Trust Law Reform

POSTED BY Ben Morrison
07 October 2013

posted in Legislation | Asset Planning | Trusts | Law Commission

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"For the past four years the Law Commission has been reviewing the law of trusts and the Trustee Act 1956. This complex review has looked at the need to address current issues with the Trustee Act as well as wider issues with the use of trusts in New Zealand."

- Geoff McLay, Law Commissioner

On 11 September 2013, the Commission’s report was tabled in Parliament. The report recommends replacement of the Trustee Act with a new Trusts Act. It outlines 51 specific recommendations for reform.

What are these "current issues”?

In general terms there is, and has been for some time, a widely held view that the Trustee Act is inadequate. Often cited is its failure to provide adequate (or, in some cases, any) guidance as to fundamental issues such as what a trust is, when a trust is or isn’t formed, and what the duties of trustees are. Its language is considered somewhat inaccessible, and the practices on which it was originally based are long out of date.

While there is a large body of case law (stretching back as far as Roman times) establishing equitable principles and underpinning the law of trusts, it is largely inaccessible to non-lawyers. The Commission has taken the view that a new Trusts Act should not only improve upon the Trustee Act, but should also deal with a number of matters that have not previously been codified in New Zealand legislation.

Should these issues be resolved by statute?

Many lawyers and academics caution strongly against any attempt to codify fundamental concepts and principles of the law of trusts and equity.

The main concern often expressed is that the doctrine and principles of equity that underpin trust law, which have been carefully developed by judges over the centuries, are a critical part of the social and economic fabric of Western society, and that any attempt to codify such matters in a relatively simple, modern piece of legislation carries a serious risk, that crucial equitable principles developed in the courts will be missed: one piece of legislation, it is said, cannot hope to capture every nuance of the developed case law.

By way of example, in a passionate address to the 2013 annual NZLS Trusts Conference in Auckland, Professor Charles Rickett (currently Professor of Law at the University of South Australia) raised serious concerns with the overtaking of developed doctrine around trusts and equity (which Professor Rickett summarised as being, essentially, not based on "fairness” but rather on relationships, intention and rights) by modern ideas of "the social contract” and "social justice”. He identified two developments as resulting from that:

  • Judges in trusts cases are increasingly looking for outcomes that "feel right” on a social/moral basis rather than determining issues on the basis of established doctrine (which allows outcomes to be predicted with greater certainty).
  • Parliaments are increasingly looking to replace such doctrine with regulation, which has as its objective the achievement of "socially just” outcomes.

The Law Commission, on the other hand, argues in its report that "it is not our intention to create a code that completely supplants the case law, principles of equity or the creative role of judges”…”the Trusts Act will be the primary source of trust law in New Zealand, but it will not contain everything that conceivably needs to be known about the law of trusts in New Zealand.

The fundamental objectives of the proposed new Trusts Act are summarised in the Commission’s report as follows:

"A new Trusts Act should set out the core characteristics of the trust, and the duties of trustees, thereby strengthening the common understanding of the institution of the trust and providing guidance to individual trustees who need to understand, without reference to large tomes of compendia of cases, what their basic obligations as trustees are”.

In our view this is sensible, provided real care is taken in writing the new statute.

Notable recommendations

While the Commission’s final report contains 51 recommendations in total, there are a few key points that should be noted, as follows:

  • When a trust does/doesn’t exist – the proposed new Trusts Act would define the core features of a trust, and would empower the Court to find that a trust does not exist if it lacks the listed statutory characteristics, including the intention of the settlor to create a trust. For example, no trust would exist if the sole beneficiary of a purported trust were also the sole trustee.
  • Mandatory trustee duties – these would be implied into every trust. Trustees would be required to:
    • understand and adhere to the terms of the trust
    • act honestly and in good faith
    • act for the benefit of the beneficiaries or to further the purpose of the trust
    • exercise stewardship over the trust property for the beneficiaries or the purpose of the trust, and
    • exercise their trustee powers for a proper purpose.
  • Trustee liability – it would not be possible for a trust deed to limit a trustee’s liability, or indemnify a trustee for a breach of trust arising from the trustee’s own dishonesty, wilful misconduct or gross negligence. However, this has not been extended to encompass liability for general negligence.
  • Beneficiaries’ right to information – this has long been a confused subject. Under the new Trusts Act, trustees would need to:
    • notify every person who has a realistic possibility of receiving trust property that such person is a beneficiary and has a right to request information
    • provide sufficient information to sufficient beneficiaries to enable the trust to be enforced.
  • Duration – trusts will be able to exist for 150 years instead of 80, as at present.
  • Relationship property– the new Trusts Act would give Courts greater powers to order trustees to distribute assets from trusts following relationship splits.

For further information please contact Ben Morrison, Partner. 

POSTED BY Ben Morrison
07 October 2013

posted in LegislationAsset PlanningTrustsLaw Commission

VIEWED 7524 TIMES

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