As you may already be aware, the new Trusts Act 2019 has been passed and will come into force from 30th January 2021. This new Act has modernised existing trust law and includes some fundamental changes. Moreover, there are key elements of the new Act that require specific attention of all trustees as the Act regulates trustee duties and increases the transparency of the trust and its activity. This article summarises these changes below.
What does this mean for your Trust?
Trusts are still an important part of estate planning and can be an appropriate way to reduce the business risk to your assets. The new Act has clarified and simplified some aspects of Trust law, and the Act now contains a number of administrative rules that are applicable to all “express” trusts. Express trusts include all discretionary family trusts which are prevalent in New Zealand. Therefore, it is prudent to consider the effects of the Act as the new requirements will increase the time and costs associated with managing the trust, including the significant new rules that requires certain trust information to be disclosed to beneficiaries.
The new Act contains both mandatory and default trustee duties. The mandatory duties cannot be excluded or modified by the trust deed and impose on all trustees the following duties:
- a duty to know the terms of the trust;
- a duty to act in accordance with those terms;
- a duty to act honestly and in good faith;
- a duty to act for the benefit of beneficiaries; and
- a duty to exercise the trustee’s powers for proper purposes.
The default duties will apply to all trusts unless the default duties are expressly excluded or modified by the trust deed. The default trustee duties include the following:
- a general duty of care;
- a duty to invest prudently;
- a duty not to exercise power for a trustee’s own benefit;
- a duty to consider the exercise of power;
- a duty not to bind or commit trustees to future exercise of discretion;
- a duty to avoid a conflict of interest;
- a duty of impartiality;
- a duty not to profit;
- a duty to act for no reward; and
- a duty to act unanimously.
How these changes affect you
A significant change is the mandatory disclosure regime. Under the disclosure regime, beneficiaries must be told that they are a beneficiary of a trust, the name and contact details of the trustees, when the trustees are appointed, removed or retired, and that they can ask for a copy of the Trust Deed or trust information. Under the new rules, trustees must also regularly consider whether they should be making this information available (e.g. when a beneficiary turns 18 years old).
This information can only be withheld from beneficiaries in exceptional circumstances. It is not intended to be a way to challenge Trustee decision-making; rather, it is intended to indicate how the Trust is operating. Nevertheless, this information must be disclosed to a beneficiary who has the potential to hold the trustees to account. The purpose of the disclosure regime is to ensure transparency and accountability of trustees.
What do you need to consider?
All trusts must be administered in accordance with the new Act from 30 January 2021. The long transition period before the Act comes into force is to enable trustees to ensure their trust is compliant with the new rules and that any changes to the trust deed, or other necessary arrangements, can be implemented.
It is prudent to consider if you are willing to undertake these increased compliance and disclosure obligations and if you are comfortable with these new rules. You may also want to review your commitment to having a trust in light of the increased time and costs that will be required to manage the trust under the new Act. It is also pragmatic to consider whether your assets can be better protected using other mechanisms, either by executing a relationship property agreement under the Property (Relationships) Act 1976, drafting a robust will, or by having adequate insurance. Ultimately, it is important that you consider whether the earlier circumstances for establishing the trust are still relevant today.
What are some options?
As a result of these changes you may decide to review the options available to you in relation to your trust.
We suggest a three-step approach to reviewing the options for your trust, namely:
- Review: your existing Trust Deeds and state of your trust records – are they complete?
- Meet: get Trustees together to explain their new duties and responsibilities and discuss continuing the Trust. This is also a good opportunity to discuss any capacity/succession/family issues and discuss your options for the Trust. The Trustees can also consider whether the terms of the trust should be varied or the trust resettled on another trust.
- Plan: Develop a preliminary plan of action. Perhaps meet with the current beneficiaries and explain the trust details. You may also consider making some distributions depending on the trust’s assets and its property.
Essentially the best options available to you will be contingent upon the rights and powers under the Trust Deed, the purpose for the trust and your intentions for the trust assets. These options may include some of the following suggestions:
- narrow the class of beneficiaries;
- change the trustees and/or the appointors;
- vary the trust in accordance with the Trust Deed;
- resettle the trust property into a different trust; or
- wind the trust up and distribute the trust’s property.
In each case, the trustees must ensure their decisions are in the best interests of the beneficiaries. Trustees must also carefully consider the tax implications of each option. We also recommend that you ensure that your Will and Enduring Power of Attorney documents are up-to-date.
The above changes come into force on 30 January 2021. We therefore recommend that you contact us as at your earliest convenience to discuss how these changes may affect you and to ensure that your trust is compliant by 30 January 2021.