In just 14 days the new Trust Act 2019 will come into law from January 30, 2021. It is the most significant reform of trust law in New Zealand for some time.
Family trusts in New Zealand have been with us in one form or another for more than 400 years, and their fundamental nature remains the same – to protect the assets and secure them for future generations.
Their role certainly evolved to meet each generation's needs, but the law governing trusts hasn't been updated for over 60 years and is dated.
To keep it relevant to the modern-day trustees and beneficiaries, the Trust Act 2019 made several changes and consolidated the existing law to make it more accessible and understandable. This is partly to provide better guidance for trustees and beneficiaries and enhance beneficiaries' ability to hold trustees to account.
The new act will also have a significant impact on the governance and administration of trust assets. It will affect family trusts, charitable trusts (with some provisions) and trusts for the benefit of iwi, hapū, whānau and will come into effect on January 30, 2021.
Running trusts under the new regime can be divided into functional, emotional, and ethical components. Neglecting to invest trust property or poor investment choices can be reasons for the breakdown of trusts.
One of the primary roles of a trustee is to manage a trust fund prudently for the beneficiaries. This will often involve making decisions and investing money held in trusts correctly.
While this may sound easy, it is often one area that trustees find themselves in error, specifically when families or friends are acting as trustees. This can lead to being personally liable for failing to have a robust prudent investment process in place and not taking advice, not to mention the potential for family disputes.
Where a professional is appointed as a trustee, they are expected to exercise an even higher standard of care and skill.
Investment choice and duty to invest prudently
The general investing and financial principles are contained in the act. They may also feature in the trust deed itself, giving trustees the power to put trust assets into any investment.
This is a wide-ranging power; however, there is further guidance on how trustees exercise this function in the Trust Act 2019 (s30).
When exercising any power to invest trust property, a trustee must show the care and skill that a prudent businessperson would exercise in managing the affairs of others;
Trustees must consider the suitability of proposed investments of the trust;
The investment strategy should be diversified if appropriate to spread risk;
Where trustees do not feel they are suitably experienced, they can take qualified financial advice to comply with their obligation.
Depending on the trust's nature, below is a checklist for trustees may need to be considered regarding the appropriateness of any investment.
Have all the trustees:
Dealt with the trust's assets as if they were dealing with assets which belonged to somebody else?
Engaged trustee investment professionals to ensure where they are investing is in accordance with the "Prudent Person Rule" or the modified standard in the trust deed?
Confirmed the trust deed provides a "contrary intention" to the prudent person/investor duty rules, and that it is worded in a way which will stand up to scrutiny under the provisions of the new Trusts Act 2019?
Sought and understood the circumstances of all beneficiaries, and recorded those details?
Set in place a trust investment policy with clearly stated aims and processes? Then implemented those policies and tested those aims and strategies for efficacy?
Ensured there are succinct and clear records of their processes, actions and resolutions that are stored well and readily accessible to them as trustees?
Ensured that where there are domestic houses, the rates and loans are paid and up to date, the property is well maintained and adequately insured?
Ensured where specialist assets are owned, such as a business, farm, land, etc, there is evidence held that is up to date with regulatory compliance, ie. health and safety, environmental, employment, etc?
Reviewed and held records, reports, or conducted themselves diligently on trust contracts, product/service provider costs and fiduciary relationships?
Following initial investment choices by trustees, regular reviews should be undertaken, and if necessary, amendments should be made to ensure that trustees continue to exercise their professional duties and responsibilities.
Where trustees do not manage a trust fund correctly, they can be held to have breached their position and be held accountable for the loss. Where a loss had been incurred, and the trustees have acted per their duties, for example, stock market volatility, trustees will not be liable if they have acted appropriately and with due care.
So it is important not to make a rash knee-jerk reaction to changes, and it is always prudent to seek professional advice about your trust.
Be sure to talk with a financial adviser with fiduciary responsibility to review your objectives and goals to ensure that the trust is still relevant and is being properly managed.
Financial advisers can employ a variety of approaches to manage trust assets proactively—which can involve reviewing fiduciary conduct, costs and quality of products/services. They can also help trustees focus on emotional, ethical, and functional aspects of the trusts.
• Nick Stewart is an Authorised Financial Advisers and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz