficiaries can only hold Trustees to account if they have sufficient information to do so. Accordingly, provision of a reasonable amount of information will be required.

Under Section 51, all beneficiaries are entitled to certain basic information such as whether they are a beneficiary of the Trust, the name and contact details of the Trustee, and a copy of the Trust Deed. In addition, other information must be made available unless the presumption of disclosure does not apply.

Section 53 sets out the factors for a Trustee to decide whether the presumption of this closure would apply. They include the following:

1. The nature of the interests in the Trust held by the beneficiary and other beneficiaries of the Trust, including the likelihood of the beneficiary receiving Trust property in the future;
2. Whether the information is subject to personal or commercial confidentiality;
3. The expectations and intentions of the settlor at the creation of the Trust (if known) as to whether the beneficiaries as a whole and the beneficiary in particular would be given information;
4. The age and circumstances of the beneficiary;
5. The age and circumstances of other beneficiaries of the Trust;
6. The effect on the beneficiary of giving the information;
7. The effect on the Trustees, other beneficiaries of the Trust, and third parties of giving the information;
8. In the case of a Family Trust, the effect of giving the information on relationships within the family, and the relationship between the Trustees and some of the beneficiaries to the detriment of the beneficiaries as a whole.

In summary, it is important for existing Trustees and Settlors to review the Trust Deed and whether some beneficiaries should remain as beneficiaries. If they are, Settlors should consider making it clear as to their intentions as to whether the information would be disclosed only to certain beneficiaries. For example, for a Family Trust where the Settlors are the parents, information would be available to the parents and children as primary beneficiaries presumably. Disclosure to grandchildren may not have been intended if they are intended as secondary beneficiaries. Disclosure to spouses of children and grandchildren is most likely not desirable. They should be excluded as beneficiaries where possible.

Modifying Default Duties

There are certain Trustees duties which will apply if they are not modified. For example, Trustees are meant to act in an impartial manner towards all beneficiaries. However, if it is intended that certain beneficiaries are mean to be primary beneficiaries and others secondary, then it is appropriate and indeed important to modify the duty. Similarly, Trustees are mean to act unanimously, but if it is intended they can act by majority rule, then that needs to be specified.

Similarly, a Trustee is not meant to exercise any power for their own benefit, nor are they mean to profit or act for reward. If any Trustee is to be paid for the work that they do, then it must be specified.

Investment Duties

In terms of Trust investments, Trustees are meant to act prudently. With many Family Trusts where the investment provisions or duties of Trustees are often modified as there is not the same ability to diversify. Section 29 of the Act from our Trustees have a duty of care in carrying out Trust investments. Under Section 30, the Trustees have a duty to invest prudently. If these duties are to be qualified, it would be important to provide an alternative set of criteria by which the Trustees will be judged. It may be preferable for the Trust Deed to state its own standard, e.g. to invest in accordance with certain investments and principles and objectives adopted by the Trustees and reviewed annually.

Exclusion and Limitation of Liability

The new Trusts Act limits the ability as to how far the Trust Deed can contract and exclude a Trustee’s liability. Any exclusion of liability for a breach of Trust arising from a Trustee’s dishonesty, wilful misconduct, or gross negligence will be illegal. If such provisions exist in a trust deed, they will no longer have any effect after end of January 2021.

Duty to advise Settlors about Limitations of Liability

For any new Wills or Trusts created after end of January 2021, the advisor of the Trust must alert the Settlor to any provisions in the Trust Deed which limit or exclude the liability of a Trustee or grant the Trustee an indemnity for the Trustee’s liability for breach of Trust. Failure to advise about the effect of the limitation or liability does not mean the clause itself is invalid. However, the advisor could be liable for any consequential loss by the Trust by not being aware of such provision, or may not be able to take advantage of the clause itself if the advisor becomes a Trustee.

Given the above, it is preferable that any new Trust Deed or Will includes a certification signed by the Settlor or Will maker that they have been given a full explanation of the limitation/exclusion/indemnity provisions.

Power to Remove/Replace Trustees

Under existing law, if a Trustee loses mental capacity, there are no provisions which apply automatically to transfer property out of the Trustees’ ownership. Often Courts have to be involved to complete the property transfer.

This issue has now been addressed under the new Act. The Trust Deed may now set out a its process for trustee removal and replacement in such circumstances. In addition, it allows for any property to be transmitted out of the ownership of the Trustee who has lost mental capacity.

Summary

It is a good idea to talk to us if you wish us to consider the implications of the new Trusts Act on your Trust and your Trust Deed. Please contact us.

Teresa Chan

7 September 2020

This article is for general use only. Advice should be sought for specific circumstances. Please consult Teresa Chan at Teresa Chan Law Limited, Level 3, Westpac Building, 106 George Street, Dunedin 9016, ph. 477 1069, or email teresa@tchanlaw.co.nz